For two years now, I’ve been warning in our Boom & Bustnewsletter that China is going to be the ultimate and largest trigger for the next global financial crisis… a crisis that will be deeper and last longer than the first one that governments quickly combatted with unprecedented quantitative easing and bailouts.
And the cracks in the greatest bubble in modern history are finally starting to show. China bubble burst? Yes. And 2014 is the year that happens. When it does, it will trigger a market crash around the world.
George Soros warned late last year that China’s subprime lending was starting to look like the U.S. just before its crisis.
Now Leland Miller, President of China Beige Book International, is warning that 2014 will be the year of defaults for China.
Defaults will occur in trust products… wealth-management products… corporate bonds… and even some government bonds.
China’s subprime lending has mushroomed to more than $2 trillion in the last five years.
Its corporate bond market now totals $4.2 trillion.
Its total credit has surged from $9 trillion to $23 trillion since late 2008, or 250% of GDP.
Once again, additional borrowing and spending adds very little to GDP…
Just like it was, right before our subprime crisis, right now every dollar of debt China incurs adds only 15 cents to its GDP. At the height of our crisis in 2009, each additional dollar of debt created 85 cents of GDP.
China is currently getting very little bang for its borrowed buck.
As I always say: Debt is like a drug. It takes more and more to create less and less effect until the system fails.
Now, China’s system is starting to fail… and the bubble is starting to blow up and the fallout will affect us all.
As Miller warns, this is a different China than that of the past two decades. The government understands that it has to slow growth after massively overbuilding and inflating bubbles.
This, he warns, will impact China’s neighbors — places like South Korea, Japan, and Australia (where I recently issued strong warnings about the China burst) — more than most people assume.
Societe Generale’s analyst, Albert Edwards, warns: “Australia is a leveraged time bomb waiting to blow up. It is not a CDO (meaning collateralized debt obligation), it is a CDO squared. All we have in Australia is, at its simplest, a credit bubble (consumer debt) built upon a commodity boom, dependent for its sustenance on an even greater credit bubble in China.”
Already, an agricultural financial co-op has closed its doors, and depositors couldn’t withdraw their money. And a China Credit Trust wealth-management product of $496 million blew up.
The Chinese government bailed them out.
Then, on March 7, China saw its first corporate bond default, when Shanghai Chaori Solar defaulted on its bond payments. It’s unlikely the government will bail it out.
The government wants to reign in the subprime lending that has spiraled out of control. But can it slow down lending and allow defaults without creating a snowball effect?
I don’t think so. Not with the extreme real estate and debt bubble.
No government has ever been able to wind down a major bubble without a crash. Bubbles don’t correct… they don’t have soft landings… they burst!
But finally the sign I have most been waiting for…
A Chinese developer, Zhejiang Xingrun Real Estate Company just defaulted on $567 million of its debt to 15 banks, including 29% of it to China Construction Bank.
Now we’re talking.
Chinese developers are highly leveraged. They have massively overbuilt everything, with the encouragement and backing of the central and local governments, and with rising subprime lending from wealth-management products searching for yield (sound familiar?).
This is where I expect the greatest acceleration of defaults to come from, that then prompt real estate declines… then further defaults in wealth-management products… and so on.
Nomura Holdings, Inc. now warns what I’ve been saying for years: “There is a high risk of a sharp correction in real estate prices due to oversupply.”
Mark my words: The China bubble is going to blow up and when it does, the country’s economy and market will fall over like a dead elephant. There is no chance of a soft landing here.
How much is central bank easing in the U.S., or Europe, or Japan, going to help when Chinese wealth implodes even faster than Japanese wealth did when its stock and real estate bubble burst?
Even worse, the most aggressive buyers bidding up real estate in the most bubbly cities — like London, New York, San Francisco, L.A., Vancouver, Singapore, Sydney, and Melbourne — are Chinese.
That means we’re not just going to see the China real estate and debt bubble burst, but real estate and debt bubbles around the world.
Get ready for the great deflation of 2014 to 2019.
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