INSIGHTS

2008 REDUX?

Ed Peters
|
September 22, 2021

Markets opened the week in retreat as a major Chinese property developer, China Evergrande Group, appeared on the verge of default. Many fear that this is the tip of the iceberg, and that there will be contagion among other Chinese property developers failing in a manner eerily reminiscent of the 2008 US financial crisis. We all remember that those failures in the US led to the Global Financial Crisis.

In a more “under the radar” development, the Bank for International Settlements (BIS) released new information. While not mentioned in the press, BIS data shows that the ratio of credit to GDP (the “credit gap”) for many countries has risen to levels not seen since 2008. A “Minsky Moment” is when credit reaches such high levels that a fall in asset values can cause an increase in margin calls and credit defaults, which then leads to instability in the banking system. The markets fear that China may be facing a Minsky moment.

The question is whether such a crisis (if it occurs) would be contained to the Chinese economy, or would it create global contagion as there was in 2008? In any case, the markets haven’t had a good correction since October 2020, so maybe they’re just overdue for one and this is just a simple correction. Time will tell.

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