$8.7B spent on 20 minutes: What China’s crash means for your portfolio now

From Tom Dyson, editor, The Palm Beach Letter: In 1949, there were only 69 cities in China. Today, there are 658.

No civilization in world history has built so much infrastructure in such a short time.

But there’s a catch…

Many of China’s new high-rise apartment and office buildings are totally empty.

Miles of highways are not only devoid of traffic—there are no cars on the roads at all.

Parks and playgrounds look like the set of a zombie movie.

According to a report from China’s National Development and Reform Commission, the Chinese government “wasted” $6.8 trillion building ghost cities between 2010 and 2014.

$6.8 trillion is double Germany’s annual GDP. It’s also four times more than the total dollar amount invested in S&P 500 index funds.

Take the Qingdao Haiwan Bridge, for example…

One example of China’s extreme malinvestment: a 42 km bridge (white) built in
Qingdao instead of a far cheaper 4.5 km potential bridge route (red).

This recently completed bridge (the white line across the middle of the bay) holds the world record for the longest bridge over water.

Spanning 42 kilometers, it’s long enough to cross the English Channel.

The bridge cost 56 billion yuan ($8.7 billion). It crosses Jiaozhou Bay and connects the main urban area of Qingdao city with the Huangdao District.

The span has cut about 20 minutes of travel time between the two areas.

But some argue it’s a waste of taxpayers’ money to build a 56 billion yuan bridge to save just 20 minutes.

And many have questioned the specific route of the bridge—regardless of the cost.

As you can see from the satellite image above, the bridge spans the longest possible route between the two shorelines.

If the bridge had been built along the red line, the distance between two sides would have been reduced to a mere 4.5 km.

The U.S. dollar’s been climbing in value for the past few years. The renminbi—artificially pegged to the U.S. dollar for the last decade—has appreciated alongside it.

This has not been good for China’s export-heavy economy.

A stronger renminbi means China’s lost billions in export sales. Its goods were simply too expensive (factoring in the “strong” renminbi when making currency conversions into other “weaker” global currencies). Countries looking to buy Asian goods were choosing China’s cheaper neighbors, like Myanmar, Vietnam, Taiwan, or Thailand.

(This is why China’s GDP has decreased every consecutive year since 2007. It’s now growing at its slowest pace in almost 25 years. China’s GDP will contract even further in 2016.)

Now, the billions of dollars in lost export revenue are no longer available to service its bad debts…

China must now find new ways to service its enormous public debt. According to consulting firm McKinsey & Company, China’s public debt, as a percentage of its GDP, is the highest in the world.

It stands at 282% of its GDP. (The United States’ debt is 100% of its GDP.)

We’ve already seen a consequence of this type of “contagion” in the Chinese stock market. The Shanghai Composite Index dropped over 40% in just 18 trading sessions. It’s still down over 30% from its June 2015 peak.

To make up the cash flow it once had, China will be forced to further devalue its currency. It has cut interest rates six times in the past year. And its biggest devaluation came this past August. It let its currency free float… and it immediately sank 3% versus the dollar.

To be clear, the Chinese government isn’t going to go bankrupt. And China isn’t going bankrupt. A country as vast and full of natural resources as China will have pockets of growth and opportunity.

But on the broad scale, in the coming months and years, we’ll see many debts go bad and default—in both the private and quasi-government sectors.

Bottom Line: The dollar will continue in its bull market. And China’s $1-3 trillion in U.S.-denominated debt will rack up devastating losses.