China could take steps to prop up its economy, but that would leave it vulnerable to a 'Lehman moment,' economist says

• The Conference Board forecasts China's GDP growth in 2024 to decelerate to 4.1%.
• While Beijing has the capacity to engineer stronger growth, doing so could risk worsening structural issues.
• Large stimulus could provide a near-term boost, but may open the door to a "Lehman moment" later on.

China's post-pandemic rebound failed to materialize this year, and it's unlikely to arrive in 2024, according to the Conference Board.

A wobbling property sector, declining domestic demand, waning foreign investment, and deteriorating consumer confidence all pose headwinds to the world's second largest economy.

Alfredo Montufar-Helu, the head of the Conference Board's China Center for Economics and Business, said policymakers have the ability to spark a near-term boost via stimulus, but doing so would open the door to worsening long-term impacts.

"A massive stimulus would perhaps lead to a number of years of good growth," he told Business Insider. "But once the effect of the stimulus dissipates, China would be left with a bigger problem, and then we would really have to consider whether there is a possibility for a Chinese 'Lehman moment.'"

A broad-based stimulus plan would extend debt maturities, but when they come due, it could trigger more defaults that set off a domino effect in financial markets and lead to a liquidity crunch, Montufar-Helu explained.

"The government would have less capacity to respond because of the magnitude of the problem and because the previous stimulus would have likely strained its fiscal and financial capacities," he added.

Meanwhile, the economist said policymakers appear to be moving cautiously with moderate and targeted fiscal interventions over recent months. In fact, nothing has come close to the stimulus package that came during the Great Financial Crisis, which led to some of the current structural issues China faces today.

Ultimately, China must find a way to reduce its people's need for precautionary savings. Building a social safety net won't happen in one or two years, he said, but working toward that will allow for a consumer- and demand-drive economic model.

The coming years could bring a prolonged period of below-potential growth as Beijing works through its structural imbalances.

"But this is necessary," Montufar-Helu said. "The alternative is the implementation of a massive stimulus plan that would only exacerbate structural imbalances and kick the can down the road."