The Chinese economy is experiencing a “near-complete collapse” that could have “serious consequences” for the United States, according to a real estate investment analyst.
Graham Stephan, a 32 year old self-made multi-millionaire, says China has become too reliant on its failing housing developers and the fallout could send shockwaves around the world.
China’s unhealthy obsession
According to Stephan, the real estate market in China is so “crazy”, the median house price in Beijing can be up to 25 times the median annual income.
That ratio is significantly higher than in New York, for example, where the median home price is around 10 times the median annual income.
“Chinese are obsessed with real estate and 70% of China’s wealth is tied to real estate (twice as high as the US),” Stephan said.
“Chinese citizens prefer to invest in real estate as the Chinese stock market is notoriously opaque and unreliable.”
“The Shanghai Composite (similar to our S&P 500) has not yet recovered from its 2008 peak, despite China’s GDP growing by nearly three times since then!”
Stephan says China’s “insatiable” demand for real estate has led to “ponzi schemes” where developers pre-sell unbuilt homes, use the pre-sale money to start more projects, and then collect more pre-sales from new projects.
“The government’s strategy for over-leveraged properties is to lend more money to finish them and pretend that everything is fine,” he said.
Only recently, China announced its launching government-backed real estate funds to support delayed residential projects.
Unfolding real estate crisis
The extent of China’s problems became widely known in mid-2021, when one of the country’s biggest developers, China Evergrande, began defaulting on its debts.
However, there are also many other developers in the same position.
“Nearly half a million customers have lost their deposits as the banks lent indiscriminately to housing developers who are now facing cascading defaults,” Stephan said.
“The government has agreed to pay up to $15,000 dollars for lost deposits, but only if the banks weren’t involved in “non-compliant” transactions.”
Since then, there have been ongoing reports of mortgage boycotts, where investors refuse to pay loans for things they were promised but never received.
Chinese bank runs
The real estate crisis quickly spread to banks, which had loaned out depositors’ money to developers who were now defaulting on payments.
Asia Markets was among the first media outlets to report on the so-called ‘bank runs’, where Chinese depositors demanded their money back from the banks.
“As frozen deposits mounted and protests erupted all over China, investigations revealed critical systemic issues,” Stephan said.
“For starters, during the Covid crisis, the government had lowered the 10% limit on assets that banks had to keep in cash.
“And investigations revealed corrupt practices in the banks, some of which were taken over by criminal gangs who transferred the deposits outside the country.”
Stephan says reports suggest that more than 400,000 customers have fallen victim to such activities and public trust in the banking system plummeted.
‘Serious consequences’
The problems might be confined to within the borders of China, but Stephan says the United States will not be immune if China’s economy collapses.
“As the semiconductor shortages showed us, events across the world can have serious consequences back home,” he said.
“Chinese companies have substantial investments in US equities and might sell them during a crisis.
“This can tilt the investor sentiment to fear and trigger selloff. Short-term investors should keep an eye out for news from China.”
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