Whenever there’s trouble in China, the media conjures Lehman.

“China Needs A Lehman Moment” or the tantalizing interrogative form, “Is This China’s Lehman Moment?”, are guaranteed to generate web traffic. And web traffic generates revenue. So Lehman it is.

On Wednesday alone, there were at least two Lehman/China headlines. “China Needs Its Own Lehman Moment — Now,” Shuli Ren declared, for Bloomberg Opinion. “As China’s property crisis plagues its economy and financial system, is a ‘Lehman Moment’ looming?” SCMP wondered.

Given those headlines, and countless others like them, it’s worth briefly running through some key statistics which together give you context for China’s ongoing property crisis and associated spillover risks.

According to a lengthy Q&A-style explainer from Goldman, China has around $8.4 trillion in property sector debt. In 2008 (so, Lehman year), mortgages and developer debt together amounted to just under 17% of GDP. As the figure on the right, below, shows, that number was close to 55% a dozen years later.

“This was part of a broader ‘debt boom’ that ranks as among the largest in world history,” Goldman analysts including Andrew Tilton and Hui Shan wrote.

The institution of the so-called “Three Red Lines” (spearheaded in part by Pan Gongsheng) saw property sector leverage decrease to under half of GDP by the end of last year.

Where is the debt, exactly? In two words: With banks. In a few more words: Three-quarters of developer debt is on bank balance sheets and 16% sits with trusts. Trusts like those at the heart of China’s burgeoning shadow banking crisis.

On Goldman’s estimates, banks’ exposure to property is around CNY14.6 trillion. “Any broad restructuring efforts towards developer debts would have implications across both Chinese banks and trust companies,” Goldman said, adding that notwithstanding the potential for some stress in smaller cities, mortgage loans in China aren’t likely to present a problem “given the high initial down payment and the full-recourse nature of the loans.”

The issue, Goldman emphasized, is developer debt, which has increased 23-fold since 2008. That pile (some CNY21 trillion as of end-2020), can be categorized as bank loans, domestic bonds, offshore bonds and shadow banking. The figures below show the breakdown.

The “Three Red Lines” succeeded in curbing non-bank financing, but the imperative of avoiding a meltdown (and ensuring that unfinished projects are completed) meant that bank lending continued to rise. So banks’ share of developer loans is now bigger than it was.

What does all of that mean for losses? Well, Goldman puts total potential property losses at around CNY2 trillion, 60% of which would probably be absorbed by banks. In such a scenario, trusts would take a CNY540 billion hit.

Can the banking system handle that? Yes. Mostly. And “assuming defaults do not spill over into the mortgage book,” as Goldman put it.

Chinese banks have CNY9.4 trillion in risk buffers, so “even in a bear case scenario in which losses emerge in the non-property loan book,” large banks would probably be ok. Smaller banks, though, could require recapitalization in the event of a “comprehensive restructuring of the property sector,” Goldman said.

And what about spillover from trusts to banks? That isn’t especially likely. Investors would take trust losses, and in the event that isn’t palatable (say, if it led to social unrest), banks could absorb the entirety of trust losses with a 1% hit to their CET1 capital, Goldman estimates.

To be sure, Goldman’s analysis wasn’t sanguine. The full note was 20 pages, and came with all manner of cautionary remarks and caveats to account for anything and everything that could go wrong.

This goes without saying, but the biggest risk is probably the spillover both to sentiment and the broader economy from a worst-case property downturn. A total meltdown obviously can’t be ring-fenced. Sentiment is tough to resurrect once it’s undermined, and when you roll up construction activity with property to capture residential and non-residential investment as well as infrastructure spending and real estate-related services, you end up with around a third of Chinese GDP.

Goldman sees property-related activity subtracting around 1.5pp from GDP growth in 2023, and less than that going forward. But, the bank warned, those estimates are “only designed to capture the ‘first-round’ real effect,” which includes “construction and services output in the real estate industry, fiscal channels through land sales and consumption effects via move-in related purchases and housing wealth effects.”

Second-round effects, which Goldman’s analysis doesn’t estimate, include the possibility that retail investors who lose money in trust products stop spending. Private investment in real estate could slow in the event of defaults. And financial conditions could tighten if stocks continue to sell off and credit spreads widen.

Those effects “could be nonlinear and increase sharply if the property market deteriorates further from already depressed levels,” Goldman said. “But they are difficult to quantify.”