Could a financial crisis in China turn into a global crisis?

The risk that Evergrande, China’s second-largest real estate developer, with EUR 260 billion in debt, will go bankrupt has triggered a reflection on the risk that it could turn into a global financial crisis. The worrying precedent is that of Lehman Brothers, whose bankruptcy dramatically amplified the subprime crisis. The concern is that the Chinese government is now accepting Evergrande’s bankruptcy, just as the US government accepted Lehman’s bankruptcy in 2008 to set an example. We therefore seek to determine whether a severe financial crisis in China could be transmitted to the rest of the world. The transmission channels are: Objective: the Chinese debt held in the rest of the world, which transmits the crisis if there are losses on this debt and if it is large enough; Subjective: a crisis may spread through an overall rise in risk premia (as we saw for banks in 2008) due to the increase in overall risk perception, without there being an objective transmission of losses incurred by lenders. In the case of China, we can see that both possible contagion mechanisms seem weak. A financial crisis in China, which is possible, would therefore not necessarily have a major impact on the rest of the world, although there are risks arising from the high level of Chinese equities (but not credit) owned by non-residents.