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China’s imminent housing crash is threatening to trigger a global financial catastrophe beyond any seen in modern history. While bond and stock markets across the United States and Europe are dangerously inflated due to central banks’ extraordinary response to the health crisis and the enormous amounts of borrowing and spending over the past year, in the eyes of most financial analysts, Chinese markets remained suitable for investment as the country has managed to put the health crisis under control and reopen its economy. However, experts are alerting that Bank of China balance sheets and the latest measures introduced by the Chinese government indicate that the country’s markets are anything but safe since a monumental domestic real estate bubble has been growing at the same pace as the $9.7 trillion household debt, and a bubble bust is likely to create a domino effect of failures all around the world, unleashing a financial disaster of epic proportions. That’s what we’re going to analyze in this video.
After the burst of the health crisis, Beijing authorities panicked and ended up releasing a staggering volume of $504 billion in credit to local governments with a mandate to invest to boost the economy. The housing sector was their primary investment of choice, as the new middle-income population was willing to borrow to finally get their own homes. But problems in the country’s real estate sector have been concerning authorities way before the occurrence of the sanitary outbreak. In 2016, Chinese officials could already see that a dangerous speculative bubble in rising house prices was threatening the economy. They have tried, without success, to impose restrictive measures in order to prevent the situation from spiraling out of control. However, that only incited local governments and banks to resort to covert ‘off-balance sheet’ lending via so-called local government financing vehicles, where the local governments create an investment company that sells bonds to finance real estate or other local projects.
Regardless of the official measures, China’s housing bubble continuously rose. February data show that home prices increased by 16.8 percent. “According to data from China’s National Bureau of Statistics, the total market value of China’s real estate is currently around $65 trillion. In 2019, China’s GDP was $14 trillion, making China’s real estate far more inflated than US or EU values by a big margin. A 2018 study found Chinese home prices averaged 9.3 times annual incomes, outstripping inflated San Francisco’s 8.4 times,” as reported by Engdahl.
In the second half of 2020, China’s Evergrande Group, one of the most valuable real estate companies in the world faced a ravaging cash crisis due to an enormous debt burden of approximately $121 billion and the slow down of economic activity. The Evergrande crisis scared the Chinese government, but, as result, authorities doubled down on local hidden real estate debts. Total local hidden debt is estimated to be at between $4.2 trillion to $6.1 trillion.
China’s domestic debt has been rising at an average annual rate of roughly 20 percent, which is significantly faster than its gross domestic product, meaning that in every possible scenario, the eastern superpower is in huge trouble. Official data revealed that outstanding household debt, which mainly includes real estate debt, was surpassing $9.7 trillion at the end of 2020. That already represents 62 percent of the Chinese gross domestic product.
As the strategist described “if troubles in this local bond market spill over into the national sovereign bond market, a huge market worth a staggering $18 trillion, that would drive bond rates far higher, triggering a wave of local defaults in less viable projects including real estate. It is certain that the state central bank would then pump liquidity to save its giant state banks. But given the scale of the debt, that could well force liquidation of China dollar assets abroad, including its estimated $1.04 trillion of US Treasury debt”.
With the new $1.9 trillion stimulus package, the U.S. national debt has skyrocketed and the bond market has already started to feel the impacts of rising Treasury yields. That is to say, it would take very little from a China bond crisis to trigger a global financial meltdown. And the Chinese housing bubble burst could be the final coup to provoke a domino downfall. Only this time, as we previously discussed, considering the entire world economy has fallen into a debt spiral that is out of control, with the simultaneous collapse of both of the world’s leading superpowers, no one will come to the rescue, and soon we might find ourselves in the middle of a tragic Great Depression of modern times.