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Cathie Wood: China鈥檚 COLLAPSE Is FAR Worse Than You Think - YouTube
Channel: Casgains Academy
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china has grown to become an economic
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powerhouse over the past two decades not
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a single country in the world has
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experienced the same level of growth as
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china but what if i told you that the
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entire growth of china was all a bubble
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that's what the ceo of arkhan vest kathy
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wood dinks as she likens the growth of
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china to japan's 30-year economic
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disaster in the early 1990s just like
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japan's gdp that was spearheaded by a
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real estate bubble china is currently
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experiencing the largest housing bubble
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in history in this video i'll cover from
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top to bottom how the world is about to
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wake up to china's destined collapse
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over the past 20 years china's economy
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has grown substantially but a
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considerable portion of that has come
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from real estate property developers
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have borrowed money to expand their real
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estate portfolio to hundreds of cities
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we're talking about modern glass and
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steel apartments office buildings and
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houses all across cities in china
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speculators began purchasing houses with
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the sole purpose of price appreciation
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after all from the perspective of
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chinese citizens housing prices have
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been increasing year after year for
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decades this was in part from the rapid
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population growth that china experienced
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but the speculation grew even further
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than that because housing prices just
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kept increasing year after year the
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majority of chinese citizens could no
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longer afford a standard house or
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apartment in cities like beijing or
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shanghai the logical move would be to
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purchase a property within the vicinity
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of the cities but far enough so that
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prices would be cheap and that's exactly
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what many citizens did people begin
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flocking towards houses and apartments
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not in chinese cities rather 10 or 15
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miles away because of the increasing
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demand for houses near cities prices
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began to increase leading citizens to
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expand even further away from the cities
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property developers believed that this
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expansion would continue so they
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preemptively built houses further and
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further out
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nowadays if you drive an hour or two
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outside of beijing or shanghai you'll
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notice something very strange there are
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plenty of modern buildings in great
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condition but there's one issue there's
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nobody there
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those cities are named the ghost cities
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because the only reason why they exist
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is because speculators think prices will
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increase this is a testament to china's
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growing real estate bubble a significant
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driver of the country's economy take a
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look at china's most renowned ghost town
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ordo's new town the city was expected to
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house 1 million people but that number
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went down to 300 000 and finally to 100
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000 in 2016. only after moving top
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schools into the city was orto's new
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town able to fill its empty houses
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these types of empty units are so
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widespread that the aggregate amount of
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space can literally house the entire
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country of italy after 20 years of
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appreciation the chinese real estate
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sector is now worth over 50 trillion
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dollars two times more than the us and
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almost four times more than china's
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entire gdp lumis sales an investment
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management firm estimated that 70 of
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china's entire wealth is in real estate
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in china it's not atypical to see
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citizens put aside money for decades
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just to purchase one property property
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prices near cities are so high relative
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to income that even after years of
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saving citizens will have no choice but
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to rely on mortgages to afford shelter
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this is exaggerated by the fact that
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increasing property prices make citizens
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feel the fear of missing out ultimately
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forcing citizens to take out dangerous
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levels of loans four out of the top 10
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of the most unaffordable cities to
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purchase housing in are all located in
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china this type of appreciation is
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concerning and won't continue forever we
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saw this before in america's 2008
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recession and we're seeing similar signs
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in china china's real estate boom is
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already showing signs of a substantial
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slowdown because a chinese housing
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market just keeps accelerating in prices
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property developers have done anything
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to expand their real estate portfolios
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as fast as possible just like before any
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financial crisis greed took the center
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stage and developers were soon stuck
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with too much debt to handle one of
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these developers included the epitome of
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chinese real estate development
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evergrand evergreen is one of the
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largest real estate developers in the
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world by using corporate bonds issued to
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international investors evergreens grew
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its real estate portfolio to over 565
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million square meters of development
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land this was only possible because
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evergrand took out over 300 billion
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dollars in debt such enormous access to
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capital led evergrand to thrive in 2018
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evergren became the most valuable real
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estate company in the entire world this
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positive sentiment soon began to shift
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dramatically as investors realized that
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evergrand was in major trouble credit
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agencies recently had to categorize
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evergrand in default after the company
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failed to repay a 260 million dollar
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interest payment the credit outcry in
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response to this has been extreme as
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evergren's bond prices have fallen
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significantly over the past few months
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international bondholders are now
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threatening to sue evergren in response
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to its debt crisis part of these
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struggles has to do with president xi
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jinping who has been cracking down on
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the chinese real estate sector
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presidency is attempting to reduce
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china's dependence on the property
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sector by reducing the amount of
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speculation in real estate c's mantra is
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that homes are for living in not for
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speculation presidency's actions are a
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threat to china's economic stability
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evergrand may be large fish in the pond
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but it's simply just one of many
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developers that are defaulting chinese
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real estate developers are currently
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dropping like flies for example chinese
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developer xi mao recently defaulted on a
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101 million dollar interest payment
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another developer named oceanwide
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holdings defaulted on a 175 million
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dollar loan a recent exchange actually
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revealed that a total of 484 companies
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were overdue on at least three
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commercial payments in the fourth
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quarter of 2021. that is a staggering
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amount but the disaster is just getting
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worse and worse as time goes on it's
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become quite obvious that chinese real
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estate may not be the best place to be
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in right now and property developers
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know this too well
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contracted sales for the top 100 real
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estate development companies were down
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35 percent in december 2021. that marks
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the first year that development company
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saw a decrease in sales in over 20 years
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according to kathy wood now one other
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thing i'd like to focus on here is china
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so much is going on in china that again
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the headlines are getting some of this
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but within one week a bloomberg
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journalist sophia horta acosta
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acosta
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reported that all of this happened in
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greater china this week i'm going to
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just read you a few of these to give you
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a sense of the drama here
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evergrand suspends trading on the stock
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exchange
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and the developer evergrand
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was ordered think about this to demolish
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39 illegal buildings
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because they weren't they didn't have
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the right permits
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can you imagine if that happened in the
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united states
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the largest hundred largest developers
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in china reported
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that their contracted sales were down 35
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in december and for the year as a whole
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they fell
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for the first time sophia says in at
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least five years i don't think i've ever
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seen them fall in the last 20 years
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so real real change a few of the other
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developers went bust shimano which was
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rated investment grade in november
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uh defaulted on a trust product and
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rocked the credit market
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and the central bank withdrew liquidity
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a lot of people thought they were going
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to
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increase liquidity because they said
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they would a china regulator vowed
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stability after stock market's rocky
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start but they haven't done anything
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about it yet
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and very interestingly the yuan
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the the rmb the local currency
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after a very strong year held up and i
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think it held up probably helped by the
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government supported by the government
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it is starting to weaken quite a
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telltale sign and one stock harang which
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had been
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had not traded since last march
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opened this week and dropped 50 percent
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even the federal reserve has taken note
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of china's housing bubble as the fed
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believes that china's real estate
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slowdown could ultimately hurt the u.s
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economy the fed stated that stresses in
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china's real estate sector could strain
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the financial system with possible
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spillovers to the united states to back
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up this claim the fed cited china's
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government and local debt as a major
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concern many economists assume that
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china's fast-growing gdp is a sign of
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economic prosperity however a
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significant portion of that growth was
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filled up by humongous debt bubble not
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just in real estate but in china's
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entire economy chinese household debt
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relative to both income and gdp has
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increased sizably over the past two
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decades household debt is growing
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disproportionately to gdp it's true that
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china's gdp has been growing incredibly
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quickly but what's growing even faster
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is china's debt balance the debt crisis
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is becoming so severe that china's total
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debt as a percentage of gdp is almost in
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line with that of developed countries
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imagine an economic powerhouse like
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china having almost as much relative
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debt to gdp as developed countries such
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an over-extension is bound to come with
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negative consequences another issue that
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the fed cited is a stretched real estate
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valuations and how the chinese communist
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party's crackdowns could crash those
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valuations that statement was in
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reference to the three red lines policy
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that the chinese government is
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implementing on the property sector the
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three red lines outline thresholds for
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the level of borrowing that real estate
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developers can take out the three
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requirements include a liability to
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asset ratio under 70 percent a net debt
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to equity ratio less than 100
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and they cash the short-term debt ratio
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of one companies that meet these
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thresholds will be able to increase
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their debt level by five percent per
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year for each red line that they comply
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with such a policy is reasonable to
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enact but the government should have
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implemented it many years ago kathy wood
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likens the ccp's actions to playing with
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fire because their new policies could
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burn the whole property sector into
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ashes now that the developers are
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overextended
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it's going to be difficult to bring them
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back to the ground floor two-thirds of
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the top 30 chinese developers have
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crossed at least one red line the issue
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with these three lines is that property
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developers can't just lower their
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liabilities with a snap of a finger the
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only way to meet the lines is by selling
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properties which is exactly what many
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developers are trying to do right now
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evergreen and kaiser group holdings are
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attempting to sell their properties as
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quickly as they can everland is looking
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to sell the evergan tower which is the
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tower that houses its hong kong
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headquarters however that property
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hasn't been sold yet kaiser group
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holding has put 18 of its projects with
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a combined square footage of 4.7 million
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square feet on the market and just like
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evergrand kaiser still hasn't sold any
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of these projects the issue with all of
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these properties going on sale is that
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there aren't any buyers available this
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is because all of the other real estate
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developers are also trying to meet the
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three redline requirements if there's no
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buyers for all of this property on the
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market the only solution would be for
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evergrand and kaiser to lower their
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price and when those prices are lowered
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over and over again the market is going
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to collapse this was evidence when
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everland announced its plan to offer a
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30 discount for all properties in an
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effort to raise cash a 30 drop is a
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large amount but even that is not enough
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for buyers to sweep in ever against
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properties are simply not selling fast
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enough for the company to pay off its
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loan interest this is going to hurt
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china's previously fast gdp growth that
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economists have marveled at for decades
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property development represents 29 of
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china's total economic output imagine
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what's going to happen to the gdp if the
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sector collapses according to the
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federal reserve china's upcoming
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slowdown is not an issue for chinese
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citizens but potentially for people all
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across the world the feds stated that
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china's economic slowdown could strain
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global financial markets through
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deterioration of risk sentiment pose
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risks to global economic growth and
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affect the united states in other words
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if the chinese real estate market
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crashed the entire global economy would
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suffer the world relies on china to
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manufacture almost every good that you
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can think of in 2019 over 28 of global
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manufacturing output was from china you
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might think that china is too big to
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fail but this type of economic slowdown
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is not one that we haven't seen before
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though the crisis happened many decades
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ago japan's 1989 real estate crash is
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very similar to china right now back in
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the 1980s japan was the golden model for
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growing economies economists thought
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that japan would eventually overtake the
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us as the largest world power news
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reports show that japan's theoretical
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land value was worth four times more
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than all of the land in the u.s
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other countries in the world envy
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japan's quickly growing real gdp which
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grew at an average annual rate of 3.89
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in the 1980s after decades of thriving
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economic growth japan was in a humongous
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debt crisis similar to china japanese
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corporations borrowed immense amounts of
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money after the ministry of finance
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encouraged corporate borrowing the
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finance ministry also promoted low
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interest rates deregulation and domestic
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stimulation that increased the money
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supply by around 8 to 10 percent per
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year prices climbed higher and higher
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and so did japan's gdp but even though
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japan rode up the ranks extremely
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quickly its economy collapsed even
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faster by 1992 the japanese stock market
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was down almost sixty percent to fifteen
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thousand nine hundred over the next two
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decades the nikkei index dropped an
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additional forty five percent on top of
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the existing 60 fall this crash is known
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as the lost decades because equity
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prices didn't recover for decades kathy
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wood believes china is in a very similar
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situation chinese real estate prices are
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elevated to new highs that are fueled by
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a growing debt crisis
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the implications of china's impending
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crash are immensely deflationary more
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specifically china's struggling economy
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is going to crash commodities to
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unbelievable lows an upcoming crash
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could have powerful implications
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commodities haven't crashed much yet and
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because of that kathy is confused
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weakening consumer confidence typically
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leads to lower commodity prices but
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consumer confidence is still relatively
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high which could be misguided by food
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prices
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now when china catches a cold
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commodities usually catch pneumonia and
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we're seeing this in a few commodities
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iron ore prices and so forth but it
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isn't quite clear cut yet
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and i was saying to our team this
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morning
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how could this be happening and the
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economy not be falling apart and the and
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the consumer not getting restless there
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well
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the consumers consumer savings is 75
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in real estate but what i learned this
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morning and it does make sense one of
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our analysts our newest genomics analyst
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pierce worked in his lab as he was
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getting his phd at texas a m
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with chinese
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with other chinese students
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in fact he only worked with chinese
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students
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and
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he learned that a greeting in china
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the equivalent of a hello
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is basically i hope you have enough to
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eat and so
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pork prices and rice prices are
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critically important
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and what do we see happening there pork
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prices are down depending on the measure
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33 to 50 percent rice prices are fairly
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flat and apparently uh that keeps the
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consumer happy now i don't know i think
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this property debacle is is quite
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something so we shall see
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property prices are already beginning to
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crash as i speak chinese property sales
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fell by over 16 percent year over year
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in november and new home prices fell by
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0.3 month over month a 0.3
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month-over-month decline might not seem
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like much but when annualized that's a
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3.6 percent decline chinese housing
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prices have decelerated to rates not
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seen since the 2015 chinese economic
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slowdown in arkhanvest's quarterly
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report kathy explained how she believes
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china's economy is going to slow down by
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a serious amount in the next three to
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six months kathy said if we are correct
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during the next three to six months the
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market is likely to focus more on the
[989]
risk of recession in the u.s the serious
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slowdown in the chinese and emerging
[993]
market economies and potentially a
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surprising drop in inflation some
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commodity prices already are flashing
[999]
red iron prices have dropped 35 percent
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perhaps in response to the real estate
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turmoil in china while the baltic
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freight dry index has declined more than
[1008]
40 percent dram prices 25
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and u.s lumber prices 33
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even with the wti oil price a notable
[1017]
outlier until recently has declined by
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12 percent the chinese communist party
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has recognized that china's economy is
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weakening and has taken measures to stop
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a crash from happening china's central
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bank recently announced that it cut
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interest rates to boost the economy this
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directly contradicts federal chair
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jerome powell who wants to raise rates
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as soon as possible china's property
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market is definitely in huge trouble
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that will likely continue to get worse
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as time goes on snp's rating agency
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expects a 10 decline in nationwide
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residential sales in 2022 due to credit
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tightening and restrictive policies that
[1051]
decline is going to affect you in some
[1053]
shape or form no matter where you are
[1055]
watching this video from that being said
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let me know what you think about china
[1059]
down below do you agree with kathy wood
[1062]
if you enjoyed this video please hit the
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like button and subscribe
[1066]
and i'll see you in the next one
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