China has grown to become an economic powerhouse over the past two decades. Not a single country in the world has experienced the same level of growth as china, but what if i told you that the entire growth of china was all a bubble? That's what the ceo of arkhan vest kathy wood dinks as she likens the growth of china to japan's 30-year economic disaster in the early 1990s, just like japan's gdp that was spearheaded by a real estate bubble. China is currently experiencing the largest housing bubble in history. In this video i'll cover from top to bottom, how the world is about to wake up to china's destined collapse over the past 20 years, china's economy has grown substantially, but a considerable portion of that has come from real estate.

Property developers have borrowed money to expand their real estate portfolio to hundreds of cities, we're talking about modern glass and steel apartments, office, buildings and houses. All across cities in china. Speculators began purchasing houses with the sole purpose of price appreciation. After all, from the perspective of chinese citizens, housing prices have been increasing year after year for decades.

This was in part from the rapid population growth that china experienced, but the speculation grew even further than that, because housing prices just kept increasing year after year. The majority of chinese citizens could no longer afford a standard house or apartment in cities like beijing or shanghai. The logical move would be to purchase a property within the vicinity of the cities, but far enough, so that prices would be cheap and that's exactly what many citizens did. People begin flocking towards houses and apartments, not in chinese cities rather 10 or 15 miles away.

Because of the increasing demand for houses near cities, prices began to increase, leading citizens to expand even further away from the cities. Property developers believed that this expansion would continue, so they preemptively built houses further and further out. Nowadays, if you drive an hour or two outside of beijing or shanghai you'll notice, something very strange: there are plenty of modern buildings in great condition, but there's one issue: there's nobody there. Those cities are named the ghost cities, because the only reason why they exist is because speculators think prices will increase.

This is a testament to china's growing real estate bubble, a significant driver of the country's economy. Take a look at china's most renowned, ghost town, ordo's new town. The city was expected to house 1 million people, but that number went down to 300, 000 and finally, to 100 000. In 2016., only after moving top schools into the city was orto's new town able to fill its empty houses.

These types of empty units are so widespread that the aggregate amount of space can literally house the entire country of italy after 20 years of appreciation. The chinese real estate sector is now worth over 50 trillion dollars. Two times more than the us, and almost four times more than china's entire gdp lumis sales, an investment management firm, estimated that 70 of china's entire wealth is in real estate in china. It's not atypical to see citizens put aside money for decades just to purchase one property property prices near cities are so high relative to income that, even after years of saving citizens will have no choice but to rely on mortgages to afford shelter.

This is exaggerated by the fact that increasing property prices make citizens feel the fear of missing out, ultimately forcing citizens to take out dangerous levels of loans. Four out of the top 10 of the most unaffordable cities to purchase housing in are all located in china. This type of appreciation is concerning and won't continue forever. We saw this before in america's 2008 recession and we're seeing similar signs in china.

China's real estate boom is already showing signs of a substantial slowdown, because a chinese housing market just keeps accelerating in prices. Property developers have done anything to expand their real estate portfolios as fast as possible just like before any financial crisis. Greed took the center stage and developers were soon stuck with too much debt to handle. One of these developers included the epitome of chinese real estate development.

Evergrand evergreen is one of the largest real estate developers in the world by using corporate bonds issued to international investors, evergreens grew its real estate portfolio to over 565 million square meters of development land. This was only possible because evergrand took out over 300 billion dollars in debt. Such enormous access to capital led evergrand to thrive. In 2018, evergren became the most valuable real estate company in the entire world.

This positive sentiment soon began to shift dramatically, as investors realized that evergrand was in major trouble. Credit agencies recently had to categorize evergrand in default after the company failed to repay a 260 million dollar interest payment. The credit outcry in response to this has been extreme, as evergren's bond prices have fallen significantly over the past few months. International bondholders are now threatening to sue evergren in response to its debt crisis.

Part of these struggles has to do with president xi. Jinping, who has been cracking down on the chinese real estate sector presidency, is attempting to reduce china's dependence on the property sector by reducing the amount of speculation in real estate. C's mantra is that homes are for living in not for speculation. Presidency's actions are a threat to china's economic stability.

Evergrand may be large fish in the pond, but it's simply just one of many developers that are defaulting chinese real estate developers are currently dropping like flies. For example, chinese developer xi mao recently defaulted on a 101 million dollar interest payment. Another developer named oceanwide holdings, defaulted on a 175 million dollar loan. A recent exchange actually revealed that a total of 484 companies were overdue on at least three commercial payments in the fourth quarter of 2021..

That is a staggering amount, but the disaster is just getting worse and worse, as time goes on, it's become quite obvious that chinese real estate may not be the best place to be in right now, and property developers know this too well contracted sales for the top 100, real estate development companies were down 35 percent in december 2021. that marks the first year that development company saw a decrease in sales in over 20 years according to kathy wood. Now one other thing i'd like to focus on here is china. So much is going on in china that again, the headlines are getting some of this, but within one week a bloomberg journalist, sophia horta, acosta acosta, reported that all of this happened in greater china.

This week, i'm going to just read you a few of these to give you a sense of the drama here: evergrand suspends trading on the stock exchange and the developer. Evergrand was ordered. Think about this to demolish 39 illegal buildings because they weren't they didn't have the right permits. Can you imagine if that happened in the united states, the largest hundred largest developers in china reported that their contracted sales were down 35 in december and for the year as a whole, they fell for the first time, sophia says in at least five years.

I don't think i've ever seen them fall in the last 20 years, so real real change. A few of the other developers went bust shimano, which was rated investment grade in november. Uh defaulted on a trust, product and rocked the credit market and the central bank withdrew liquidity. A lot of people thought they were going to increase liquidity because they said they would a china regulator vowed stability after stock market's rocky start, but they haven't done anything about it yet and very interestingly, the yuan, the the rmb, the local currency after a very strong Year held up - and i think it held up probably helped by the government supported by the government.

It is starting to weaken quite a telltale sign and one stock harang, which had been had not traded since last march, opened this week and dropped 50 percent. Even the federal reserve has taken note of china's housing bubble as the fed believes that china's real estate slowdown could ultimately hurt the u.s economy. The fed stated that stresses in china's real estate sector could strain the financial system with possible spillovers to the united states to back up this claim, the fed cited china's government and local debt as a major concern. Many economists assume that china's fast-growing gdp is a sign of economic prosperity.

However, a significant portion of that growth was filled up by humongous debt bubble, not just in real estate, but in china's entire economy. Chinese household debt relative to both income and gdp, has increased sizably over the past two decades. Household debt is growing disproportionately to gdp. It's true that china's gdp has been growing incredibly quickly, but, what's growing, even faster is china's debt balance.

The debt crisis is becoming so severe that china's total debt as a percentage of gdp, is almost in line with that of developed countries. Imagine an economic powerhouse like china having almost as much relative debt to gdp as developed countries. Such an over-extension is bound to come with negative consequences. Another issue that the fed cited is a stretched real estate valuations and how the chinese communist party's crackdowns could crash those valuations.

That statement was in reference to the three red lines policy that the chinese government is implementing on the property sector. The three red lines outline thresholds for the level of borrowing that real estate developers can take out. The three requirements include a liability to asset ratio under 70 percent, a net debt to equity ratio less than 100, and they cash. The short-term debt ratio of one companies that meet these thresholds will be able to increase their debt level by five percent per year.

For each red line that they comply with, such a policy is reasonable to enact, but the government should have implemented it many years ago, kathy wood, likens the ccp's actions to playing with fire, because their new policies could burn the whole property sector into ashes. Now that the developers are overextended, it's going to be difficult to bring them back to the ground floor. Two-Thirds of the top 30 chinese developers have crossed at least one red line. The issue with these three lines is that property developers can't just lower their liabilities with a snap of a finger.

The only way to meet the lines is by selling properties, which is exactly what many developers are trying to do right now. Evergreen and kaiser group holdings are attempting to sell their properties as quickly as they can. Everland is looking to sell the evergan tower, which is the tower that houses its hong kong headquarters. However, that property hasn't been sold yet kaiser group holding has put 18 of its projects with a combined square footage of 4.7 million square feet on the market and just like evergrand kaiser still hasn't sold any of these projects.

The issue with all of these properties going on sale is that there aren't any buyers available. This is because all of the other real estate developers are also trying to meet the three redline requirements. If there's no buyers for all of this property on the market, the only solution would be for evergrand and kaiser to lower their price, and when those prices are lowered over and over again, the market is going to collapse. This was evidence when everland announced its plan to offer a 30 discount for all properties in an effort to raise cash.

A 30 drop is a large amount, but even that is not enough for buyers to sweep in ever against. Properties are simply not selling fast enough. For the company to pay off its loan interest, this is going to hurt china's previously fast gdp growth that economists have marveled at for decades. Property development represents 29 of china's total economic output.

Imagine what's going to happen to the gdp if the sector collapses according to the federal reserve, china's upcoming slowdown is not an issue for chinese citizens, but potentially for people all across the world. The feds stated that china's economic slowdown could strain global financial markets through deterioration of risk sentiment, pose risks to global economic growth and affect the united states. In other words, if the chinese real estate market crashed, the entire global economy would suffer, the world relies on china to manufacture almost every good that you can think of. In 2019, over 28 of global manufacturing output was from china.

You might think that china is too big to fail, but this type of economic slowdown is not one that we haven't seen before, though, the crisis happened many decades ago, japan's 1989 real estate crash is very similar to china right now, back in the 1980s, japan was The golden model for growing economies, economists thought that japan would eventually overtake the us. As the largest world power news reports show that japan's theoretical land value was worth four times more than all of the land in the u.s other countries in the world. Envy japan's quickly growing real gdp, which grew at an average annual rate of 3.89 in the 1980s. After decades of thriving economic growth, japan was in a humongous debt crisis similar to china.

Japanese corporations borrowed immense amounts of money after the ministry of finance encouraged corporate borrowing. The finance ministry also promoted low interest rates, deregulation and domestic stimulation that increased the money supply by around 8 to 10 percent per year, prices, climbed higher and higher, and so did japan's gdp. But even though japan rode up the ranks extremely quickly, its economy collapsed even faster. By 1992, the japanese stock market was down almost sixty percent to fifteen thousand nine hundred over the next two decades.

The nikkei index dropped an additional forty five percent on top of the existing 60 fall. This crash is known as the lost decades because equity prices didn't recover for decades. Kathy wood believes china is in a very similar situation. Chinese real estate prices are elevated to new highs that are fueled by a growing debt crisis.

The implications of china's impending crash are immensely deflationary. More specifically, china's struggling economy is going to crash commodities to unbelievable lows. An upcoming crash could have powerful implications. Commodities haven't crashed.

Much yet, and because of that kathy is confused. Weakening consumer confidence typically leads to lower commodity prices, but consumer confidence is still relatively high, which could be misguided by food prices. Now, when china catches a cold commodities, usually catch pneumonia and we're seeing this in a few commodities, iron ore prices and so forth, but it isn't quite clear cut yet, and i was saying to our team this morning: how could this be happening and the economy not Be falling apart and the and the consumer not getting restless there. Well, the consumers.

Consumer savings is 75 in real estate, but what i learned this morning and it does make sense one of our analysts, our newest genomics, analyst pierce, worked in his lab as he was getting his phd at texas, a m with chinese with other chinese students. In fact, he only worked with chinese students and he learned that a greeting in china, the equivalent of a hello, is basically, i hope you have enough to eat, and so pork prices and rice prices are critically important. And what do we see happening there? Pork prices are down, depending on the measure 33 to 50 percent. Rice prices are fairly flat and apparently uh that keeps the consumer happy.

Now i don't know, i think this property debacle is is quite something, so we shall see. Property prices are already beginning to crash. As i speak, chinese property sales fell by over 16 percent year over year in november, and new home prices fell by 0.3 month over month. A 0.3 month-over-month decline might not seem like much, but when annualized that's a 3.6 percent decline.

Chinese housing prices have decelerated to rates not seen since the 2015 chinese economic slowdown in arkhanvest's quarterly report kathy explained how she believes china's economy is going to slow down by a serious amount in the next three to six months. Kathy said, if we are correct during the next three to six months, the market is likely to focus more on the risk of recession in the u.s, the serious slowdown in the chinese and emerging market economies and potentially, a surprising drop in inflation. Some commodity prices already are flashing. Red iron prices have dropped 35 percent, perhaps in response to the real estate turmoil in china.

While the baltic freight dry index has declined more than 40 percent dram prices, 25 and u.s lumber prices 33, even with the wti oil price. A notable outlier until recently has declined by 12 percent. The chinese communist party has recognized that china's economy is weakening and has taken measures to stop a crash from happening. China's central bank recently announced that it cut interest rates to boost the economy.

This directly contradicts federal, chair jerome powell, who wants to raise rates as soon as possible. China's property market is definitely in huge trouble that will likely continue to get worse as time goes on. Snp's rating agency expects a 10 decline in nationwide residential sales in 2022. Due to credit, tightening and restrictive policies that decline is going to affect you in some shape or form, no matter where you are watching this video from that being said, let me know what you think about china down below.

Do you agree with kathy wood? If you enjoyed this video, please hit the like button and subscribe and i'll see you in the next one.