China recently jailed the CEO of its second largest property developer (Evergrande) for life – and the details could not be any more salacious.
In 2017, he was worth $45 billion (per Forbes), and he had access to the highest levels of government, his own mega yacht (because of course), his own private dance troupe (per rumors), and his own “elevator guard” (20 young men who cleared elevators to ensure he did not have to ride with lowly employees).
Making his crushing downfall worse – they confiscated all his wealth and jailed his sons and executive staff with him.
His wife (who holds a Canadian passport) seems to have escaped the mess, though. She divorced him carefully after the company started to collapse in 2021, removed her name from the company’s executive roles, and moved assets into her name. She is also suing her own son (now in jail) for $128 million – which I found sweet because it will ensure they get to spend time together in court (this is also a reminder to never trust Canadians).
China’s Huge Housing Bubble
Evergrande was the poster child developer at the top of China’s massive housing bubble – one of the largest bubbles in history (approaching the size of the entire U.S. stock market at one point). China’s local governments became dependent on selling land to developers to raise revenues. China also encouraged both land and housing development with very cheap financing to stimulate its economy. Worse, Chinese buyers bought and largely paid for homes long before they were finished. And – it all worked…for a while.
It all started to unravel during COVID. China currently sits on 60 to 80 MILLION unsold units (vs about 1.5 million in the U.S.), and millions of Chinese homebuyers are on the hook to pay for units that are not yet completed and may never be.
This bubble pop is, and has been, a massive drag on the Chinese economy – and could still drag it into collapse. China has been forced to increase exports at any cost to raise cash, as Chinese consumers have holed up and refuse to spend anything.
Lessons
1. When governments subsidize a single industry via cheap financing, subsidies, and/or regulatory favors – bubbles form. We saw this in Japan in the 1980s, when they got behind DRAM chips, real estate, and stocks – and then rode the crash all the way to the beach. We saw this too with U.S. housing in the early 2000s, when the government encouraged “affordable housing” that made housing way more expensive.
Let’s hope President Trump’s “golden shares” (stakes in U.S. companies) and specific industry subsidies don’t foster bubbles. Clearing the way for industry overall is healthy, but picking specific industries never ends well.
2. When bubbles are forming, nobody sees the pop coming. Chinese officials were as gung-ho as Evergrande when the bubble was forming. This is similar to how everyone viewed the U.S. dotcom bubble in 1998, or U.S. housing in 2006. But, I am sure AI is not a bubble… 😊
3. Governments always blame everyone but themselves. China fostered its housing bubble with its own policies, but the CCP will never admit it. Instead, they tried and jailed Evergrande’s CEO and executives to shift blame.
American politicians did a beautiful job of blaming “bankers’ for the 2008 meltdown that was 99% caused by government policies. BUT – they did not jail anyone. If, however, government power continues to grow here in the States, I wouldn’t be surprised to see business people jailed in response to bubble pops.
What makes American politicians look even dumber is the fact that they bailed out the same bankers they blamed. So, at least China isn’t that dumb.
Anyway, when AOC is President and the AI bubble pops, poor Jensen Huang could end up broke and in jail (but hopefully, he has a Canadian wife who can secrete some of his assets away).
