Prepare for the Latest China Virus

This One’s Financial Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] Prepare for the Latest China Virus - The greatest Ponzi scheme in world history is falling apart… - The financial contagion will spread… - Then Jim Rickards shows you why the Chinese economy is really one big house of cards that’s in serious danger of collapse… Recommended Link [The most important 42 seconds of your life?]( [Read more here...]( The first 42 seconds of this video could change your life forever… Because it reveals details on an event so massive that it could send stocks plummeting by more than 75% as soon as this upcoming Monday… Billionaires like Charlie Munger, and Warren Buffett are already getting prepared for this kind of event… And you should too...but you don’t have long… Because come Monday... It may already be too late. [Click Here To See The Video]( Portsmouth, New Hampshire September 20, 2021 [Jim Rickards]Dear Reader, The stock market got crushed today. The Dow was down about 950 points at one point, its worst single-day drop since last October. A late-day “rally” limited the damage to a 614-point loss. The S&P and Nasdaq also got pounded. Meanwhile, the CBOE Volatility Index (VIX), also known as Wall Street’s “fear gauge,” spiked over 30%. Analysts are giving different reasons for today’s market plunge, including fear of a government shutdown as the deadline to raise the debt limit approaches, rising COVID cases and investor concerns that the Fed will signal it’s ready to begin tapering at its meeting this week. But one explanation looms larger than the others. That’s the fear of a financial crisis brewing in China. I’ve long advised my readers that the Chinese wealth management product (WMP) system is the greatest Ponzi in the history of the world. WMPs are sold by banks to retail investors. They are technically pass-through notes structured as units in a pool. In U.S. terms, they are something like a hybrid between commercial paper and ETFs. The problem is that retail investors are led to believe that WMPs are like bank deposits and are backed by the bank that sells them. They’re not. They’re actually unsecured units in blind pools that can be invested in anything the pool manager wants. Most WMP funds have been invested in the real estate sector. This has led to asset bubbles in Chinese real estate (at best) and wasted developments that cannot cover their costs (at worst). When investors wanted their money back, the sponsor would simply sell more WMPs and use the money to pay back the redeeming investors. That’s what gave the products their Ponzi characteristics. Due to thousands of products sponsored by hundreds of major banks, the total amount invested in WMPs is now in the trillions of dollars. Chinese investors are all-in with WMPS. Now the entire edifice is collapsing as I predicted it would. The largest property developer in China, Evergrande, is at the heart of the current crisis. It’s quickly headed for bankruptcy. Evergrande stock plunged more than 10% on the Hong Kong Stock Exchange today, on fears that the Chinese real estate giant will collapse under a mountain of debt. That’s a multibillion-dollar fiasco on its own. Evergrande WMP investors are now staging protests at banks after learning that their WMPs will not pay out for two years. Of course, Evergrande will be bankrupt long before that, and the investors will get nothing in the end. Chinese regulators believe they have the resources to bail out or restructure Evergrande with some haircuts for creditors. They probably do, but that misses the main point. The damage will not be confined to Evergrande. It will spread quickly to counterparties of Evergrande, including other developers and banks. A run on all WMPs will begin. When a Ponzi starts collapsing, no one wants to be the last one out. Everyone wants his money back right away. Chinese regulators are so desperate that they are trying to pay off WMP holders in kind with deeds to real estate that no one wants. This is another fiasco in the making because investors will dump that unwanted real estate, which will collapse the property market in turn. The Chinese are only looking at what’s inside the four walls of Evergrande and ignoring the fact that their entire property and financial system is on the verge of a world-historic crack-up. Not to toot my own horn, but again, I predicted this all along. If you still own Chinese stocks, it’s not too late to get out of those positions. But it will be soon. Below, I show you how WMPs are really just a symptom of China’s Ponzi economy and why the problem is much bigger than Evergrande. Read on. Regards, Jim Rickards for The Daily Reckoning P.S. The Fed is at the very center of a massive, [$6.6 trillion daily flow of capital that few investors know much about.]( It’s not necessarily secret, but it’s largely overlooked. That’s a shame because you can tap for potentially explosive gains. [And I recently revealed my proprietary secret]( for profiting from this massive, $6.6 trillion daily flow of capital that’s overlooked by most investors. Quite simply, few know about it. And that’s a shame. But I’m out to change all that. [My system is called COBRA.]( My team and I have built a new computerized Tactical Operations Center to track this massive cross-border capital flow. It’s something you really need to see. I think you’ll be amazed. [Click here now for details.]( Recommended Link [Amazon’s Head Honcho Refuses to appear before Senate]( [Read more here...]( After stepping down as CEO of Amazon, the world’s richest man refused to testify at a senate hearing on wealth inequality. It could be because his latest project has the potential to make him — and thousands of Americans — even more wealthy. Billions of Dollars are at stake in this project. [Click Here For More Details]( The Daily Reckoning Presents: “The toxic combination of government debt, corporate debt, WMPs and unrealistic growth expectations have set up China for the greatest market crash in history”… ****************************** China’s Ponzi Economy Is Coming Unglued By Jim Rickards [Jim Rickards]Picture this. You're a middle-class Chinese saver and you walk into a bank. They offer you two investment options. The first is a bank deposit that pays about 2%. The other is a WMP that pays about 7%. Which do you choose? That might be fine if WMPs were like high-quality corporate or municipal bonds. But they're not. They're more like the biggest Ponzi scheme in history. Here's how they work... Proceeds from sales of WMPs are loaned to speculative real estate developers and unprofitable state-owned enterprises (SOEs) at attractive yields in the form of notes. So,WMPs resemble collateralized debt obligations (CDOs), the same product that sank Lehman Bros. in the panic of 2008. The problem is that the borrowers behind the WMPs can't pay their debts. They've relied on further bubbles in real estate or easy credit from the government to meet their interest obligations. Now reality is setting in. What happens when a WMP matures? Usually the bank customer is encouraged to roll over the investment into a new WMP. What happens if the customer wants her money back? The bank sells a new WMP to another customer and then uses those sales proceeds to redeem the first customer. The new customer now steps into the shoes of the first customer with the same pile of bad debt. That's where the Ponzi dynamic comes in. Simply put, most of the debts backing up the WMPs cannot be repaid, which means it's always been just a matter of time before the WMP market went into a full meltdown and triggered a banking panic. But WMPs are a symptom rather than a cause. China has kept its growth engine humming all these years mostly with investment instead of aggregate demand from consumers. Investment is fine if it is directed at long-term growth projects that produce a positive expected return and help the broader economy grow as well. But that's not what China has done. About half of China's investment in the past 15 years has been wasted on "ghost cities," white elephant transportation facilities and prestige projects that look good superficially but that don't produce enough revenue or efficiencies to pay for themselves. Much of this investment was financed with debt. If the project itself is not revenue producing, then the associated debt cannot be repaid and will go into default. The toxic combination of government debt, corporate debt, WMPs and unrealistic growth expectations have set up China for the greatest market crash in history. Most of the debt statistics are well known. Analysts are relaxed about it. They acknowledge that debt levels are high but point to the fact that China has the second-largest economy in the world and is by far the fastest-growing major economy in the world. China's debt burdens are manageable as long as the growth is there to support the debt. This rosy scenario ignores two harsh realities. The first is known as the "middle-income trap." The second is a death spiral of rising debt and rising interest rates that chokes off growth just when it is needed most. When I studied development economics in graduate school in the 1970s, it was widely believed that the most difficult part of moving countries from poverty to wealth was the initial stage. Societies seemed stuck in a permanent rut of primitive agrarian culture and simple resource extraction. What was needed was a "takeoff" that would move citizens to cities, improve productivity on the land (the "green revolution") and employ newly urbanized workers with foreign direct investment, foreign aid and national savings. From there, the expectation was that growth would be self-sustaining and economies would grow rich over time — just as Japan and Germany had achieved high-income status from the ruins of World War II. It turned out that the first part of this model was true, but the second part was not. Recommended Link [Discover How to Earn Real Estate Income from the Safety of Your Own Home]( [Read more here...]( Looking for a way to create real estate cash flow without having to leave your house? With over a dozen “lazy” real estate secrets ready for you to take advantage of today, this new book will help you discover how to earn monthly income from real estate from the comfort of your home… and without all the hassles of being a landlord. [Click Here To Claim Your Access]( In broad terms, the IMF and OECD define a "low-income" country as one with per capita income of less than $5,000 per year. A "middle-income" country lies between $5,000 and $20,000 annual income per head. Above $20,000 per year of per person income is generally considered "high income." Obviously such measures are somewhat arbitrary. Also, because they are averages, they mask a lot of relevant information about income distribution. In the case of China, per capita income is about $8,000 per year, but extreme income inequality means that the median [i.e., midpoint] income is far less. These figures also do not take into account government benefits and social safety nets that can produce a decent quality of life even at lower income levels. China has no robust social safety net (one reason the personal savings rate is so high). This means the $8,000 per year income figure overstates the income security of Chinese workers compared to some other countries. Even adjusting for income inequality and no social safety net, the Chinese per capita income figure puts it solidly in the middle-income ranks. By way of contrast, India today is stuck in poverty at $1,600 per year. In the high-income ranks, Switzerland's per capital income is $81,000, almost 50% greater than in the United States. In 1960, per capita GDP for China was $90 in terms of today's U.S. dollars, adjusted for inflation. The Chinese Miracle is that per capita income has risen 10,000% in less than 60 years, with most of that coming in the past 40 or so years since the death of Mao Zedong. All of this is consistent with the 1960s take-off theory I studied in the 1970s. The problem is that this growth is not self-sustaining. It turns out that the path from poverty to middle-income is straightforward, but the path from middle-income to high-income is far more difficult. Moving from poverty to middle-income is just a matter of mobilizing factor inputs of labor and capital. The labor comes from hundreds of millions of citizens moving from subsistence level farms to cities and taking manufacturing jobs. Finance capital comes from export-related savings and foreign direct investment. The result is an explosion of income through simple assembly-type manufacturing and cheap exports. This process is helped by a cheap currency, which China manipulated from 1995 to 2008. Moving from middle-income to high-income is a different challenge. It cannot be done with more of the same urbanization and manufacturing. It requires high-value added products that come from education, technological innovation, and entrepreneurship. Germany and Japan managed this after World War II because they had huge reservoirs of human capital in the form of an educated workforce despite the destruction of physical capital. Since then, only three major countries (other than oil exporters) have moved from middle-income to high-income. Those three are Taiwan ($22,000), South Korea ($27,500), and Singapore ($53,000). Macau and Bahamas also made the leap, but those are special cases based on tourism and gambling that cannot be applied to major industrializing economies. No other country has generated the kind of self-sustaining technological innovation seen in Taiwan, South Korea, and Singapore. The prospects for China to break out of the middle-income trap are poor. China's theft of intellectual property and weak rule of law have made it an unattractive venue for technology development. After decades of inaction by several administrations, Trump finally cracked down on intellectual property theft. Also, China’s Communist Party dictatorship also does not allow the free exchange of ideas, social media connections, and entrepreneurship needed to generate high value-added processes. At the same time, China's advantages in assembly-type manufacturing are being siphoned away by low-income countries such as Vietnam ($2,100), Philippines ($3,000), Indonesia ($3,600), and others in Central and South America. In short, Chinese growth is in severe jeopardy. Its manufacturing base is being taken over by competitors and its high-tech future has yet to emerge, and may never emerge in time to avert a debt crisis. The Chinese Miracle is no miracle at all, it's just simple development economics. China is now out of time and out of good options. Regards, Jim Rickards for The Daily Reckoning P.S. The Fed is at the very center of a massive, [$6.6 trillion daily flow of capital that few investors know much about.]( It’s not necessarily secret, but it’s largely overlooked. That’s a shame because you can tap for potentially explosive gains. [And I recently revealed my proprietary secret]( for profiting from this massive, $6.6 trillion daily flow of capital that’s overlooked by most investors. Quite simply, few know about it. And that’s a shame. But I’m out to change all that. [My system is called COBRA.]( My team and I have built a new computerized Tactical Operations Center to track this massive cross-border capital flow. It’s something you really need to see. I think you’ll be amazed. [Click here now for details.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [James Rickards][James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Add feedback@dailyreckoning.com to your address book: [Whitelist us]( Additional Articles & Commentary: [Daily Reckoning Website]( Join the conversation! Follow us on social media: [Facebook]( [LinkedIn]( [Twitter]( [RSS Feed]( [YouTube]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [unsubscribe here.]( Please read our [Privacy Statement](. 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