Can China’s Economy Crash the U.S. Economy?

the single biggest real estate company in China, with over $300 billion dollars in assets, is currently in default - and the entire world is waiting to see if that’s going to crash China’s economy, the US economy, the global economy, and the cryptocurrency markets. Actually, the company in question - Evergrande, isn’t just the largest real estate developer in China, They’re also invested in electric cars,

theme parks, sports, food and drink distribution,

and as of this week, they’ve officially stopped paying their bills. That’s a huge problem, not just because of the market instability it causes, but because China’s economy is backed by companies relying on risky debt - creating a merry go round of borrowing money, investing that money, and borrowing even more money on the back of their investments,

without an actual plan as to what to do when the merry go round stops. In short, China’s exponential growth in the real estate market, is, seemingly, a pyramid scheme. And it’s the same pyramid scheme that collapsed the US economy, and by extension the global economy in 2008.

Over the past few decades there have been next to no regulations on how much debt massive Chinese companies could accumulate - to the point that it became obvious that the level of debt was totally unsustainable, and just this year, the Chinese government finally set limits on how much debt companies were allowed to have based on their ability to repay it, in a policy called the “Three Red Lines”.

The problem with Evergrande is that its growth depended on accumulating risky debt, and this new policy cut them off from being able to borrow more money - so as it’s come time to pay their very high interest and risky loans, they can’t borrow enough money to keep building the pyramid.

Meanwhile, they own over 1,300 projects in 280 cities across China, many of which were built or acquired purely as speculative properties that haven’t panned out. Thousands of empty office buildings and apartments that are only used to generate more debt as overpriced collateral, and to be clear - Evergrande is not unique in doing this,

China’s real estate bubble has functioned on the same exact premise as the US’s subprime mortgage crisis. Overpriced properties sold to investors looking for a large return based on unsustainable growth - and the obvious risk is ignored because it’s assumed that the government will bail out any failures because these companies are too big to fail.

But as we’ve seen, “too-big-to-fail” just means that the wealthiest investors get a golden parachute as their risky investments collapse and create an economic domino effect, while individual investors, homeowners, regular people with jobs and retirement accounts, all see their net worths wiped out. Even though the similarities between the 2008 global economic crisis and sinking of the Evergrande aren’t perfectly aligned,

a lot of the same elements are there - and they’re built on the same basic idea, growth begets growth until it doesn’t, and that’s the definition of a pyramid scheme. Economists have been ringing alarm bells about this for nearly a decade,

but they’ve been ignored in the face of exponential growth - China’s economic bubble has been unstoppable, until now. So while some parts of this are clear - Evergrande is going to be forced to restructure, sell off its divisions, and possibly go bankrupt,

while China’s Central Bank pumps billions into the economy to prevent a crash, we’ve seen that historically, this exact response hasn’t been enough to stave off an economic crisis. But we really don’t know - being overleveraged is now the norm, it’s how entire countries responded to the COVID-19 crisis, and created a new paradigm about how debt functions in a bubble.

On the one hand, this might be a tipping point and trigger a global economic catastrophe, on the other hand, nothing might happen, and the bubble will grow even bigger, setting the stage for an even greater collapse down the road. The fundamentals of our global economy are totally broken, and they have been for a while. Nobody has any real answers here, other than to ignore the alarm bells because we can’t fix it. So, for now, we’ll have to just wait and see.

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