It’s inevitable!
For two decades, that’s what so many experts thought about China overtaking the U.S. in GDP and influence. And I understand why.
China has an enormous population (approximately 1.4 billion as I write). Its economy was growing at an astounding clip, with GDP growth coming in at double digits for much of the ‘90s and 2000s. Even better, the country was eager to do business with the world. While the U.S. might feature the Statue of Liberty welcoming in the “tired” and “huddled masses yearning to breathe,”…
The Red Dragon was busy being a beacon of tax breaks and cheap labor – a combination that seemed to work very well for it year after year after year.
In 2001, Goldman Sachs’ Jim O’Neill published a piece on the “BRIC” nations: Brazil, Russia, India, and China. He argued that each one had the potential to become a major economy by 2050, with China standing out especially.
O’Neill did offer cautions about his theory, as he should have. But his bullish thesis still sparked a global craze for Chinese assets, with investors all around the world wanting “in.” And, naturally, those new waves of money only helped the country grow even more.
The good times seemed like they would never end.
Here’s the thing, though: There’s no such thing as a perfect investment. So anytime something is presented as such, you should run. No matter that everyone else is racing the other way.
I can tell you now that the dominance of the Chinese economy was never inevitable, but its collapse was.
Understanding Evergrande
I’ve worked in real estate my entire adult life.
That’s what I did right out of college. It’s what I did when I struck out “on my own” (with a partner). And it’s what I’ve loved ever since.
Yet, I was never tempted enough to buy into Chinese real estate.
Yes, the government was pulling people out of the countryside into its cities to keep up with its ever-increasing economic opportunities. That meant both housing and commercial real estate (CRE) opportunities were booming.
Even so, I couldn’t get past one very big problem…
Despite welcoming capitalist concepts and companies, China was not and is not a free-market economy. Far from it.
Remember that its official name is the People’s Republic of China. And its governing body is the Communist Party of China – or, as we in the U.S. know it, the Chinese Communist Party (CCP).
Either way you look at it, you see a concentrated focus on government initiative, influence, and power. And whenever you have that much government involvement, it’s a recipe for disaster.
Communist operations are too interested in generating impressive numbers and not nearly as concerned about what’s behind those numbers. It was true in the U.S.S.R. with its five-year plans all those decades ago, and it’s true today with China.
People wanted to believe it was different this time. But it wasn’t. It never is.
Evergrande Group, a now-defunct Chinese property developer of once-epic proportions, serves as a proverbial example. At its peak in 2017, it boasted a market value of more than $50 billion. And a year later, it had ranked as the world’s most valuable real estate company.
The firm owned more than 1,300 real estate projects in China, including enormous housing developments.
To achieve that kind of scale, it accumulated $300 billion in debt, which is also a world record. Business Insider says that was “equivalent to 1.6% of China’s GDP” – proof of how out of control the situation got.
That’s why, when Evergrande began falling in 2021 after the national shutdowns sent shockwaves through its operations… it snowballed into one of history’s most epic fails.
This Isn’t Going Anywhere Good
Now in 2024, the China Securities Regulatory Commission says it was all a lie anyway. That the now defaulted and defunct Evergrande inflated its revenue by $78 billion.
This is something it probably should have been suspicious of well before this point. Instead, it was busy basking in the supposed success story and the economic benefits it involved.
Keep in mind that China’s real estate sector amounted to about 30% of its annual GDP just a few years ago. So, the CCP had every reason to encourage it to the point of excess.
Evergrande never should have gotten as big or as bold as it did. Yet even its smaller remaining competitors are suffering under intense levels of debt today.
The latest Chinese property developer to miss a bond payment is Country Garden. Earlier this month, it missed its May 9 commitments for a combined $9.1 million, according to The Wall Street Journal. And while it did go on to rectify that imbalance before its five-day grace period ran out…
That’s still not a good sign. At all.
Not for the company and not for the country.
It’s a bit like finding a cockroach in the kitchen. If you see one, there are at least a dozen you don’t see. Evergrande is the cockroach you saw. Now check under the refrigerator.
More and more analysts are now guessing that China won’t surpass the U.S. anytime soon. This BRIC country – once the frontrunner in economic potential – is looking less and less reliable.
Things will get worse for the Chinese economy. The real estate sector could easily be the first domino to fall. I doubt it will be the last.
This could be the eventual collapse of the whole communist system. Or at least a serious stagnation that will affect generations to come.
Some investors are looking at China as a potential turnaround story.
Don’t be one of them.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily