The Lehman Brothers’ bankruptcy in 2008 marked the beginning of what would be the United States’ long, dragging and worrisome economic downfall and eventual recession. Recorded as the largest bankruptcy filing in the history of the United States, the whole phenomenon has since been referred to as the “Lehman Event”.
The Lehman Event was considered to be a nightmare feared by many countries including and most especially by China. This phenomenon hitting the world’s second largest economic structure would be a horrible scenario and could possibly lead to the biggest economic blast in history.
Let us give you a more visual scenario to illustrate our point:
Have you seen the 2001 film, Vanilla Sky? If yes, then good. Now, try to visualize Tom Cruise driving through the Times Square, which is considered as the most visited place in the world. See him going through it but deafening silence because this time, it was completely empty.
Now you have a pretty good idea of what’s happening to China – as it turns into a ghost town.
Where Did the Huge Chinese Population Go?
China’s “Manhattan” situated at the City of Tianjin now has abandoned skyscrapers and could easily be regarded as a ghost town. The reason to this was attributed to the country’s poor asset management in the real estate market, the same fate the USA experienced.
For one, China’s Central Bank was printing money three times faster than the US Fed, most of it going to banks where misguided construction projects were often granted. Another factor was the shadow banking system. Borrowers use collaterals in exchange of an approved loan which would eventually lead to debts piling over debts and leave borrowers to fight over the properties in case of a default.
They Got It Wrong, Too
The wrong interpretation about the real estate demand and supply in the US also happened in China. The demand was only there because there was a high supply of money, accessible debt arrangements and real great deals being offered: “no zero down-payment”, “buy one flow, get one floor free”, and so on.
The moment the money has run out, so did the demand for real estate leaving 52.5 million houses vacant.
The lenders were left with no money and unprofitable investments with no choice but to sell their properties at very low prices. The banks were also hanging on a thread, trying to prevent huge losses as the day passed by.
The US-China Relationship
The US was a debtor while China was a creditor.
During the US economic crunch, it was China who purchased the United States’ $1 trillion worth of Treasury Bills, which at that time was the only saving grace of the USA.
According to economist, Gonzalo Lira, the problem would occur when China starts saving its banks by selling the US treasury bills. The US continues to make borrowing through selling treasury bills. When China stops buying them and starts flooding the market with these bills, the value will drop dramatically. This presents a very serious problem to the United States.
One option to address the problem would be the doubling down of money printed by the Federal Reserve and use it to buy the treasury bills themselves. In effect, inflation and maybe hyperinflation will happen.
Treasury bills and bond such as debt are conservative investments favorable to risk-averse people.
China, on the other hand, would be an unsafe place to keep your money when they decide to sell off all their U.S. debt.
This tactic allowed Mark Cuban to stay a billionaire even though all his wealth was in the stock market when the dot-com stock bubble burst.