Meltdown Similarities: China and the U.S.

Published on Author rhynem14


A recent article in the Wall Street Journal compares the current state of credit in China to that of the United States in 2007. This is an especially poignant comparison as we begin the semester and try to distinguish what characterizes the Chinese economy as unique. According to George Magnus at UBS, similarities between the two countries’ credit problems exist in the “use of the credit system to substitute for better sources of economic growth.” However, while this mistake culminated in a crisis in the U.S. due to ignorance and confusion, the Chinese have already witnessed the financial crisis of 2008. They already know why things have and will go wrong, so they will be better prepared to respond. While the “meltdown” in China may be a more gradual one than the bust of 2007-08 in the United States, there are definitely signals that it will come in some form, and the gradual process has already begun.

Source: “China’s Credit Levels Echo U.S. Crisis,” Wall Street Journal,” 9/8/2013.

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2 Responses to Meltdown Similarities: China and the U.S.

  1. Pricing assets in an economy that doubles in size in less than a decade is challenging. Gather accurate data on real estate prices is really hard, too, because no two properties are quite the same — location, location, location as the old mantra of retailing goes.

    At a technical level, in the US the use of 3/27 loans allowed banks to place a big bet on rising real estate prices while earning (and important to management, booking) fees up front. When prices stopped rising, that quickly unraveled. (Dfn: a 30 year mortgage but with 3-year teaser rates that jump sufficiently to force refinancing, which generates fat fees.) In China, however, these sorts of triggers are absent, while purchasers typically have a big equity stake – no NINA loans with no downpayment as in the US. [NINA = no income no asset)

    We’ll read more in the Miller book, and see further reporting on this over the course of the fall.

  2. I am surprised that the author of the article can compare these two. The Chinese economy and the United States economy have different priorities (import vs export) and have very different populations. While China should be able to learn from the United States about our specific credit crisis, I’m not sure how useful it will really be to them.