The risk of a 'Lehman moment' in China is rising, says Jefferies' Chris Wood

Jefferies' global strategist Chris Wood said the risk of a 'real Lehman moment' in China is rising in the context of a shadow banking crisis intensifying in the country. In his 'Greed & Fear' newsletter, Wood said the news this week on Chinese asset manager Zhongzhi Enterprise not making interest payments on wealth management products is likely to be followed by others if property sales continue to decline, putting more financing pressures on private sector developers. Wood said Chinese equities remain a value trap.

According to news reports, Zhongzhi, which has sizable exposure to the country's real estate sector, told investors it is facing a liquidity crisis and has stopped payment to investors in its products. The move highlights the crisis in China's real estate sector.

"By contrast, Evergrande was not such a Lehman moment, contrary to what the media said at the time, primarily because Evergrande's problems were induced by the authorities in terms of the "Three Red Lines" policy," said Wood in his newsletter.


Lehman moment refers to the collapse of US investment bank Lehman Brothers in 2008 amid the global financial crisis that had severe repercussions on the financial markets and the economy.

China introduced the "Three Red Lines" policy in August 2020 in its attempt to rein in property developers' huge borrowing. This restricted the extent of fresh loans they could raise each year.

Wood said while Chinese President Xi Jinping's anti-corruption campaigns have been popular with the masses, they clearly have had a dampening impact on entrepreneurial spirits.

"This is on top of the huge blow to the confidence of the property-owning middle class triggered by last year's Covid-related lockdowns, which has raised the key question of whether permanent damage has been done to China's command economy model," he said.

Though China began to relax the "Three Red Lines" policy, this easing signal was subsequently undermined by the lockdowns resulting in the biggest downturn in the residential property market since the market was privatised in the mid1990s, said the Greed & Fear newsletter.

Wood said for those who believe China has entered a 'balance sheet recession', the strategy is to own a dividend index and also the long end of the government bond market.