'Investing in Communism Never Pays' — China's Proposed $278 Billion Rescue Stimulus Risks Falling Flat, Fears Abound of Continued Social Unrest

Investors in China can't catch a break — both aspiring Chinese property owners who never got the homes they paid for from now-bankrupt builders and stock market investors who have ridden the nation's market almost straight down from recent crisis after crisis.

The iShares MSCI China ETF MCHI has started the new year down by about 4% and is trading about 37% lower than at its inception in 2011. Even Alibaba Group Holding Ltd. BABA can't escape an onslaught of bad news, with its stock losing about 38% of its value in the past year.

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To attempt to stem the bleeding, China's biggest brokerage, CITIC Securities Co. Ltd., restricted short selling last week. Given that CITIC is owned by the state of China, it's clear this directive came from the Chinese government.

Now, Bloomberg reports that the Chinese government is aiming to get 2 trillion yuan ($278 billion) into markets by purchasing stocks via markets in Hong Kong, primarily through the offshore accounts of Chinese state-run companies.

Perhaps no one else epitomizes the crushing debt in the Chinese economy than the country's homebuilders, who took out massive loans to build more homes in a nation with already enough empty homes to house the entire population of France.

Many of these property investors in China were just regular people, with an estimated 70% of Chinese household wealth in real estate, an asset class many Chinese thought of as safer than stocks. 

China's market collapse has some experts remarking on the similarities between the United States' 2008 Great Recession caused by its property crisis. Reuters recently reported that since the real estate debt crisis hit China in mid-2021, 40% of Chinese home sales have been from companies that have since defaulted, with most being private property developers.

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Chinese investors are also facing significant stock losses and unrest could continue at a time when President Xi Jinping has already consolidated power with an increased nationalist focus toward Taiwan. A core component of the protests is unpaid construction workers as well as buyers of homes that never got built by these now-bankrupt homebuilders.

Most analysts have not been optimistic about China's prospects to rebound with anything but extreme intervention. "We are in need of a white knight to boost some confidence, given how bad things have been," Daisy Li of EFG Asset Management said. 

If the reality is so bad, why have the Chinese authorities waited so long? For those concerned about America's debt-to-gross domestic product (GDP) levels, consider China's, which rose to a new record of 286% in the fourth quarter of last year. Its already staggering debt to GDP raises the risk of possible policy error.

Kyle Bass, Hayman Capital Management's chief investment officer and well-known China hawk, summed up the Chinese markets, telling CNBC, "Investing in communism never pays, and when U.S. Investors figure that out, it's going to be too late." 

Whether China's newest state intervention works or not, perhaps the more important question worth pondering is whether China’s local problems risk global contagion. 

Investors should consider the risks of increased inflation in the event of massive Chinese stimulus pumped into the economy to stave off a possible depression. However, the real danger might be if China's money printer falls flat and can't even escape the mess by raising debt to GDP levels even further.

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