Ark Invest founder Cathie Wood recently gave an interview where she compares the current state of China's economy to the Japanese real estate bubble in 1989. After the Japanese bubble burst, the economy stagnated for the following 30 years and their stock market has not recovered to the peak bubble levels. China is currently in its own real estate bubble which is now beginning to burst. Property developer Evergrande was recently declared to be in technical default after missing an $83 million interest payment. In this video we go over Cathie Wood's predictions and try to predict what is in store for Chinese economy.
Email us: Wallstreetmillennial @gmail.com
Check out our new website: Wallstreetmillennial.com
Support us on Patreon: https://www.patreon.com/WallStreetMillennial?fan_landing=true
#Wallstreetmillennial #Evergrande #China #Cathiewood
Email us: Wallstreetmillennial @gmail.com
Check out our new website: Wallstreetmillennial.com
Support us on Patreon: https://www.patreon.com/WallStreetMillennial?fan_landing=true
#Wallstreetmillennial #Evergrande #China #Cathiewood
What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing it's no secret that china's economy has been facing some serious problems. Recently, ratings agency fitch ratings recently declared evergrants to be in technical default after missing an 83 million offshore loan payment. If you've been watching the ever grand saga over the past few months, this shouldn't have come as too much of a surprise. Evergreen has been on the brink of default for almost half a year now and they've been stretching the 30 day.
Grace periods of bond repayments to the last minute, they've, desperately been selling off corporate assets and chairman xiujian has even pledged his personal hong kong real estate. As collateral now that they're in technical default, the common equity of the company will probably be rendered worthless. This is reflected in the stock price, which is down almost 90 year-to-date. To the surprise of many observers, the chinese government has failed to directly bail out evergrand.
However, they are asking state-owned property developers to take over some of evergrant's projects. This is an attempt to soften the blow to the country's real estate sector, but with dozens of massive property developers trying to offload their properties at fire, sale prices. New home prices have been falling precipitously and with the real estate sector, making up close to 30 percent of the country's gdp. The economic consequences of this meltdown will likely be severe.
Many observers are comparing china's current real estate troubles with the bursting of japan's real estate bubble in 1990.. Ever since that crash, japan's economy has stagnated. Today the average japanese worker is worse off than they were at the peak 30 years ago. In a recent interview, arc investor kathy woods says that china may be facing a lost decade similar to what japan faced in the 1990s we're looking at china today, much like we were looking at japan in 1989, so in 1989, japan was at the peak of its Real estate boom uh, the nikkei, had hit 40 000 or was close to it, and we thought we, the world, largely thought wow.
There's no stopping japan um japan's going to become the largest economy in the world, and of course that didn't happen. The nikkei has yet to get back to that 40. 000 uh level uh. So that's 30 years 30.
Yes, 30 years later, 31, two years later, so china, what's the analogy here well, china's real estate has been very very important. China is cracking down on real estate, and home prices are falling and there's a bit of social unrest about it. While china has led the world in economic growth since the turn of the millennium, kathy wood thinks they're on the brink of a turning point and will face an economic recession similar to japan, while kathy wood made her name as a disruptive technology investor, she studied economics In college and started off her career as an economic analyst, so she does have some credibility to make economic predictions, but china's economy is very different from japan and the bursting of their real estate bubbles will have a very different effect in this video. We'll look at the currency of china's economy and see if their real estate collapse will cause a lost decade. First, we'll look at japan's real estate bubble from the 1980s after the country was devastated by the second world war. They slowly started rebuilding their industrial capacity. Many japanese companies sent engineers to visit manufacturing facilities in the us, which was a technological leader at the time by adopting the latest american technologies, their economy recovered to pre-war levels within a couple decades by the 1980s, they had surpassed the us to be the new technological Leader, they pioneered factory automation and became a dominant exporter of consumer electronics. Instead of japanese companies trying to learn from american companies, it was the american companies desperately trying to copy the likes of toyota and sony.
In fact, japan actually surpassed the us to become the richest major country on a per capita basis. At the peak in 1995, the average japanese worker was making about 50 more than the average american worker, as people had more money to speculate on real estate home prices. 5X and perhaps the largest asset price bubble in modern history. At the peak of the insanity, the japanese imperial palace was estimated to be worth more than all the real estate in california, combined.
Of course, the palace was never for sale. The palace grounds are more than three square kilometers. If you applied the price per square foot of nearby property sales, the palace would have been worth trillions of dollars, but obviously this situation was not sustainable. In 1990, the real estate and stock market bubbles finally collapsed, and they have still not fully recovered.
To this day, the japanese stock market index is still 25 below the 1989 peak. Part of the stagnation can be attributed to excess leverage that built up the economy and is forced to unwind when the bubble burst, but the persistence of the stagnation can be more attributed to structural problems such as the aging population. In a lot of ways, china is in a similar situation. Today, as japan was in the 1980s, their economy is rapidly developing and they're on track to surpass the us to be the world's largest economy within the next decade.
A lot of this growth has been fueled by excessive leverage and speculation in the real estate market and in major cities like beijing and shanghai. Real estate prices have ballooned to be almost as unaffordable as they were in tokyo 30 years ago across china. The house price to annual income ratio has risen to roughly 17 times for perspective. This number is less than six times in the uk.
To buy homes, chinese homeowners and speculators alike have taken on ever increasing amounts of debt developers like evergrand, have similarly borrowed well beyond their means to benefit from the price bubble. Last year the government saw that the price bubble was unsustainable and implemented. The three red lines: policy for property developers to preemptively tamp, down speculation; these new regulations force heavily indebted developers like evergrand to start off loading, their properties at fire, sale prices and triggered the current financial distress. While this causes some pain in the short term, it will hopefully prevent the bubble from growing and eventually causing an even bigger disaster. In the future. The real estate industry makes up roughly 30 percent of the chinese economy. It employs tens, or possibly over 100 million people, either directly or indirectly. The evergrand disaster has shattered home buyer confidence.
New home sales have fallen off a cliff and home prices are also beginning to soften. Economists have been steadily downgrading the short to medium-term growth outlook for china, and some sort of a recession seems all but guaranteed. At this point, the big question remains: how long will the recession last kathy wood thinks we could be heading into the lost decade of economic stagnation, similar to what japan experienced in the 1990s. However, there are few key differences between china and japan, which makes such a scenario rather unlikely.
Remember that at the peak japan was an economic leader, they had the most advanced manufacturing technology. The problem with being the technological leader is that you can no longer copy other countries. If you want the economy to continue growing, you have to continuously make new innovations at home. After japan's real estate bubble burst their pace of innovation slowed dramatically and the us was able to reclaim the title of technological leader.
Economists have not yet come to a consensus about why japan's stagnation has been so prolonged, but the most convincing theories have to do with their rapidly aging population. China's per capita income has increased more than 20-fold over the past 30 years, but this started from a very low base on a per capita basis. The average american is still six times richer than the average chinese for comparison. The average japanese was 50 richer than the average american at the peak, so the situation is far from analogous.
The reason that china is on track to surpass the us as the world's largest economy is because their population is four times bigger, not because they are more. Technologically advanced, while the short-term outlook for china's economy is bleak in the long run, they will almost certainly continue to close the gap with the us over the coming decades. Suppose your economy is very primitive and you still use donkeys to plow your field. You send some observers to foreign countries where you see them using tractors, which are hundreds of times more efficient by copying their technology. You can produce massive improvements to productivity in a very short period of time. That's basically what china's been doing for the past 30 years. In the 1980s, there was a roughly 100 fold gap between the us and china on a per capita basis. They have reduced this gap to six times today and they probably still have room to run for at least the next 20 or 30 years.
Almost all economies are liable to boom bust cycles, and china is probably particularly vulnerable, given the outside importance of real estate in their economy. While the evergreen debacle could easily cause a one or two year, recession, the chances of them having a japan-style lost decade is extremely remote. Alright, guys that wraps it up for this video. What do you think about the chinese economy? Do you think they're in store for a lost decade? Let us know in the comments section below as always.
Thank you so much for watching and we'll see in the next one wall, street millennial signing out.
The elephant in the room for China is the super low birth rate, coupled with a massive number of upcoming retirees whose well being are dependent on an ever growing economy. Even without the problems of Chinese real estate, the fast dropping youth population coupled with the rapidly increasing elderly population points to economic disaster. Don't worry though. The government will find a solution, like producing Soylent Green using the rapidly growing resource.
No comparison with 1990 Japan!. China is keeping USA "afloat" and is dominating US economy especially computer chips market! China is just breaking the Billionaires who took advantage of growth of Chinese economy with fraudulent building projects!. Western analysts fail to understand Xi does not understand Chinese economy – "Belt and Road" investments just starting to pay off in the form of a new Asia market!. The power of China is its greatest asset and it is dominating computer chip research increasing Trade surplus and gold bullion markets!. Who benefits I'd USA goes bankrupt?. ASIA NOT China!.why!. Well why are Chinese companies delisting from US Stock Exchange and listing in Hong Kong Stock Market?. These companies no longer need US support – they not like the way USA has blocked technology and bullied USA allies to reject Huawei!. China /Asia are the future so these companies want to add to the Chinese success story! Look at last 50 years and see how China has over one huge problems – developed new technologies – look at basket case USA that has lost its way in future!.
Why didn't u mention china's population problem? They are also going to have a massive old population within the next few years. They have a shit ton of old people. It's the same problem that Japan had that u mention lol.
China GDP per capita is very low. Their education level is very low. Only 30% of population has highschoold education or higher. And 70% of population lives in rural areas.
China is very big country so if they have 200-300 million well educated people if shows as a huge relative economic growth globally. Problem is that their population shrinks and most of population cant move to modern jobs that exist in West and more developer countries. China is no more cheap labor place. But most of its workers are educated like they were.
Thats the middle income trap that exist in Mexico too. While China has some very advanced technologies and its number of engineers is absolutely high, as a country they propably have achieved their peak. There is no reseve labor for high end jobs available and existing labor pool shrinks too. They can only make the existing well educated work force better in short and medium term. And this sets definite limit to their economic growth. There is also possibility of great social unrest as jobs go abraod and really big portion of people dont have as good jobs than before. Because they have not the education they could replace those jobs on other well paid sectors. China propably has to put more money on retirees, internal security and social security to keep everything stable.
All this while their more advanced economy sectore cant expand in China because labor shortages. While they also put more money on military. And have huge debt bubbles.
China is screwed. In 35 years all those tofu buildings will have collapsed. The children and grandchildren will look back at their ancestors in disbelief saying 'how could they have been so stupid?'
You left out politics. Due to Covid and China’s belligerent stance towards its Asian neighbors, companies have started re-evaluating their dependence on China for supply chain and some are moving out, either to other Asian countries or back home. China is 30-50 years from having domestic consumption to support its employment. And that assumes no loss of business. If Xi doesn’t calm down and make some attempts to get along with the world, they may end up like Russia.
I don't know how anyone gives Cathie more money. If you track her buy/sells of Chinese stocks like Tencent, she buys high and sells low lol. China is the factory of the world, their growth will obviously slow down but it's not getting hit by stagflation. Thank you for ending the video the way you did, it is highly unlikely indeed.
Your assessment has a gaping hole in it. You fail to take into account the catastrophic demographic crash coming for China. Many demographers are now believing that China's population will decline by 50% by 2060, a far more precipitous drop than anything Japan experienced.
The best thing one can do right now is to invest. The huge influx of money that govt has pushed into economy is so big that it's gonna flow like crazy into real estate and stocks for many years to come and would work in conjunction with TINA effects. There would be fears here and there with brief downtrend but it gonna shoot up for sure, not fully because of increasing valuation but because of decreasing dollar value. The cash sitting in bank would decay faster than ever for next few years and is worst thing to do right now. Generally, there is a lag of 10-12 months for stimulus to show it's full effects.
The surest sign of trouble ahead is when someone says, "their is no stopping them". The "experts" said this about Japan's economy in the 90's, Mortgage back securities in late 90's and early 2000's, about Bre-x production of gold and now China's market.
I don't know .. we predicted wrongly China's collapse for 2 decades. China is not Japan. China have a much larger capacity and unlike Japan, China do not have to abide to US directives. Japan was forced to sign the US initiated Plaza Accord,… Japan do not have a choice. Many Japanese say the accord was the turning point for the Japanese economy.
Chinese population is also aging rapidly what you didn't mention in the video. Soon there will be social costs associated with a large number of old people, as well as the costs of maintaining the developed rail and road infrastructure.
The question is how long will the Chinese people tolerate all the economic instability caused by the CCP? The video mentioned social unrest, but that is really the wild card.
China will see a lost decade just like Japan, and of coarse it will turn into lost decades. The demographics including population decline will hamper any long term growth that they will see. Funny, the Chinese were worried about turning into Japan and they made steps to avoid similar mistakes, but reality comes for everyone in the end.
One thing that is not mention is the importance of reforms for China and the fact that under Xi the reforms are stagnated. The 2013 CCP plenum explained very well what kind of reforms China needed (abolishing hukou system, land reform, tax property reform, local fiscal autonomy, SOEs privatization and liberalization …) but with Xi these reforms have not been implemented. These reforms are the only way China can have a growing TFP. And a growing TFP is the only way for China to growth considering that more capital it's not a solution (since the over investments that has been made in China expecially in terms of infrastructure investments) neither labor force is (due to demographic decline).
Economic studies are all about making the wealthy richer but Xi is more into society stability. See how tame hk has become, 95% of the population are thankful.
Japan did not recover because of china rise. Remember how a vcr cost a month salary, Japan really f&&k people upside down. China brought many good affordable improvement to many people.
Credit goes to Xi who decided enough is enough. Unlike other countries that allow the wealthy to screw people over and over. Xi makes the wealthy pay for the financial crimes, lock them up until they coughed up all the ill gotten gains.
China's unprecedented rate economic of growth over the past 40 years cannot be repeated nor will it be renewed, now that Western Democracies and Rest-of-World, which flooded China with Trillions$ of FDIs over the past decades, now realized, they all have been supporting a belligerent regime that desires world domination and hegomony.
Maybe there is still grow potential in rural China, but is it possible without western capital ?
Chinese gouvernment is corrupt and unpredictable. If I had money and wasn't worried about political unstability, I would rather invest in Africa. Maybe that's why the Chinese gouvernment prefers investing in Africa than in China.
Don't bet against Cathie Wood! She is spot on, your information come from "official" channels and reality is far grimmer than anyone can imagine. They will manage/survive but the gravy train is gone for good, damage is done and Xi is left with very little room as they have cornered themselves in every possible way, it's a tsunami of self induced bad situations.
China has a different problem – middle income trap. As big companies in Japan grew, they also began outsourcing to korea and china for cheap labour. Those factory jobs changed to white collar R&D jobs and a wealthy country with good social security (for laid off factory workers). China doesnt want to raise wages for the factory workers, they fear losing those jobs to vietnam and india, but they arent rich enough to have a self sufficient consumer economy for 1.4 billion.
Japanese are "worse off", but they still have a very high standard of living.
The average standard of living for the Chinese is quite low once you venture past the glitz and glamor of the Beijing, Shanghai, Guangzhou and Shenzhen.
I like how Cathy uses history to determine the future for other countries and companies. She is a hipercrit that does not apply the same logic using history to her own bubble ETFs.
Did you check the population data for china fam? China's population is in a much worse state than Japans was and is, and those are the numbers the CCP put out, so we can assume they're probably worse off than even those numbers suggest. Japan never had a one child policy.
The situation in China is much more dire than most people realize. All of those unfinished properties, all of those ghost towns, amusement parks, etc have a date with a wrecking ball. The Chinese people are currently being fired from their jobs left and right, and many foreign businesses are leaving for places like Viet Nam. Actual Chinese manufacturing capability is far less than one would think without countries like Taiwan, S Korea and the US building their products there, which is rapidly disappearing. It's done, stick a fork in it.
PS: frankly comparisons with Japan are off the mark.
I think China is going to have a "lost forever", not just a decade. Their advantage was in cheap labor. They no longer have that. They have definitely improved their infrastructure, and dramatically improved their "human capital." But the rule of law is still weak, and getting weaker. Xi and the CCP for some reason feel the need to show their might. That will discourage foreign capital investment. Their population is aging rapidly. The result will be long term stagnation. The Middle Income Trap.