China Is Headed for a 'Lehman Moment' – Here's What to Do
- Shah Gilani, Total Wealth
- Oct 6, 2023
- 4 min read
It's the weekend, so we're going to have some fun. We'll combine the premise of a popular 1970s movie with a tried and so-far successful policy prescription for averting financial disaster.
All of this relates to what triggers an actual capital markets and global economic meltdown, because it all pertains to China's imploding property market.
The premise of the 1979 disaster movie The China Syndrome was that a nuclear power plant leak in the U.S. would melt all the way through the earth's center to China.
Now, the opposite is actually true. The potential meltdown of the Chinese property market, the largest asset class in the world at $60 trillion, could burn global capital markets through the world to the U.S.
Already, the tip of the titanic property market, Evergrande, once China's largest property developer in terms of valuation, is melting to its core.
Evergrande first defaulted on some loans in 2021 and now they're out of money to pay any more interest or principal on any loans or bonds.
The developer's already left millions of would-be homeowners who bought into more than 700 residential property projects, many of which are being built or may never be finished or ever occupied, in the lurch.
Mortgage borrowers have stopped paying for homes they may never see.
Country Garden, once China's largest property developer in terms of sales, with more than 3000 projects completed and under construction -- including many finished unoccupied apartment complexes -- has missed debt payments and is failing.
And yet, like Evergrande, it was once considered too big to fail.
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And it's not just residential property that's in trouble. All across China, newly built shopping malls are empty, having never been occupied.
Towering office buildings and entire cities are empty. Construction sites everywhere are idle. There's no company cash flow to keep working on projects.
No money in the form of pre-sales to finish abandoned residential projects. No money flowing from wealth management products mom and pop investors across China flocked to for their high interest rates, courtesy of the expected high interest to be paid by property developer borrowers.
It's not just the amount of leverage in the system, or comedown in the once $60 trillion valuation of Chinese property, or how much is owed to how many. All of that can theoretically be calculated.
It's that 70%-80% of the Chinese population's wealth is tied to property that's unimaginable.
So, it's not just about developers, or borrowing, or defaulting, or markets. It's about the core of the Chinese economy and the population's future that's melting down.
In the past, whether it was Treasury Secretary John Paulson promising to pull out a metaphorical bazooka to blast through subprime market melting problems, or in 2012 ECB president Mario Draghi telling the world the European Commission would do "whatever it takes" to save the splintering European Union and European banks, policy makers have alluded to or in fact used their bazookas, their ultimate weapon to arrest financial meltdowns, whatever those measures were or would have to be.
Well, China's policy makers better have a stockpile of bazookas because their property problem won't be fixed by one or two or a hundred.
So far, Chinese regulators, officials, policy police and CCP leaders have fired small bore fixes at the problem, like reducing mortgage rates, loosening restrictive regulations on speculating in property, prompting banks and local governments to lend to developers to keep them afloat, but everything they're doing isn't enough.
Property prices keep sinking. And the death spiral keeps picking up speed.
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Remember what happened in the U.S. when home prices, which only ever went up, or so everyone thought and bet on, went down?
The $800 billion subprime bubble burst, imploding investment bank Lehman Brothers and triggering a wave of contagion that swept across the globe.
That so-called "Lehman Moment" is going to happen again, only not in the U.S., but in China, when the property dam -- that's been plugged with proverbial gum and goo -- breaks.
If America's $800 billion subprime meltdown caused an insane financial crisis and Great Recession, imagine, if you can, what the implosion of a $60 trillion asset class will do.
If you can't, then imagine if a nuclear meltdown actually could burn its way through the earth. Because that's what it's going to feel like.
That's why it's time to start shorting China, and there are a bunch of ways to do it: short the iShares China Large-Cap ETF (FXI) or any Chinese-centric ETF, buy puts or put spreads on Chinese ETFs or banks or any asset related to Chinese property.
However you do it, now's the time.
And real estate isn't the only area of China's economy that's in a struggle.
I've been shouting from the rooftops for a while now about the potential consequences of the "chip wars" currently going on between China and the United States.
With their property market in jeopardy, they could double down on trying to assert control over the next generation of A.I. microchips, with potentially dire consequences if they succeed at doing it.
That's why I wanted to make sure you know exactly how to protect your investments and even potentially grow your wealth in the months ahead as this all shakes out.
Good Investing,
Shah Gilani
Publisher, Total Wealth