Why Chinese real estate is concerning:

Why Chinese real estate is concerning:

I posted a tweet earlier about the Chinese real estate sector:

I’ve been writing about this and talking about it on Twitter the last few months.

It’s the risk people in the financial world are not accounting for properly.

Let me start from the beginning.

A large portion of China’s GDP and economy is based on real estate.

~29% according to Business Insider.

It’s how people have built massive wealth for the last 20 years in China.

But it’s all been done by a ton of borrowing because money is so cheap.

Interest rates are low.

So these Chinese real estate developers like Evergrande and Fantasia kept borrowing money to build bigger and bigger cities.

Only problem is no one came to live there.

Entire cities in China are empty.

China has 65 million empty houses, enough empty real estate to house the entire population of France.

When cities are empty, the developers have to bear the cost because there’s no rent coming in.

Chinese developers continued to build by taking money from the people and ‘diversifying’ into other industries.

Evergrande owns a soccer team. They own one of the largest electric vehicle companies in China. They have many businesses outside real estate.

One of them was a wealth management arm, which took money from its employees and the Chinese people, and used this money to keep building these mega cities.

The problem happens when real estate prices stop going up.

It means developers have to bear the cost of all the excess they built.

Because they don’t have enough cash, it means defaults and bankruptcy.

The issue if they go bankrupt is how many people and financial institutions around the world hold Chinese real estate debt?

My bet is a lot.

When their bankruptcy happens, banks have to write down portfolios.

Assets fall.

People lose money.

When some of those are trading on margin or using leverage, they need to cover margin calls.

The selling then begins.

Banks and hedge funds begin selling long positions.

Volatility goes through the roof.

This could create a death spiral in the market.

Just read a fantastic write-up by a Twitter account named the Last Bear Standing about the volatility squeeze.

If you go through his write up, he beautifully outlines how history is repeating itself on the VIX. 

Quick side note: the VIX is a measure of volatility, which is a gauge of how much fear is in the market.

Volatility is ready to explode. It’s inversely correlated with the S&P so when this blows up, the S&P will get crushed.

People will blame China but there are bigger questions underlying the entire structure of the US market that need to be addressed.

The Internet is making noise. They’re much more educated about how the market really works now.

Superstonk is incredible. The resources, write-ups and memes in that community are nothing short of spectacular.

It’s hundreds of thousands if not millions of readers around the world contributing to changing society forever while flipping the balance of power to the people.

It’s unbelievable what we’re about to experience. I barely remember 2008 yet this may make 08 look like a training run.

Millions will suffer because of the choices of the few while millions more will have their lives changed forever.

The Chinese real estate collapse could blow this whole house of cards.