There was a time when the phrase “when America sneezes, the world catches a cold” was quite common and certainly rang true. This simply meant that what happened in America affected the rest of the world, whether for good or bad. As China becomes more influential on the world stage, we can easily substitute the United States (US) with China in that phrase.

The novel coronavirus (COVID-19) pandemic, which many scientists and health experts believe originated in China, is one example of how problems that originate in China can impact the rest of the world. There is also a looming problem in China’s real estate market which carries the risk of global financial contagion in much the same way that the global financial crisis which began in the US over a decade ago, eventually spilled over to the rest of the world.

On September 15, 2008, Lehman Brothers, a global financial services firm with Headquarters in the US, filed for bankruptcy, which is to date, the largest bankruptcy filing in US history. When it collapsed, Lehman was the fourth-largest investment bank in America with 25,000 employees across the globe, $639 billion in assets and $613 billion in liabilities. Lehman quickly became the poster child for the global financial crisis which ensued as its collapse precipitated wider global financial market contagion. According to the Yale School of Management, the cost to financial markets was in the region of $10 trillion in lost economic output.

Lehman’s collapse was enabled by a combination of deregulation and lack of proper oversight in America’s financial markets. This allowed for financial industry players like Lehman to be overexposed in areas such as the real estate market uncheckered. Therefore, when Americans started to default on their mortgages in droves, Lehman became highly susceptible to the deteriorating market conditions. The end result was a global financial crisis of massive proportions.

The bit of history above is important as there are some parallels currently unfolding in China. Evergrande, a Chinese real estate conglomerate, is facing a debt crisis which is unsettling global financial markets. Evergrande is one of China’s largest real estate developers and a global Fortune 500 company, meaning that it is one of the world’s largest companies by revenue. Evergrande has debt amounting to $300 billion which it is increasingly finding difficult to manage. The company has already warned markets that it could default on its debt due to a cash crunch. On Monday 20 September, the company was supposed to repay interest on several bank loans.

However, as per a CNN report, Chinese authorities told major banks that they will not receive the payments from Evergrande.

The story of Evergrande testifies to the interconnected nature of global financial markets, as well as the growing centrality of China within those markets and the global economy more broadly. Therefore, any default by Evergrande, or worse yet, a total collapse of the firm, carries the real risk of global financial contagion not seen since Lehman. In a world that is still trying to rebuild in the face of the persistent COVID-19 pandemic, a financial market crisis would be particularly melancholic.

Of course, a default by Evergrande or a collapse of the firm is not a foregone conclusion since there is the possibility that the Chinese government could step in with liquidity support should they assess that there is a systemic risk to China and or further afield. However, even if the Chinese authorities intervene, there is also a bigger concern which will not go away simply by solving Evergrande’s current problems. That bigger concern, as articulated by Mattie Bekink, China Director of the Economist Intelligence Unit, is that there are structural challenges to China’s economy related to debt. These are problems which several economists have spoken about for several years and the Evergrande crisis could be a signal that the chickens are coming home to roost.

Finally, a loss of confidence in the Chinese economy, especially in this pandemic environment, could spell real trouble for global economic recovery. Should a “made in China” global economic crisis ensue, many governments and regular folks will be required to “band their bellies.”