Top of Mind: Brewing Chinese Financial Crisis

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Ben Fraser: Welcome back to another episode of the invest like a billionaire podcast. I am your co-host, Ben Fraser joined by fellow co-host, Bob Fraser. We got another. Hop of my episode for you today, these are shorter episodes focused on interesting things that we’re seeing in the marketplace. We’re reading news on and I think it’s relevant to our listeners.

And so one of the things we’ve been talking about sprinkled in here over the past few months is China. We did a whole big mega trends presentation just recently. You can go watch, we’ll link to it and then shut us here in China. What’s the future of China? What you’re hearing out there, some economic proponents and those that are saying China is still in a good place.

Skewing the narrative of what’s really going on behind the scenes. And, here in America, we’ve been talking about what’s been going on here. We think the economy is in a good position. It’s continuing to grow because you’re strong, but there are these extraneous things out there and potentially black swan events that could happen.

And we think the biggest risk potentially of those wouldn’t be Something related to China. So Bob talks a little bit about what’s going on and specifically in the kind of property bubble and just the economic boom that we’re starting to see, relax here. 

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Bob Fraser: And while everybody’s talking about World War III and Hamas. Israel, I don’t see how that blows into World War III.

And, no one is interested in that, Russia’s going to enter. They’ve, they’re dealing with their own crisis that they’re barely managing in Ukraine. China, they don’t care, don’t give a rip about this. If there’s anything they can foil us and make us look bad.

Yeah. But they’re not interested in full on confrontation. Iran doesn’t have a lot of friends, except these little enclaves that are, with militant funding coming out of Iran, Syria is in the middle of a civil war. Jordan is not really a player.

They don’t really have a military, there’s just no way world war three is really going to happen there but, and what’s happening is everybody’s not paying attention to the real problem that’s unfolding and it’s a slow motion train wreck called China. And what’s happened. So China for years has just built stuff.

They’re building massive infrastructure in, canals and dams and apartment complexes and roads and trains, and they’re building this massive infrastructure. But if you look at their demographics, there’s a great article from the wall street journal. If you should, you should look at Google.

It says in a wall street journal, China’s 40 year boom is over. What comes next? And the subtitle is the economic model that took the country from poverty to great power status seems broken and everywhere are signs of distress. And we’ve been calling this for a while China is over as a global power.

Their population peaked about 10 years ago and their population is declining today. And what’s more, their population is going to be half. That’s what it is today by the end of the century. So how many roads are they going to need? How many new trains? How many apartment complexes?

Literally, imagine every apartment complex is 50 percent full and that’s as full as it’s ever going to be. Every train has 50 percent full roads and they’ve been building this stuff. So one of the ways they’ve done this boom is by creating economic boom by creating these building booms and just getting more and more in debt and building stuff, which is stimulating and Anybody think there’s a problem?

I mean borrow money and build stuff that nobody wants anybody see the problem there.

Ben Fraser: It’s what only works when Everything just keeps going up and to the right, right? And it populates. One of the biggest drivers of GDP growth. And we haven’t, we’ve been in a population boom for the past, a hundred plus years globally, and it started to peak in a lot of.

It’s rolling over. It’s rolling over. Yeah. We don’t have a concept for that, right? Because if you have less people, you don’t need as much stuff. You don’t need as many apartments. 

Bob Fraser: And if you have half, half the people, your GDP is half, right? Your economy is half. Unless you double your productivity somehow.

But so what’s happened is we’re seeing a, the popping of the property bubble and it’s going to create tsunamis in China for sure. So are we predicting a banking crisis coming out of China? I don’t think so. And the reason is. The banks are state controlled and if you look at the playbook that the Federal Reserve did in 2009 to stem the great financial crisis, the giant meltdown we had.

 No one knew if it was going to work. It was all, doing these equity injections, the bank bailouts, the TARP programs, all the bailout programs. No one knew what was going to happen. They were just plugging holes in the dikes as fast as they could while it worked.

And I think I’m personally of the firm belief that America would have entered into a second great depression had they not fixed this. Cause you get into a doom loop where people start losing their jobs and people lose their jobs, stop spending and people that stop spending then you, then people lose their jobs and it’s a doom loop and you have to have, this is where.

The anti government thought around a lot of conservative, fiscal conservatives is wrong. You absolutely need a government to create artificial demand sometimes and to stop a doom loop just to, the bike is rolling down the hill and gaining speed. You put a stick in the spokes and stop that thing.

And that’s exactly what the Fed did. So the playbook has been, it’s been written. Now, and everyone globally, all the central bankers see, see how it’s been written. I think they can stem a giant banking crisis. Property crisis, you can’t prop up all the property values.

Now, what it looks like to me is Japanization. And what happened, I don’t know if people remember the 19. And when, it was literally the, Japan had a property bubble, like nobody’s business. Remember the, when, in the 1980s when Japan was going to take over the world and everyone was afraid of Japan.

They were, all the, everybody, what everybody’s been saying about China for the last 20 years, they were saying about Japan before that. And literally the property under Japan, oh gosh, I can’t remember the temple complex or the palace complex or the land under that was worth more than all the property in California combined, right?

And the property values have been saying, and it all popped and it went down, but what happened, we didn’t see a global tsunami. What they did is they changed the banking regulations to allow the banks to carry the bad debt on their books at these elevated prices and not write them down.

Yeah. Brilliant. Not so much. It created what we, what they termed later zombie banks. So these banks have the, you got a hundred million dollar loan out there on as an asset on your books on a property that’s worth 20 million and you just carry it that well, how many more loans you’re going to be making?

Not much. So there were, these banks became zombies. They just. They couldn’t do anything. They couldn’t move forward. They couldn’t move backwards. And it took basically, what, 40 years to clean it out. And now they’re reasonably healthy again, and inflation, over, over the 40 years and super low interest rates helped.

Facilitate all this. So it looks to me like that’s what, if they do this that’s one approach is to basically you don’t let the banks fail. You just let them continue carrying an upside down balance sheet and pretend your balance sheet is fine. And you just keep, they keep making, keeping business.

So it’s what it’s increasingly looking like to me. 

Ben Fraser: Yeah. And the challenge too is you never get good data out of China. It’s a little hard to tell what’s going on and how big the problem is already. But to your point, you can maybe stymie the bleeding in a banking crisis, but if all of a sudden over the next 70, 80 years, you have half the population that you once had.

Property values, there’s just, there’s no way to, to change the values if you have an apartment building that’s just half full, right? You’re only going to generate half the rent and half the income. And so there’s a bigger problem from that standpoint of, there’s no way to, to change the values of those or try to sweep it under the rug.

But how do you see this played out as a potential black swan, right? Maybe let’s play the thought experiment if they don’t, try to smooth this out, like in a Japan like way. How could this impact the Chinese economy? How could this be the ripple?

Bob Fraser: So assuming they prop up the banks they don’t let the bank, now if the banks start failing, you will see a massive financial meltdown across China because banks are the plumbing, right? Credit is the plumbing of any modern society. It’s the financial plumbing. And if you literally stop the plumbing, it’s horrendous.

And so if the banks fail, you’re going to see a pretty massive financial crisis erupting out of China and a big giant meltdown. I don’t think that’s going to happen. The other thing we could see is a property bubble popping and what that means is lots and lots of bankruptcies and then it could spill over to the bankruptcy spill over to the lenders and the, like the insurance companies and the private credit companies.

And so you see a big meltdown in these kinds of things. And so that’s, that seems more likely to me. You’re seeing a property, just the property prices crash and lots of wipeouts of individuals, investors, and just a huge destruction of wealth that happens by, when a bubble pops, that’s what happens.

wOuld that spill over to America? Okay, you’ve got, there’s a lot of investment that has happened in China by Americans and Europeans over the decades. Hundreds and hundreds of billions of dollars. sO those companies could be at risk in something like that.

But are they, is it big enough to create a real tsunami in America or Europe? Probably not, right? Probably not. But. Could it create some light little ripples, and some real problems with individual companies? Absolutely. But a systemic problem? Probably not. And now we’re seeing a few things, but the economic data is coming out of the crisis.

Oh, and by the way, the article here in Wall Street Journal is about the Chinese financial crisis. No one’s talking, nobody’s talking about, so you can Google that if you like. And then the numbers coming out of China we’re seeing fresh signs of slowing coming out of China. And it’s because of a property bust as well as we’re seeing changes in America and, as companies are reshoring, think about this, so America is bringing back manufacturing in, it’s been going on for three, four, five years now I’m in gaining momentum while every time these companies are coming on board in, in, in America, they’re going to stop making orders from China.

And so you’re seeing a decline, you’re seeing a decline in demand out of China, and furthermore, the property bubble. So if people have lost their investment, there are no investors, these investors. I include retail investors and corporate investors. All of a sudden they see their equity being wiped out.

Why are they going to be spending on new factory builds and consumer spending, et cetera they’re not buying those cars and everything else. So you’re seeing internal demand slowing from the property bubble and you’re also seeing external demand slowing because of the de-globalization trend that’s happening worldwide.

So they’re being hit from every side possible and then have the worst leader ever in China’s history. At the helm, doing the stupidest things that have ever been done in the history of China. There’s been a lot of stupid things done in China. So I probably can’t say the stupidest, but he’s certainly way up there in, as far as absolutely incompetent leadership.

And it’s not a good time for China. 

Ben Fraser: No, this is something that investors really need to pay attention to and really. Dig in because so much of the headlines and, we’ll say Ray Dalio, who’s a spokesperson and constantly talking about China being the next global superpower, which is laughable.

That’s just so laughable. It, but he’s got such an audience and he’s a brilliant guy. 

Bob Fraser: So it’s hard to explain that to me cause I don’t know how I can agree with that, right? How?

Ben Fraser: Yeah. I think the explanation is a vested interest. He is biased because he has a lot of investments in China.

Bob Fraser: So he’s banging the bang in the China drum, but do you think he really believes it or is he just banging the China drum because, I mean it’s confirmation by his race. You see what you want to see, right? You see what you want or you’re just being a complete, you know the truth and you’re saying the opposite of because it’s doing your best interest.

Ben Fraser: I think it depends on your time scale, right? In the short term. Maybe he has some things that are accurate and are there. No, we’d probably disagree, but in the long term, it’s really hard to agree with the data. And I would encourage you if you have not watched our investable megatrends presentation.

Please go do we’re going to put the link in the show notes here and you need to see the charts and you need to see the projections for the population decline of China and the competence levels. What’s so crazy about this is they cannot turn the ship around. It’s not something that can really be changed at this point.

Their destiny from a population standpoint. It is pretty well written for the next hundred years. It is. And so this is something investors need to pay attention to because it’s, they’re selling the alarms and you’re trying to like superpower and take over the U S and it’s just this fear based content and honestly just BS that is not founded in facts and it’s not helpful for investors.

And we want to just come out and say this cause it’s really important. You pay attention to it and be sure to watch the presentation if you haven’t yet. All right. Thanks so much for listening. I hope you enjoyed this episode. If you’re enjoying it, I always appreciate you leaving reviews and sharing it with a friend and be sure to tune in next time for another episode.