I see China as the center of the greatest bubble period in modern history.
The emerging world has been on an urbanization tear, especially since 1980, and China has led the way!
But, it’s not done so with the two proven pillars of democracy and free market capitalism, which have made most of the developed world urban and rich since the late 1800s.
Rather, China is the largest centrally-planned economy in the world. It’s a model that economists drool over, calling it “state-driven capitalism,” but that’s an oxymoron if I’ve ever heard one. It’s a violation of Adam Smith’s “invisible hand.”
Democracy balances the greed and income inequality of capitalism, while capitalism balances the free-lunch, welfare state of democracy. China has removed democracy from the equation and created an environment where unelected politicians have the power to overbuild and over stimulate to please the people and keep power.
And man has China overbuilt!…
- 22% of condos there are empty, and most never occupied.
- Chinese real estate is the most overvalued in the world compared to incomes.
- Debt has grown 80 times since the mid-1990s and 50% of it is collateralized by such wildly overvalued real estate.
- Basic industries and large state-owned enterprises have massive excess capacity – 20% to 50%.
- 20% of Chinese bank loans are estimated to be bad, far worse than Italy.
- China’s real estate bubble has been estimated to have finally exceeded the Japanese bubble in extremes (and don’t forget that the Japanese property bubble burst 67% in the early 1990s forward).
China’s first great top-down stimulus program was to subsidize and encourage rapid growth of export industries, especially in the 1990s forward. Exports were growing 30% a year for many years.
When that peaked out at 26% of global trade in 2009, China switched to internal growth through massive implicit debt guarantees to build shit for nobody at the local levels.
China’s total debt as a percentage of GDP almost doubled from 171% to 299%, just since the end of 2008.
There’s excess capacity everywhere! Enough for the country to grow and urbanize for the next decade without building anything new.
And those migrant workers flooding in from rural areas… they’re not even trickling in anymore. They’re actually going back to their rural roots and have been since 2014 because city real estate is unaffordable, city pollution is choking, and city traffic is unbearable!
The Belt and Road strangling the East…
In 2013 China launched its Belt and Road Initiative, a $1.3 trillion ($4.4 trillion longer term) commitment to building infrastructures throughout Asia to revive the old Silk Road trading zone, augmented with maritime travel.
That’s right! Overbuild in emerging countries that are already choking on too much debt, to consume some of that excess industrial capacity for cement and steel, etc., and increase trade throughout Asia to offset falling exports since 2008 and the current trade war with the U.S.!
But now many of the 68 partners (with 4.4 billion in population) in this grand project are balking at the debt China is imposing on them for these projects.
Have you noticed that both China and the emerging markets stock indices are down near 30%?
They’re already leading the next debt crisis…
The developed world dominated the debt bubble into 2008, then it predictable crashed and burned.
The emerging countries have dominated since, with cheap dollars and euros printed by central banks to stave off a depression in the developed world. Now, one debt crisis after the other is emerging: Venezuela, Turkey, Argentina, Pakistan, and more to come.
This new silk road is the last thing that China’s top-down, quasi-communist, crony-capitalist government will try to overbuild before the house of cards collapses, led by defaults on loans to partnering emerging countries…
And look out below when China’s real estate bubble blows.
It will be the greatest deflation of wealth in modern history and become the epicenter of a global real estate crash AND the next great reset in stocks and financial assets… similar to late 1929-1932.
My cycles say this great reset starts by September 2019 into January 2020 at the latest.
Are you ready?
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