| The Weekend Edition is pulled from the daily Stansberry Digest. Don't Let the Headlines Scare You... China Isn't on the Brink of Disaster By Chris Igou, analyst, True Wealth Opportunities: China Many investors avoided investing in China at all costs in recent months... There will always be a reason not to buy as an investor. And lately, many folks have focused their reasoning on a few macroeconomic concerns in China's market... Regular readers know all about the country's trade war with the U.S. We've covered the latest twists and turns in the seemingly never-ending saga over the past year and a half. And in Hong Kong, millions of people have marched in protests for several months... Fears of the local government passing a bill that would have allowed extraditions to mainland China drove the protestors into action. These protests broke out in Hong Kong's major airport, halting travelers and delaying flights for days at a time. In some cases, protesters turned violent in the streets. Look, I hear you... Most of the recent news about China has been negative. But if we dig deeper, these types of "world ending" scenarios aren't as bad as they seem... Since the trade war began, analysts have predicted it would devastate China's economy. But the two sides seem to have made progress recently... U.S. President Donald Trump and Chinese President Xi Jinping are moving closer to signing a "phase one" trade deal. It would be a positive step forward in resolving the trade war. Even more, Hong Kong's government is taking steps to settle the unrest. Last month, it formally withdrew the bill that originally started the protests. And if you haven't bought Chinese stocks this year because you're worried about these issues, you've missed out... China's Shanghai Composite Index is up roughly 20% in 2019. I joined Steve Sjuggerud's team four years ago... Since then, my friends outside the finance world love picking my brain about stories in the news. Whether it's about the trade war or something happening here in the U.S., they want to know what I think will happen next. For example, during the bitcoin craze in late 2017, I received several text messages about the crypto's big move from less than $1,000 to more than $17,000 that year. My friends asked questions like, "Could bitcoin really reach $50,000?" and "What about alternative coins like Ethereum?" Not surprisingly, those texts stopped coming after bitcoin's price collapsed throughout 2018. Sometimes, it's good to see these messages coming in from my friends... It gives me a rough feel of what people outside of finance think about the markets. The questions I've received lately all revolve around China... As you might expect, many relate to the trade war and what's going on in Hong Kong. However, several questions have touched on another China-related topic. And in my mind, it's one of the biggest misperceptions in today's financial markets... China's debt. You see, China's debt has swelled since the 2009 global financial crisis. It's now at the largest level in recent history. And I've been getting questions like this as a result... "Isn't China overloading on debt to support its struggling economy?"... "Are you ignoring China's debt problem when talking up its stock market?"... "Is China's debt out of control?" If you've been reading the headlines, you might be wondering the same thing... The mainstream media has pushed this narrative time and time again over the past decade. Take a look at this headline from financial news network CNBC in August... That headline makes it seem like China is a ticking debt bomb that's about to go off. And you're not alone if you've avoided investing in the country because of what the media says. But I want to make one thing clear... This perception of China is flat-out wrong. Today, I'll show you why China's debt isn't on the brink of collapsing its economy as many believe. In fact, the reality is so different than perception in this instance that I believe we could see a massive rally in Chinese stocks over the next few years because of it... Now, I'm not predicting a total return of 450% like we've seen in U.S. stocks since 2009. But this misperception could easily lead to triple-digit gains in Chinese stocks from here... Let's start with the debt from Chinese households... It's true that household loans in China have doubled since 2008. And household debt is not a small fraction of the economy, either. To be clear, in this calculation, I'm talking about both consumer debt and mortgage loans... As of the end of last year, China's outstanding household debt equaled 44% of the country's total gross domestic product ("GDP"). That's a solid chunk of GDP, but it's nowhere near the level of household debt to GDP in other advanced economies right now... In the U.K., this debt-to-GDP ratio is 87%. And it's a solid 79% here in the U.S. So as you can see, the ratio of China's household debt to the country's GDP looks relatively low compared with other global powers. And remember, China is the second-largest economy in the world... Yet its household debt to GDP is much less than its peers. China is also much more strict on mortgage down payments than we are in the U.S... The average down payment on a house is 6% in our country. And in many cases, people pay even less than that... If you get a Federal Housing Administration ("FHA") mortgage, you can put as little as 3.5% down when buying a house. That requires a low upfront cost. Last year, China cut its minimum requirements for a down payment from 25% to 20%. But that's still more than five times higher than the minimum needed in the U.S. today. Let me say it again... You need to have at least 20% of the home's cost as a down payment in China. In comparison, 72% of first-time homebuyers in the U.S. put down 6% or less. The truth is, China's household debt isn't at a tipping point today. Now, I know what you're probably thinking... "That's just a piece of China's debt puzzle." I get it. But let me show you more proof that China's debt isn't out of control right now... We can see this through what's called "non-performing loans" ("NPLs")... NPLs are exactly what they sound like... They are loans that the borrower can't pay back. And the lending bank takes the hit on the loan as a result. In the middle of the last financial crisis, the ratio of NPLs to total loans in the U.S. reached a peak of 5%. The ratio sits at about 1.5% today, according to economic data provider CEIC. Meanwhile, China's ratio of NPLs to total loans is 1.9% right now. While that's higher than the U.S. today, it's not far off. And it's similar to the U.S. ratio in January 2017 (2.1%). My point is, China's NPLs aren't through the roof today. They haven't skyrocketed higher. But even if the NPLs do keep increasing in the months ahead, China's banks are prepared... It's not just about how much debt you take on. More important, it's about your ability to pay that debt down over time... and how you can cover bad loans when they surface. At a minimum, Chinese banks must store 150% of impaired losses. So they must set aside $1.50 in cash for every $1 in bad loans. But many Chinese banks save more than that... Two of China's major banks – the Agricultural Bank of China and China Merchants Bank – go well beyond this measurement... They have "provision-coverage ratios" of 278% and about 400%, respectively, according to a recent South China Morning Post article. So even if bad loans increase for China's major banks, these financial powers have put plenty of money aside for a rainy day. And it doesn't stop there... China's required reserves are also higher than in the U.S... One way you can measure this line of safety for banks is through the "required reserves ratio." China has cut its required reserves ratio seven times since 2017. On the surface, so many cuts in a short time frame might seem like China is being too lax on its regulations. And headlines like this one from news service Reuters in September might scare investors... China is cutting these required reserves to increase loans in the economy. But if we take a closer look, we can see that this situation is nothing to lose sleep over... In the U.S., the required reserves ratio equals 10% of deposits. That means banks in the U.S. must set aside 10% of what they bring in as cash to handle tough times. But here's the thing... Even after China cut its required reserves ratio for the seventh time, it still stands at 13%. That's right! Banks in China still must set aside more in reserves than major U.S. banks. Sure, China's debt has grown over the past decade... And yes, the country has used cheap debt to help fund its expansion. But this debt isn't crippling China's financial system. It's one of the biggest misperceptions in finance today. Investors are scared to invest in China because of its growing debt. But they shouldn't be... In reality, China isn't at the tipping point in the debt cycle. And as this becomes more evident, it could be a major tailwind for Chinese stocks over the next several years. Don't let "China-phobia" stop you from being a part of the next big rally... Again, I'm not predicting a decade-long rally in Chinese stocks. But a triple-digit move higher wouldn't be surprising given how far off from reality the perception is today. Good investing, Chris Igou Editor's note: Mark this date on your calendar right now: November 27. On that day, $22.7 billion will flood into a select group of Chinese stocks. Steve believes this opportunity could be the safest way to potentially double – or even triple – your investment in the next two years. He just put together a presentation with all the details. Watch it right here. Tell us what you think of this content We value our subscribers’ feedback. To help us improve your experience, we’d like to ask you a couple brief questions. | 