Everyone knows about the real estate bubble(s) that popped in the U.S. back in 2006-07 and the resulting financial crises that followed. Since 2010 when prices basically bottomed (for now), “dollars” from all over the world “came back” to the U.S. and were used to purchase real estate. It is said that up to 70% of all closings at one point were “cash deals.”
Several articles were penned that explained this phenomenon by foreigners in a twofold manner. First, much of it was “dirty money” that needed to be “cleaned.” Make some money by selling drugs or what have you…take the cash and put it into the ground in the U.S. and presto…clean money. Secondly, many “investors” decided that they wanted something “real” as the debasement of the dollar is obvious for all to see. This “thought process” was not just from foreigners, many Americans decided to get their funds out of CD’s and bank accounts and into something that couldn’t just dry up and blow away (but can however be taxed away). These sales (purchases) are beginning to dry up now…and interest rates have risen a little which will lead to chapter 2. Further hikes in rates will in my opinion cause this second chapter to unfold with a fury.
Part of this “second chapter” will surely include the Chinese as their real estate market has already begun to decline. “New” pricing now seems to be down from previous sales (but still higher than a year ago) especially in the smaller markets. It looks to me like they have entered into “early 2007” as a comparison to the U.S. market. As a side note, the Chinese population has nowhere near the percentage of net worth in their stock market as does the average American; they are very heavily invested in real estate.
The Chinese are now unsettled as something is wrong since real estate “always goes up,” right? Well yes, “it did.” It did in China just as it once did in the U.S. …until it didn’t which is where we are now. China also has the same “2006” problems that we Americans had, only bigger, MUCH bigger! We overbuilt homes, condos, retail space etc. betting on the extrapolation of steady growth and never again a recession. The Chinese in this instance have far outdone us as they have built ghost cities with no occupants whatsoever…so future supply is already in place.
This is now and will in the future be a big problem for their banking system…and at a time when their shadow banking system struggles with overleverage, under collateral and multiple pledging of said collateral. How will this all play out? I don’t know and do not profess to understand their system well enough to speculate, I can however make a guess from a macro standpoint. I have speculated in the past that China has overbuilt and overstocked with the knowledge that the dollar and thus the global financial system will be shaken up. “Shaken up” as in mass bankruptcies and a global “reset” that will resemble hyperinflation as currencies devalue. I believe the Chinese would rather enter this period with “stuff” built and stockpiled because it will not go away when the music stops.
It does appear that finally “their music” is stopping and my guess is that within 12 months they will have their own “American 2008” in their credit markets. I think that their leaders already know this and have known this was coming for quite some time. They have overbuilt housing and infrastructure, but, bankruptcy will not wash this away. Yes, “ownership” may change but a house will still be a house and a family or families can live in it no matter who ends up owning it.
While this was going on, you are by now well aware that the Chinese government has been purchasing gold in massive quantities AND encouraging their citizens to do the same. Why? Because what is the best asset to have going into a depression? “Cash” right? Ah but here is the big fork in the road, what exactly is “cash?” Is “cash” Yuan, or dollars, euros, yen or pounds? No, when the word “cash” is used in this context the meaning is “money.” “Money” as in something that is universally liquid and has/retains innate “value.” You want “money” going into a depression because “prices” of assets (internally and globally) get cheap while “money” is scarce. One can always increase their standing if they have money available to purchase “stuff” when it is cheap, it’s just that simple!
This is the flip side of the fiat “inflation/deflation” argument (I say “flip side” because the masses will find out for themselves what money really is). In a deflation, “money” becomes “dear” and increases in value versus goods…and the Chinese know this. They understand what exactly “money” is and they have been stocking up on it in anticipation of the coming and much delayed/postponed depression. Do they care if their banking system blows up as all other banking systems blow up all over the world? Probably yes they do but they also know that it is a necessary evil in order to be best positioned for the coming “reset” that they will preside over.
When all is said and done, it will be the Chinese who will sit at the head of the next “Bretton Woods” table and set the price on gold for years to come…and it will be WHATEVER price that they choose that is close to and has the blessings of Mother Nature. Will this be catastrophic to the Chinese to lose their banking system and or currency? No, this has happened many times in their history as they were the ones who originally invented “paper money.” Will this be catastrophic to the U.S.? Other than the civil war, we have never ever had to start from scratch again as a nation. We will have other obstacles to hurdle however. We are in need of modernizing our infrastructure from roads and bridges to electrical power stations and grids…not to mention cleaning out the cobwebs of empty vaults and begin the process of “re stocking.”