China’s debt crisis is most likely to begin if and when Evergrande defaults and collapses, which has historically been less likely to occur due to it being a State-backed private company. However with Chinese regulation in real estate, it’s more likely to occur in the coming months.
In the summer of 2021, financial regulators in Beijing told China Evergrande Group to resolve its debt problems and refrain from spreading “untrue” information, issuing a rare public rebuke of the developer as it struggles to stave off a liquidity crisis.
The problem is Evergrande is one of the key companies in China’s only way for the working class to invest properly that is in real estate. But with a vacancy rate that’s too high, less people migrating to the cities, and those who are now often too old to make it there, the China real estate bubble shows signs of popping. If I had to guess, I’d say this occurs in late 2021 or some time in 2022.
Evergrande shares have tumbled more than 60% over the last 12 months as Chinese authorities have attempted to cool the country’s hot property market with new restrictions, particularly lending to real estate businesses. They are actually down 77% from last year as of today, August 23, 2021.
While China has managed to regulate its housing market to avoid a crash of the bubble, nothing goes up forever. China’s pressure to show unending growth or “common prosperity” for the only mechanism that its consumer spending trusts — i.e. the only investment that works in China — will eventually cause the housing bubble to crash and it will be spectacular for the Global GDP, due to the Chinese consumer having so much weight.
Hopes for some sort of government bailout for Evergrande have been fading in recent weeks, sending the company’s bonds and shares tumbling. While Evergrande has significant State backing, likely in September 2021 they will lose patience with this huge real estate scam that’s actually robbed the Chinese people of real common prosperity. China is prone to various scams to perpetuate its illusion of high never-ending growth. After P2P lending, unfortunately, real estate has become that scam.
China’s Real Estate Crisis Is Nearly Impossible to Prevent
The default of Evergrande is inevitable but it could even lead to many banks failing that are dependent on mortgages. And in a worse case scenario it could lead to a housing debt crisis the likes of which China hasn’t seen. Then millions of Chinese “investors” in a 2nd or 3rd house they will never live in or even rent (because who rents in China?), will be stuck holding the bag. This may be the one of the greatest systemic risks to the macro global economy for late 2021 and 2022.
Evergrande is just massive. The company, which owed 670 billion yuan (US$104.1 billion) as of the end of last year, might be facing tight liquidity and it could collapse any week now or up to late 2021.
The Chinese government can gain greater oversight of commercial property debt issues but that doesn’t mean the real estate bubble in China will have a happy ending. Since so many working class Chinese people invest in houses (as the herd get rich scheme) they aren’t being very good consumers for other things.
The average Chinese consumer still spends at least 40% below its peers in other developed countries. The obsession with real estate isn’t healthy and will have profound consequences as China’s population begins to age more. The male to female ratio is so unbalanced, patriarchy has some unintended economic consequences since men need to own a home (among being able to offer other things) in order to get married in materialistic China.
If China cannot count on its consumer as they have been defrauded to some extent in ‘castles in the sky’, China’s real GDP growth could actually be hit pretty hard if Evergrande goes under.
A major payment failure by Evergrande could have severe repercussions for China’s financial system, eroding confidence in other highly leveraged property companies, shadow lenders and potentially even some banks. Chinese authorities and state-run banks have so far kept quiet about their plans for Evergrande, yet China’s own regulation on the real estate market likely means the demise of Evergrande and the short-term pain could cascade into other areas of China’s economy and consumer sentiment.
China’s Group-Think: Just Own More Homes At All Cost
Remember, the Chinese can be very frugal just to own more homes. Homes that will never be lived in with imaginary migrants that are no longer coming to some of those ghost towns or expensive tier 1 cities very few can even afford to live in. The situation isn’t just not sustainable, it’s become a path to the potential collapse of China’s economic system.
China Evergrande Group has endured multiple credit-rating downgrades that sent its stock and bonds tumbling. The more the Government bails them out, the more it hurts how Chinese consumers’ spending leaves its economy vulnerable to internal demographic implosion in the years to come. It’s better in 2022 to cut the cord with Evergrande and let the chips fall where they may, because the world it’s leading to is a world where Chinese youth do not want to have children or can not afford to even if they wanted to.
China’s culture shock of new and old means real estate won’t forever be the best investment. P2P lending, Chinese stock market crashes and now potentially a real estate crisis isn’t good for Chinese confidence in its own economic system or any path forward to “common prosperity” for Chinese GenZ and Alpha cohorts who may actually fall out of the middle class more often than they are able to get into it.
The credit defaults of China Evergrande Group are very near the cliff’s edge and that could be the catalyst for the entire global stock markets to crash. They don’t call me the Last Futurist for nothing. China’s real estate regulation needs a complete overhaul and the entire system is rigged into being a bubble that, when it bursts, will be a financial disaster of some magnitude. Evergrande could be the hair that breaks the camel’s back in China’s vulnerable internal system of hyper-corruption and social inequality scams.
If China has no religion, the financial heist is its faith, and China’s obsession with owning multiple homes (to the exclusion of other consumer goods) has a grave social cost for the next generations. It’s a disease that is economically unsustainable and essentially a religion of greed.
Everybody Wants Common Prosperity and Real Estate Only Goes Up in China
When you understand the real estate motivations of the common people seeking ‘common prosperity’ you understand why young people are ‘laying flat’. It’s such a scam of a lifetime of labor it’s unbelievable and shocking in its level of corruption. This is a system flawed with problematic incentives of how capital is spent (and wasted) due to the illusion of never-ending growth (basically a lie the State tells its people).
There’s a 28% chance China will have a housing crisis in 2022 that will impact Global GDP in a significant way. Evergrande Group is just the tip of the iceberg. China is a story of the desperation of the masses for a common prosperity and a State willing to go to great lengths to pretend it’s possible for everyone.
Ultimately when people feel they have no choice, as if real estate were the only way out of generations of poverty, the system is a house-ownership trap. The problem in China is the scale of this illusion with migration slowing down and a fertility crisis looming. Like so many things in China, if you didn’t get in early, you are sort of screwed.
For Evergrande, the situation is escalating dangerously in August 2021. Evergrande was founded in the late 1990s as a real estate developer. So in the last several years, the company has climbed into the ranks of Fortune’s Global 500 list and expanded into industries such as film and entertainment, life insurance and spring water. Evergrande backs Guangzhou’s soccer team.
The State-backed company is also getting a bit silly in its ambitions. The conglomerate’s unit for new energy autos — which includes electric cars — has announced ambitious annual production goals of 1 million vehicles by 2025 and 5 million by 2035. Evergrande’s future is likely doomed, if not tarnished badly. If GenZ are laying flat, what will they do if China’s housing investments collapse and are worth nothing? How will they ever be able to trust their Government and its system again?
China’s population will be dramatically lower in the future and it will be full of ghost cities of empty castles in the sky. Oh, the faithful to the cult of real-estate scam. You can extinguish religions and cults, but what if the Chinese State is just another kind of belief system? Ever grand, until it’s not. These are dangerous times for China’s economy and demographic implosion impacting its consumer spend that appears inevitable in the years and decades ahead. This means global GDP growth won’t be great in certain patches of the 21st century.