In just one week, China curtailed the property sector and killed the crypto currency market. The week began with Evergrande which indulged in rampant borrowing that triggered the ire of Xi Jinping. Without even waiting for the Evergrande investors to lick their wounds, on Friday, China’s central bank announced that all transactions of crypto-currencies are illegal. Even mining of crypto currencies is banned. And, China happens to be one of the world’s largest crypto currency markets.
The Evergrande disaster started with the company building properties, theme parks, health care services, mineral water production and EV manufacturing – all funded by borrowings from the banks. As of last week, the company was sitting on $84 billion in debt due on Thursday this week. With no support from the Chinese government which owned all the banks that lent to Evergrande, on Friday, it missed the payment. The property sector, as a whole, has debts of $305 billion or 2% of China’s GDP. Evergrande was the big dog.
Property and crypto are the the latest to be hit by regulatory curbs. The list of victims now include technology, ride hailing, video gaming, education, entertainment and steel. Needless to say, investors scurrying for cover.
Future Wealth’s View
On the face of it, one wonders why is Xi pivoting from successful policies that have made China an economic force over the past 20 years? But, there are deeper questions to be asked – what is Xi Jinping’s eventual goal out of these crackdowns on various industries that have made China a very prosperous nation? The answer may lie in Xi’s attempt to emulate and sometimes contradict his predecessors in creating a legacy that will be written for centuries to come.
China’s prosperity began after Deng Xiaoping, in 1982, decoupled himself from the prevailing Maoist self reliance approach. That spurred economic development and brought China to the forefront of nations that have risen to power touching every aspect of people’s lives across the world. But, the rapid economic growth shifted China to look more like a capitalist society with newly minted Chinese billionaires being produced every day from successful IPOs while more than 600 million people barely got by on $160 per month or less. Which brings us to Xi Jinping’s ideology – common prosperity. While the shift may be welcomed by the masses, we believe that Xi’s strategy could go horribly wrong if economic growth stalls and takes the country back to Mao’s era. Only time will tell.
Bottom Line – Xi Jinping has made China a dangerous place for investment. The risks are too high to gamble on any industry, only to see it wiped out in a regulatory moment. Stay away.