The huge amount of debt hold by Evergrande, the Chinese real estate group, could lead to a credit crunch the like of which we have never seen. It could have implications for all financial markets especially crypto.
If you have a 1 million dollar debt owed to the bank, it is your problem. But, if you have a 300 Billion dollar debt that’s the world problem.
What the hell is going on!
We can not talk about Evergrande before we talk about the Chinese property bubble. This sector has provided for this company the ingredients to become a giant.
To say that the Chinese residential property market is a bubble is an underestimate. It has been so hot recently that online units sold out in minutes. In March, 288 apartments in Shenzhen sold out online in less than eight minutes.
People are legitimately willing to put down upward of 100000 dollars on the spot, just to have the opportunity to buy property two to three years from now. The main reason why such a demand on the property market, is that the housing market is seeing as one of the main forms of investment in the country.
When compared to the western counterpart, Chinese citizens own more property than they own bonds or stocks. In China, at least 96% of households owned at least one home, in the US, however, there is a 65% homeownership rate.
You love statistics, here is more. At the peak of the US property boom, $900 billion was being invested in residential real estate. While in China this year, almost $1.4 trillion was invested in housing. There was no such record registered worldwide before.
Buying a property in China is more about speculation than investing.
The believe that prices will always go up
Such a fulfilling prophecy, We have seen them on many occasions including the subprime mortgage crisis in 2009. And much like 2009, this property bubble was not built on saving, rather a huge amount of debt.
The boom has taken dollar investment away from other industries competing with the real estates business
To get more close picture of how dangerous this debt fuel bubble is, here is one more statistic. According to the bank for international settlement data, the US accounted 19% increase in household borrowing back in 2009. In China, it is 57% over the decade through 2019.
Housing is for living in, and not for speculation
If the government would try to deflect the housing bubble and forbid massive insane speculation, Giving the fact that so many people have their net worth tied up to housing. The deflection could lead to social unrest.
The only solution, was to keep the property market to continue its growth just so long as it keeps the people happy. And happy they have been, until the first ingredient that drove the bubble is no longer there, And eventually the epic crush.