China’s housing boom has been halted in order to curb risky business. The Communist government has ordered the demolition of one of China’s largest property developers, Evergrande Group, and the company is expected to be liquidated due to their heavy debt load. Shares of Evergrande have fallen 87% this year and are now at a record low after Beijing’s decision to halt construction on new projects and provide financial support for buyers who want out from their properties. This
means China is in the midst of a housing crisis.
The decision to liquidate Evergrande was announced on Sunday by China’s financial regulator, the China Securities Regulatory Commission CSRC. Shares in the parent company in Hong Kong dropped 3.5% in early trading Monday to $0.0599 per share, their lowest level since December 1999, according to Bloomberg.
Evergrande is one of six property developers that have been ordered by the government to stop development on their under-construction projects because it has too much inventory.
However, the Chinese government isn’t just stopping there, they are taking even more drastic measures against these massive conglomerates such as Evergrande. The people that built these empires are now being arrested and brought up on charges such as corruption, bribery and insider trading after the government shutdown their companies.
The latest example of this is Xu Xiang who is one of the owners of Guangzhou-based developer Pactera Technology Group, which was investigated by Chinese authorities for misappropriating funds after borrowing billions of yuan from two other property developers. While this may sound like great news to the US since China’s economy is starting to slow down, they are owed $1T+ by the US government and what used to be their biggest creditor is now actively pursuing them with every resource at their disposal.
We’re talking about a $10T economy, folks!
China’s housing market is the biggest risk facing the country and if it continues to slow down, which is expected in 2018 according to Nomura Holdings Inc., this could cause China’s economy to go all the way back into recession.
The epic proportions of China’s housing bubble is just one of the many reasons why I have been warning about this in my reports for years, but only few seemed to want to listen. And now the ship has sailed…
But let us not get ahead of ourselves! We are still at risk of a major collapse in Treasuries if the Fed were to raise rates 4 times this year.
As I’ve mentioned earlier, the Chinese are already experiencing this crisis and they know how it can end up if not managed properly. Which is why China has been accumulating gold at a record pace over the last decade in order to prepare for such an event see chart below. And now they are also buying farmland across the world as a way to secure food supply.
Since 2016, China has been actively acquiring farmland in Eastern Europe as well as Brazil as a natural reaction to this crisis. Brazil is an especially interesting case because Brazil’s deforestation was one of the major reasons why Brazil rose from being a 3rd world country into a developing nation in the first place. The reason for this is simple: if you have food, you have everything.
In addition to all of this, China has been creating a massive credit bubble to avoid a hard landing due to these very same reasons. And while that may seem like a counter intuitive move for a country that’s facing a housing crisis, it’s the only way to keep the whole economy afloat in China if they want to avoid social unrest.