China is the engine of world economic growth - responsible for almost one third of the incremental growth in global GDP.
In order to keep growth going, China has endorsed a policy aimed at creating jobs for millions of Chinese migrants who have moved from rural areas to the cities.
That engine has been greased by excessive credit and wasted infrastructure investment. Debt is now so large that more debt does not produce incremental production/GDP. Indeed additional debt is slowing China's growth rate and is raising questions about debt service.
Most recently the Evergrande (EGRNF) failure has exposed China's vulnerable and levered real estate exposure. And now Fantasia Holdings has failed to repay its dollar bond:
The Chinese property industry has suffered its first default on a dollar bond since the China Evergrande.
Group crisis worsened in recent weeks, fueling concern about other highly leveraged borrowers as the sector cools.
Fantasia Holdings Group Co., which develops high-end apartments and urban renewal projects, failed to repay a $205.7
million bond that came due Monday.
While the collective talking heads on FINTV and in the business media confidently express their views on their favorite long positions - and, like Pavlov's dogs, buy the dips - keeping those heads firmly in the sand, the Wall Street Journal told the truth:
Chinese authorities are asking local governments to prepare for the potential downfall of China Evergrande Group, according to officials familiar with the discussions, signaling a reluctance to bail out the debt-saddled property developer while bracing for any economic and social fallout from the company's travails...
Local governments have been ordered to assemble groups of accountants and legal experts to examine the finances around Evergrande's operations in their respective regions, talk to local state-owned and private property developers to prepare to take over local real estate projects and set up law enforcement teams to monitor public anger... a euphemism for protests, according to the people.
As James Rickards writes:
This actual crisis management plan is the worst possible playbook. Why? Any response to a financial crisis has to be centralized so that decisions about how to deploy limited resources can be made rapidly. Some lenders must be saved, some should be allowed to fail. Equity holders should be wiped out. Foreign investors in dollar-denominated debt of Evergrande will be left to fend for themselves and possibly seek relief in their home countries.
The point is these types of decisions cannot be made by "local governments" as proposed by the Chinese. The government plan is not a serious effort to truncate a financial crisis. It seems designed more to suppress social unrest and perhaps arrest "troublemakers." Western analysts don't understand this dynamic because they view events through the lens of Wall Street and Washington norms.
But the Communist Party of China does not care if Chinese oligarchs or investors in BlackRock ETFs lose money. That suits them fine. They're communists.
China's Economy Is Basically a Debt-Driven Ponzi Scheme
In essence, the contagion in the all important real estate market in China has revealed that China's globalist dream has crashed and burned.
That contagion, the dumping of unwanted real estate, has started, and China's property market and leveraged economy is toast.
That contagion and damage will spill over outside of China.
More from Rickards:
Up to half of China's investment is a complete waste. It does produce jobs and utilize inputs like cement, steel, copper and glass. But the finished product, whether a city, train station or sports arena, is often a white elephant that will remain unused. The Chinese landscape is littered with "ghost cities" that have resulted from China's wasted investment and flawed development model. And as I've explained before, that has serious implications for China's leadership...
The Chinese Communist Party Now Faces an Existential Threat to Its Power
With China's economy now in an irreversible decline - it, too, like the U.S., will be plagued by "stagflation" - jobs losses and inflation.
China's leadership is imperiled and the nascent signs of social unrest and disorder has begun to appear - perhaps on the order or worse than the Tiananmen Square protests.
In the extreme, President Xi could quickly lose his "Mandate of Heaven" - a term that describes the intangible goodwill and popular support needed by Chinese emperors to rule over thousands of years.
No Way Out?
Ahead for China lies unemployment, bankruptcies and write-offs coupled with inflation that steals - much like a tax increase - purchasing power. This could unleash social unrest and the potential for revolution.
China's leadership may not be able to endure either.
These are dangerous times and I worry, and the markets should as well, that they might institute a diversion (Taiwan?) in order to distract and attempt to unite their "citizens."
After all, wars have been started for much less.
(This commentary originally appeared on Real Money Pro on October 6th. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)