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It has begun: The greatest financial meltdown in history is now underway. The collapse of one of China’s biggest property developers, Evergrande, has triggered a stock market crash in Hong Kong and it is still threatening to spark a major default crisis that can derail the Chinese economy and spill over global markets, creating a cascade of systemic failures that will result in nothing less than a financial disaster of epic proportions. Chinese traders are getting out of the market while they still can. A major sell-off has started as investors grew increasingly more worried that Evergrande would default its gigantic loan debt. Just yesterday, the Hong Kong stock market crashed by another 13 percent and it is now on track to close at its lowest market cap ever, given that a bankruptcy of this proportion can wipe out hundreds of billions in equity.
Even worse, it can spark a default contagion that would put millions of Chinese companies at risk of bankruptcy just as well. And as more and more traders panic about the rapidly spreading contagion, other sectors that were normally immune to China’s property woes are also facing significant drops. Financial analysts are alarmed that its default crisis will soon spread to the rest of the world. Last week, Chinese officials announced that major lenders should not expect repayment. That was already a sign that the company would start its default process. And today’s silence has given further proof.
In a recent note, Goldman estimated that the potential impact of the residential and commercial real estate collapse in China’s growth could be devastating not only for China but for the entire world. It could result in the sharpest GDP drop in decades. Goldman warned that if a default “occurred without clear ring-fencing of the spillovers to other parts of the economy”, then the outcome would be much more threatening, with the Chinese GDP collapsing as much as 4.1 percent while housing activity plunges and financial conditions tighten.
Right now, the worsening of the crisis is depending on the acceleration of the current selloff while investors expect the government to unleash a trillion-dollar liquidity injection to ease the downfall. Moreover, while investors get more and more nervous about the financial strains of the Chinese real estate market, they also set off a crash on the cryptocurrency market, with bitcoin tumbling by more than 7 percent on Monday. As a huge wave of fear over a weaker Chinese economic growth sweeps through global markets, with investors just realizing how big are the consequences for its domestic peers and international commodity prices, contagion has begun to move beyond stocks and sent US equity futures below 4380.
Yesterday, the Dow Jones Industrial Average finished down 614 points, or 1.8%, recording its worst day of trading since July. Furthermore, Caterpillar and Goldman Sachs were the benchmark’s biggest losers of the day, as investors closely watched the outlook for the Federal Reserve to start tapering on its bond purchasing program. At its lowest point of the day, the Dow fell 972 points. The Nasdaq also faced a decline and closed down 2.2%. Amongst the top three biggest losers were the Chinese companies Pinduoduo, Baidu, and JD.com. The S&P 500 plunged by 1.7%. It was one of the worst days of trading since May.
The entire financial system is being shaken to the core because what is happening in China right now will ultimately have profound repercussions across all of the world’s major economies, including America. Given that global economic growth is directly linked with China’s economic strength, and the country was the only major economy to expand last year, the prospect for a global economic rebound from last year’s health-crisis-induced recession has been remarkably shrunk. According to the International Monetary Fund, China alone would contribute with over a fifth of the increase in the world’s gross domestic product in the five years to 2026.
This means that we’re effectively on the verge of the most devastating financial crisis in world history. The one experts have been warning about for months. All events are converging to what may be the simultaneous collapse of the Chinese and the U.S. economy. Needless to say, this will not end well. We’re about to witness the biggest collective wealth loss ever recorded. As the Chinese stock market crash has just begun, it’s only a matter of time before the monstrous U.S. stock market bubble finally bursts. Beware the risks. The point of no return is just at the corner.
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