Thread by @AtifRMian

China's real estate sector is facing serious rumbles, with potentially significant consequences

I'll explain how this is connected to the 2007/08 crisis, and historical lessons we can draw for China going forward ...

cnb.cx/3nCJWqs

On the eve of the 07/08 crisis, China's growth model was increasingly reliant on surplus exports to the rest of the world

the level reached 10% of GDP! This is an *incredibly* large number for a major economy

But the crisis changed all of that: the world (esp U.S. households) was no longer as willing to borrow and buy Chinese surplus.

We can see this in the remarkable and relatively quick contraction of +7% of GDP in China's external account

This contraction would have lead to a serious slowdown in Chinese growth - so obviously the policy makers had to act

China had a number of options - but the one they leaned very heavily on was to encourage creation of domestic private credit to boost demand

Domestic credit as share of GDP rose by over 80% since 2008 - a record!

It's always politically easier to follow this strategy, but history tells us that it doesn't end well

Here is the typical response of GDP to domestic credit booms that primarily finance household and property sector - growth significantly slows down
academic.oup.com/qje/article/13…

The fundamental unaddressed problem is one of imbalance in the Chinese domestic economy - read @michaelxpettis and @M_C_Klein terrific book.

So what's ahead for China?

The concern is not a "financial crisis" necessarily - the government has multiple tools to avoid that sort of stuff.

But the real challenge is avoiding a growth slowdown.

Will the economy be able to find alternative sources of domestic demand?

Will the government be able to compensate for potential precautionary cutbacks in spending by Chinese households who face these property troubles?