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China’s economy is about to experience the biggest crash in history that will take decades to recover from. China’s impending crash will be similar to Japan’s devastating 80% market crash in the 1990s. Even after three decades of the Japanese market crash, Japan’s stock market has still not recovered from its highs. Japan’s market crash culminated from specific events that caused the country’s eventual fate. Just like Japan, several signals are showing that China’s economy already crashed, but you just don’t know it yet. This video will go in-depth on why Cathie Wood believes China has fueled up a major bubble and is about to undergo the largest crash in history.
China’s housing market has inflated significantly over the past decade, which is demonstrated by the consistent increases in Chinese housing prices. Unbeknownst to the majority of investors, the Chinese real estate bubble is about to pop in a serious manner. Before we get into the indicators, we have to address the striking similarity between China in 2021 and Japan in the 1990s. Over the past two decades, Chinese real estate developers have leveraged up in order to quickly expand their real estate portfolios. This sounds great on the surface, but it also means that the market has extreme fragility going forward. We’ve seen this happen with Evergrande, the most indebted real estate developer in the world, which has failed to pay off its debt payments. This frightening pattern is evident with other Chinese real estate companies as well. At least four other major Chinese developers have recently defaulted or asked investors to wait longer to repay their debt. This includes Fantasia Holdings, Modern Land, China Properties, and Xinyuan Real Estate, all of which are failing to pay hundreds of millions of dollars worth of debt. According to economists at Nomura Holdings, real estate developers took out over $5 trillion worth of debt during the Chinese bull run. When so much leverage is in a market, a market crash is almost inevitable, just like Japan in the 1990s. From 1990 to 2003, Japan’s Nikkei index crashed over 80% from its record highs, and even today the index has not returned to those levels. This disaster is known as the lost decades, because investors in the Nikkei Index at the peak would still be down roughly 25% after over 30 years. Imagine investing in the S&P 500 and still being down 25% after 30 years. China suffering a collapse that destructive would not just affect Chinese citizens, but also the entire global economy.
So why is this all important? According to Moody’s, which is a credit analyzer, approximately 70 to 80% of China’s household wealth is tied up in real estate. If the real estate market crashes 80% like Japan’s market did, then the entire global economy would freeze. Every country depends on China for its manufacturing of almost every single good. A sudden slowdown from the Chinese economy instigated by a real estate crash would slow down consumption worldwide. This crash may happen as soon as January 2022, which is only a few months away. Goldman Sachs found out that over $6 billion of real estate development debt is due in January 2022. That is a substantial increase from the current developer debt payments of less than $2 billion in November. Several Chinese real estate development companies are already failing to repay their debt, but imagine what will happen in the coming months when repayments explode. Another downward catalyst for China is the Chinese communist party’s attempt to crack down on speculative and illegal real estate deals. The CCP is currently initiating strict regulations on real estate companies to provide more equality to citizens. This sounds logical on the surface, but Cathie Wood believes that such actions are equivalent to playing with fire. When people play with fire, they eventually get burnt.
I’ve talked about in previous videos how the commodity market is extremely dependent on China. China’s demand for commodities represents 15% of the entire global GDP, and countless commodities almost solely depend on China alone. Among these commodities are iron and copper, which are currently crashing at incredibly fast rates right now.