The Chinese real estate ponzi is collapsing:
The Chinese real estate ponzi is collapsing.
China’s real estate market is the largest market in the world and has been collapsing for a year.
This affects everyone globally.
Why?
Because everything is connected.
China’s real estate for the last 30 years has grown to unimaginable proportions financed by cheap debt financed by the world’s banks.
For 30 years, Chinese citizens piled into real estate as that was one of the only ways to grow your wealth.
House prices continued to go up until they didn’t.
Last summer was the first time we saw crises in the market.
It started with Evergrande, something which I wrote about last year, and then spread to many other developers.
The problem with real estate prices dropping is it eventually hits the banks.
It’s exactly like Lehman in 2008 in the US.
House prices fell, people couldn’t pay their mortgages, houses started defaulting and mortgage bonds held by the banks blew up almost bringing down the whole global financial situation.
Now imagine a crisis larger in size happening across China.
The banks are screwed.
We’ve already seen Chinese citizens protest in front of banks as their assets have been frozen.
All these people who worked hard and saved their money properly in a bank are now left with nothing.
The global media isn’t doing too much of a job to talk about it because they largely can’t see the connections.
So follow me for a second.
Who financed China’s real estate boom the last 30 years?
Banks.
Not just Chinese banks but global banks.
How?
Through credit, aka the bond market.
Now in China you have something called the on-shore bond market and the off-shore bond market.
Onshore is domestic banks/financial institutions and off-shore is the rest of the world.
My bet is Xi will do everything he can to save the domestic banks in the onshore bond market - at least as many of them as possible.
Some of the smaller and mid banks might be screwed, which we’re seeing the beginning of right now.
But they will likely save the larger banks.
However if you’re an offshore bondholder, like many Asian, European and US banks - good luck.
It means re-structuring, write-downs and bankruptcies.
Good luck getting your money back, even if you get pennies on the dollar.
Many Chinese developers are bankrupt and it likely will get worse.
If you’re a bank outside China, you think Xi is going to save you?
Good luck with that.
Don’t think we’ve seen the worst of this crisis yet.
This is also why Taiwan is such an interesting situation.
Are China and the US going to go to war to distract their populations from the shitty situations in their local economies?
China’s already in a recession and same with the US.
What better way to distract people than by starting a war.
Now you could argue China was going to do this anyway, and what better way to do it during a time of economic hardship.
My bet is Xi thinks he can outlast the domestic disturbances in his economy given he’s an authoritarian dictator who’ll just jail anyone who goes against him.
He likely thinks he can outlast this short-term problem and grow the country long-term based on the China 2049 plan.
Biden/whoever the next Republican nominee doesn’t have as much power and will likely face a lot more issues domestically.
If you get an 08 situation again not only in the US but also around the world, with the debt burden this high while interest rates are going up, good luck.
We’ve yet to see the consequences of what happens as China’s real estate market collapses but don’t think it won’t affect you or me.
In a globalized world like we’ve been living in the last 40 years, everything is connected.
We’re seeing the beginnings of de-globalization and the Chinese real estate ponzi collapsing could be a huge match to the coming global economic fire.
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