 Good day fellow investors. Now I have been pretty bullish on China. In my previous videos we also made videos where we analyzed Chinese stocks where I see high potential and relatively low risk in relation to the growth. Nevertheless, each bullish case has to go hand in hand with a bearish case. So in this video I want to present to you the bearish case for China. So what are the risks inherent to the Chinese economy and the Chinese stock market, Chinese investments, Chinese currency especially for us foreigners. There are three main risks in addition to many other risks but all of them involve credit. Those are wealth management products which have swelled to 4 trillion on a 34 trillion debt market which is very significant real estate bubble and of course the whole debt to GDP ratio which is at enormous levels when looked at it globally. So let's immediately start with the wealth management products, a very interesting situation. Now what are wealth management products? That's the topic especially emphasized by Cale Bass. He is the one that got right the American housing bubble and is now looking for other bubbles around the world to make a lot of money on and he is telling us that Chinese companies, financial companies like insurance companies and other financials borrow short-term with low interest rates from people around China and then buy long-term assets with those short-term borrowings. Low interest rate, long-term assets have of course a low return. So as long as people refinance those short-term borrowings everything is okay but as soon as that short-term interest rate spikes as soon as some of those long-term assets get into trouble then you get to liquidity dry up and the system collapses immediately. So it's very very risky. For example the Chinese company Au Bank Insurance 2014 they bought Waldorf Astoria for 1.95 billion dollars. That money came from short-term borrowings in China and they bought a long-term asset in the US. As long as the long-term asset is doing well and people are happy to refinance the borrowings everything is okay. As soon as let's say there is a credit crisis in the US people spend less money at the Waldorf these people lending to Au Bank Insurance pull their money back Au Bank is bankrupt in two minutes and it starts a chain and we are all doomed. So it's very important to see how these credit cycles increase rise but also how they go bust. What's very important to check and to see how market risks impact short-term borrowing rates is the Chinese free month interbank lending rate. And you can see here that since the beginning of 2017 it has spiked from 3% to 5%. That's a huge spike for just a three months interbank lending rate. Of course what happened immediately the People's Bank of China intervened and injected money into the interbank system. In addition it guaranteed loans to keep the system stable. However the Chinese bank can keep intervening just to a point. As soon as something bad happens that's something that keeps triggering defaults like the Waldorf Rastoria and other investments that Chinese companies made all around the world. Let's say a global recession then even the Chinese bank can't help anymore. According to Kyle Bass and I have to say I agree with him Chinese bank will inject even more money into the system which means that the Chinese currency will lose its value. When the Chinese currency loses its value all earnings from Chinese companies are lower especially for us international investors. So that's something really to keep an eye on and be ready. If you take a look at the valuations of financial companies in China you can see that the China Construction Bank has a PE ratio of 6. Industrial and Commercial Bank 5.9 and Bank of China 6 and all of them have dividend yields of 5%. PE ratios of 5, 6 are very low and signal distress and high dividend yields also especially those companies have no growth so it's a very very shaky system and one to really keep an eye on in China and what can happen. So you need to expect somewhere in the future a real currency devaluation in China. We'll see which one will happen first the same thing goes on in Europe in the States a little bit less perhaps in the States but Europe, Japan, China, States all big economies are printing money are helping the system to avoid any kind of economic loss. The second risk is credit to GDP we can see in this figure how the Chinese credit to GDP has really exploded in the last few years and what history tells us is that after each credit upward cycle there is a bust cycle has happened in Japan in Thailand in the US and it has not yet happened in Canada Australia and China. So sooner or later those cycles will revert because that's nature you cannot grow faster than your economy and productivity. In addition the Chinese government takes a lot of depth to invest in infrastructure projects to build the country however many argue that those infrastructure projects are economically not logical it means that they cost more than what they deliver to the economy which means they destroy value so they grow GDP as construction as everything is built but in the long term they actually destroy value. However we have to keep in mind that China is a communist country that's a little bit different that what we are used to and you have to see if that system remains in place then such infrastructure projects will always continue to be there will grow and even if they are not profitable they will benefit the whole of China and the economy indirectly so interesting to see how that will develop. The third risk is the Chinese housing bubble that everybody talks about comes from credit comes from money going into the system so it's all connected and you can see how Chinese house prices are also volatile in the short term it didn't grow in 2012 then they went up 20 percent 2014 14 then the government intervened the restriction on selling real estate then prices didn't grow then we're allowed to grow again immediately 20 percent in tier one cities and now again in 2017 the government intervened limited sales limited price increases in order to prevent the bubble and you can immediately see how real estate prices growth dropped okay Chinese people like to invest in real estate we don't know when this bubble will burst is it the bubble well probably it is but if it goes on for 10 years from now onwards and people keep buying homes then you can make a lot of money on it if it bursts tomorrow you have to know okay what happens if it bursts I lose so much so you have always to calculate the risks and rewards another negative is that the Chinese population from 25 to 54 the working age population is about to peak now 2017 so if less people will be working there will be less money to buy homes less demand for homes older people live with their families so it's another factor that shows that sooner or later the Chinese housing bubble will burst when that happened that's a very good question I would love to know China has its specific risks you need to keep an eye on them you need to position your portfolio so that you're not too much exposed or at least that the reward if you are exposed covers the risk five percent dividend yield doesn't cover the risk potential 100 200 400 improvements in a stock price or investment cover the risks of a 50 100 loss or if you're investing in a more stable company you have to know okay there is a potential that the currency evaluates and I lose 50 percent the dividend gets cut and things like that so those are the things you have to always keep an eye on the risks before you analyze the rewards then you can balance your portfolio and create a good portfolio that's let's say almost all weather I am preparing an all weather portfolio analysis or a technical way how to make it so please subscribe in order to see how I do that to conclude on China we'll see what happens in this environment central banks immediately intervene we don't know if they will keep intervening for the next two months or for the next 20 years that's impossible to know there is no historical precedent so I can't say that I know what will happen I can just prepare myself for everything thank you for watching click like if you like the content I'd love to hear what you think about this is it a bubble will it go burst and please share your ideas your thoughts about China we are here to learn from each other see you in the next video