Brace for a Global Economic Meltdown
“China’s authorities have an unparalleled capacity to kick the can down the road. But with every kick, the can gets bigger and doesn’t go as far” – Dinny McMahon, China’s Great Wall of Debt.
The largest economic bubble in modern history, by several orders of magnitude greater than the 2008 market meltdown, is playing out in China at the moment and it’s about to pop. The facts are that this is a crisis, which we’ll detail in this blog, that is trillions and trillions of dollars deep, several orders of magnitude greater than the 2008 market crash referred to as the Great Recession. There are decades of bad policy, imaginary money, and expansion at the cost of the very foundation that is all coming to a head in, possibly, in a very short time from now. It’s not just China that is about to implode; its effects will be felt worldwide. From Wall Street to main street, Australia to the United Kingdom, this will be far worse than the 2008 recession and several magnitudes greater than the pandemic lockdowns or the current supply-chain challenges. This has been a problem brewing for years that China has been able to defer through creative financial measures, but it is swiftly running out of options to kick the can down the road further. China has what is easily, the larget ponzi scheme in history that is about to implode on itself. This blog will clearly detail why it is about to play out and how every aspect of our life will likely be impacted.
THE BIGGEST BUBBLE EVER
Here it is as quickly and briefly as we can explain this problem. Real estate makes up 29%, almost a third of China’s Gross Domestic Product. An estimated 70% of Chinese household wealth is tied up in real estate. Still, there are currently 65 million empty homes. The Chinese people have invested their money into the most stable investments in their country, which isn’t the stock market or foreign investments; it is real estate. China has long been a very isolated country, so foreign, non-government sanctioned investing isn’t really an option for its citizens. The government controls and regulates everything.
One of the reasons there are a staggering 65 million vacant homes in China is that real estate has been viewed as one of the only stable investments. Banks are eager to make loans to contractors who will build housing. Yet, these contractors have continued to develop and build, though many buildings remain completely vacant and many projects are many years from even breaking ground. They use the money to construct one building to fund the construction of another. This is sustainable only if the economy continues to grow. When the pandemic shut down the Chinese economy and caused economies worldwide to stutter, suddenly, all that empty housing was just a huge liability that only holds theoretical value on paper. In fact, COVID lockdowns resulted in many developers being unable to complete hundreds of massive apartment projects, and they have already defaulted on their loans.
It’s not just vacant physical homes. There has long been a pre-sale strategy that developers have utilized where they take a loan to build one property, and while that project is underway, they use the funds to start construction on another build. It’s estimated that 85% of construction projects are funded this way, so developers are massively over-leveraged in incomplete properties. People are making mortgage payments on properties that aren’t even built yet. Can you imagine buying a first, second, or third property that is several years from completion? That is far worse than the sub-prime loans that led to the 2008 global recession. At least then, the property asset actually existed. Here it does not. It’s similar to a Ponzi scheme in that it only works so long as investors are eager to fund the projects. That’s not the case right now.
Chinese citizens stopped making mortgage payments for properties where work was halted. This is a crisis of more than 300 billion dollars. The Chinese government has struggled with a 148 billion dollar bailout and has suggested a grace period for mortgage payers. It’s important to remember that the lack of investments for the average citizen has resulted in real estate as pretty much the only possibility. There are more second home buyers and almost more third homeowners than first-time buyers. So, the average Chinese citizen is heavily leveraged in investments in vacant properties or paying a mortgage on properties not yet built, not stocks, bonds, 401ks, mutual funds, foreign investments, precious metals, or even cryptocurrencies. Chinese citizens are so outraged that many have taken to the streets to demand their money from the banks. The Chinese government’s response has been to send in tanks and troops to establish order and to freeze their citizens’ deposits.
WHY IS IT REALLY BAD?
China is the second largest economy in the world. Two important numbers to pay attention to are 72% and 9.2 trillion dollars (9,200,000,000,000). First, the 72%. Property sales fell 72% compared to the same period last year. This is a clear sign that Chinese investors no longer view real estate as a safe investment, so money isn’t going into this Ponzi scheme any longer. The Chinese are also refusing to make mortgage payments on stalled housing projects. When those payments cease to flow in, developers are forced to default on their loans.
This is where the 9.2 trillion dollars comes in. That is the estimated exposure to the property sector, and more than half of that is in the form of mortgage loans. These are genuine and scary numbers that are well documented. 9.2 trillion dollars is 12 zeros. It’s the equivalent of 565 Jeff Bezos. It’s 3/4 of China’s total GDP. It’s more than the entire GDP of Germany, France, and the United Kingdom combined. 9.2 trillion is 159% larger than the total number of every US dollar in circulation. The Greek debt crisis of 2015 sent tiny shockwaves worldwide that are still reverberating today. That was an insignificant fraction of 9.2 trillion. The 2008 sub-prime housing crisis in the United States that plunged the world into a recession was among the five worst financial crises the world had ever experienced and led to a loss of more than $2 trillion from the global economy. As bad as that was, it was just over a fifth of the size of this looming Chinese crisis.
You may have heard of Evergrande because that company defaulted to the tune of over $300 billion, but did you know other major real estate development companies: Sunac, Kaisa Group, China Aoyuan, and Shimao Group have all been delisted from China’s financial markets? The list of companies being delisted from the US stock market is also growing by the day, as Chinese companies refuse to report how bad it really is in their disclosures required for listing on American exchanges. Currently, over 260 Chinese stocks may be delisted from the US exchanges because they may not comply with third-party, impartial international auditing requirements. That could potentially deflate the stock markets to the tune of 1.3 trillion dollars. Keeping with the same analogy, that’s the equivalent of 8 Jeff Bezos.
HOW BAD WILL IT GET?
Unfortunately, we don’t know how bad this will get before it gets any better. China doesn’t have an excellent track record of reporting accurate numbers, so we don’t know where the bottom of this eminent collapse really could be. It’s difficult to tell even how the collapse will occur. It has been known about and predicted almost every year since 2016, yet it only seems to darken in scope. Currently, the ruling Chinese Communist Party has lowered interest rates, bailed out developers to encourage them to complete projects, and injected massive amounts of cash into their economy, triggering gains in their bond market. As they encourage builders to complete projects under penalty of imprisonment, will the new housing projects be habitable as corners are cut? Will there be any confident buyers, or will the new housing simply add to the 65 million currently vacant properties?
The Chinese government is freezing many of their citizen’s bank accounts to the tune of six billion dollars of deposits. They had already continued to lower the reserve requirements for their banks to keep their economy chugging along unfettered. This means that banks could collapse if more than 10% of their people withdraw their money simultaneously. That low reserve amount means that money has been lent again and again and again. It doesn’t exist but on paper somewhere, and most of it has been pumped into more and more real estate projects that have yet even to break ground. All of the CCP’s efforts right now have only managed to kick the can down the road a little further, but they are running out of road.
Should we cry wolf at this point? The evidence is all there that a wolf is at the door. We have seen predictions of China’s imminent collapse ranging from next week to next year, when hundreds of millions of bond payments are due. An accurate forecast is also tricky because of the absolute control over its markets that the CCP has. They have for decades been allowed to manipulate their currency on the global stage. They have grown the Chinese manufacturing capability to be 30% of the world’s total output. Big banks, national banks, and credit agencies are all afraid to reveal the truth and downgrade the Chinese economy for fear of the panic that will occur.
At the same time, China is heavily invested in other failing economies, most notably Sri Lanka. Their policy of garnering support on the world stage through debt-trap diplomacy has resulted in countries currently in financial freefall or reeling from inflation and recession. They will not likely be reaping any monetary compensation for these investments that could offset their current crisis. There’s the possibility that China could sell off its interests and exposure in the United States to raise capital to keep its government going. That could dramatically impact the United States market.
There’s more to China’s problems than just this real estate problem. The global consumer market is shrinking, bringing less revenue into the country and dropping their GDP. There’s a massive debt from the country’s high-speed railway network that is flashy but operating at less than 40% of its capacity. COVID lockdowns, as we covered in other videos, have shuttered factories, reduced freight, and cargo output, forced citizens out of jobs, and locked them in their homes. The citizens are in a constant state of unrest under the zero COVID policies. Though that rarely takes the form of physical revolt because of the heavy-handed authoritarian nature of the government, it is often quietly done through social media, work slowdowns, or tiny acts of rebellion that further erode GDP. Banks in China are declaring bankruptcy at an alarming rate because their fractional reserves are just 10%, and they are way overleveraged. They are up to ten times over-leveraged, as they have loaned out money that they essentially didn’t have for projects that will never be completed.
WHAT AREN’T THEY TELLING YOU?
It’s easy to dismiss the China crisis. After all, that’s many miles from us. How could their collapse possibly impact us? First, China makes up almost 1/3 of all the world’s global output for manufacturing. That’s everything from integrated circuits to insulators and other electrical machinery for power plants to plastics and building materials. Imagine 1/3 of all the parts you need to keep your country’s grid functioning, your country’s houses being built, and your transit systems running suddenly in scarce or questionable supply. Second, as China finds itself in deep need of generating actual, tangible capital, it will dump the debt it bought from other countries. China has extended loans for decades to developing and developed countries. The country holds over a trillion dollars in US treasury bonds alone. As national banks enter a monetary tightening cycle worldwide, China will likely use its investments in other countries to hold sway over those countries.
Already several credit rating agencies like Moody Corp., S&P Global Ratings, and Fitch Ratings Inc. won’t assign a grade to China lower than a C. International rating agencies and fund managers are not accurately assessing how dark China’s economy is right now because it would cause global panic and unleash massive restructuring and collapses in the financial markets at a time when the world is actively in a recession and recovering from COVID, supply chain failures, and an ongoing Russo-Ukrainian war. Why tell the passengers the plane is going down when there’s no hope of avoiding the crash?
All of these problems in the Chinese economy have eroded their people’s confidence in the banks and government, and it has scared away all the international investors. We know that based on China’s historical actions, there are several moves it may make that will hurt the world while it tries to save itself. Without investors and money coming in, default is inevitable. In September, which is why many say this will melt down within 30 days, more than $2 billion in high-yield property developer debt is due. That’s twice as much as was due this month when these same developers begged for extensions. So, with household wealth in China collapsing, payments coming due, and the CCP running out of options, they will likely go after the CEOs of these development companies and their own wealthy investors. After all, the people want a villain, and the CCP and Xi Jinping are unwilling to play that role. We will likely see significant saber-rattling over Taiwan and the South China Sea as a bargaining chip and a threat to world peace. It is likely we will see China dumping assets and massively restructuring their economy as they move away from high GDP and further into communism.
While the CCP could still kick this can further down the road, as they have done for the last 5-years, it is very likely we will see the first stutter step of a much greater fall as early as next month.
WHAT SHOULD YOU BRACE FOR?
We will not gloss over this or downplay it like the world leaders and banks are doing. This is bad. If you are going to brace for the worst, well, the worst is probably the worst we have ever seen on a global stage. This house of cards isn’t limited to China but envelops the world. Depending upon your country’s fiscal, industrial, and manufacturing ties to China, some countries will feel this collapse or massive restructuring worse than others. If you have already felt the effects of the Chinese lockdowns in the form of scarcity of products or problems at your nation’s ports, you can expect it to get far worse in the coming months. If your country’s infrastructure depends on those Chinese electrical components and machinery, you should anticipate future grid service interruptions.
If you are looking for investment advice, I am not a financial planner, so we have none. We can tell you that historically when facing a massive economic downturn, precious metals, land, and resources are what sustain many. From a prepping standpoint, we think it’s more critical than ever that people prep food, water, and energy to sustain themselves for a year or more. Like it or not, we have become globally over-dependent. The problems of another country are now ours as well. China’s problem is reaching a point where it can no longer be kicked further down the road. It’s unraveling with ever more tremendous momentum. Prep for the worst.
And as always, stay safe out there.