Making sense of China’s economic gloom: Investment, debt, real-estate bust, babies & geopolitics

here's the 30second lesson on what Legends know never practice nunchucks in a crowded room never eat choli before a road trip always take your shirt off before you IR it don't take a call near a swimming pool and don't forget saving is not investing Legends don't just save they invest in mutual funds mutual fund Investments are subject to Market risks read all scheme related documents carefully we've been sitting on a particularly significant issue for several days now and this is the decline of Chinese economy or the fading of China if you've been following International media particularly International Financial and economic media you would have seen lots of writings on this an impression has been building up I know a lot of people say oh this must be just Western propaganda but remember the Western economy is a really deeply embedded in the Chinese economy and there is a great deal of symbiotic relationship there so it's not as if the Western World the Western capitalist world looks forward to De to the decline of the Chinese economy in fact they might benefit from it look at what's happening in China what's happening in China is the Chinese economy surely has slowed down Chinese economy had consistently grown at above 5.5% between say 2010 and 20 19 that is the prepandemic year since then it's been struggling if you see the last 3 years in 20022 the Chinese economy grew by 3% 2023 it grew by 5.2% although there are lots of doubts and skepticism about how genuine that growth rate is and as we go along I will tell you in a little bit of detail to the extent that I can simplify it why this where this skepticism comes from and now it looks like the Chinese growth is not going to be more than 4% the Chinese government likes to set up targets so they save 5% and when they say 5% what happens then is that all the local governments get their targets in the provinces and places and they in trying to meet these targets they try to drive up economic activity in trying to drive up economic activity very often they borrow money those borrowings then pile up and the result of that is is debt debt debt debt debt debt I've said it six times because China is under a mountain of debt China China's debt to GDP ratio at this point is 300% and if the Chinese have to again drive up their economic growth and keep it at 4 to 5% which is a lot of growth for an economy which is already more than $8 trillion worth so 4 5% consistently will be a lot of growth but if they keep driving that by borrowing investing borrowing investing then their debt to GDP ratio in the next 10 years would go up to 400 to 450 to 500% that will be unsustainable for China that's the crisis the Chinese are in the other big fact about China and I will share with you a bunch of articles in fact with the description of this of this episode you will see a bunch of Articles listed you can go to them many of them are from carnegi endowment some from The Wall Street Journal some from other Publications and two from Financial Times written by ruchir Sharma so in fact in one of those ruchir Sharma articles we get the Nugget In fact one from each of those articles one is that the Chinese can at this point in the near future in the foreseeable future can give up the idea of becoming an economy bigger than America's as a fantasy until a few years back everybody seemed to believe that the Chinese will outstrip America in the size of their economy and this will happen not just in our lives but probably in our youth and in our middle age whatever stage of life we were in that's unlikely to happen because as rer points out in his 10 trends for 2024 is his his annual article that the Chinese economy Chinese GDP had gone up to 7 6% of American GDP in 2021 76% and at that growth rate because there was a growth differential between China and America America wasn't growing that fast the Chinese might have had an opportunity of overtaking America but two things happened one the American economic growth picked up that is something that people don't give Joe Biden the credit for even in America but the American economic growth picked up and at the same time Chinese econ economic growth declined so 2021 China was 76% of America's GDP today they are 65% of America's GDP and given the growth rates now and given the base at which the American economy starts compared to the Chinese economy this Gap Gap is not likely to narrow this Gap is likely to increase and for the Chinese to now compete they will have to repeat the same thing that they've been doing in the past and what they been doing in the past is borrowing borrowing borrowing encouraging borrowing and investing what happens is and again these are areas of complex economics that I don't know very much about but I'm trying to understand I'm trying to understand from smart people who are helping me and then getting that wisdom I'm trying to further simplify it for you now if you look at investment for every dollar of investment these are Global norms for every dollar of investment you need three of consumption right because if you are investing you are producing you're not producing you're not investing $1 to produce $1 worth of goods so for to justify every dollar of investment you should have $3 of consumption that is the global Norm with modern economies also that's how modern economies work in China that consumption consumption level is very low it's only $1.3 so for every dollar invested they own consumption is only $1.3 what that means is that the rest of the production that they have through this investment they must sell all over the world and if that doesn't happen they are not able to do it then they are in trouble and that's what's been happening because lately the American economy has picked up many other economies Poland Mexico and most of all India they've all picked up and they are investing in their own own economies investment levels are going up everywhere at the same time because the Chinese economy is not growing foreign investors are moving out of China One the economy is not growing second there is a great deal of Suspicion about how Shi Jinping is running his government third xiin Ping's actions on the political economy have become very unpredictable see how he went he went after after his top entrepreneurs top globally famous entrepreneurs like Jack ma or how he demolished his Ed Tech sector that is not something that foreign investors like in fact in 2023 for the first time since the Chinese boom started China's net FDI flows have become negative that's a very important point now now I told you and this is a 21st century principle for every dollar of investment you need $3 of consumption China has only 1.3 so that creates a gap now you can look you can look at it in a different way the different way of looking at this is that China until 2021 accounted for 18% of Glo Global GDP in fact they had reached that number earlier than that that's almost 1/5th of global GDP at the same time they had only 133% of global consumption so the remaining 5% accounted for I mean it was filled in with exports but also that is the investment that came from Chinese borrowing so 133% of global consumption 18% of global GDP but more importantly 32% of global investment so Chinese had an overhang of debt and an overhang of investment as well again if you look at Investments generally in modern economies investment accounts for for about 25% of GDP in India's case for example my colleague TCA Sharad Ragan our editor for economics he tells me that India's ratio is about about 29% generally modern economies have in the ballpark of 25% in China's case it's always been it it's always been upwards of 40% in the last 20 years in last 20 years it has not Fallen below 40% at this point it's about 42 to 44% that's where it's floating last couple of years and in 20101 it reached it hit the peak of 47% so that's an economy much more dependent on investments and in that economy is in if Investments come down one because FDI is now net negative it's going out people don't have the confidence of continuing to invest in China and they have options available they have options available they have Vietnam Next out to China they have Indonesia they have India of course then they have Poland they have Mexico Mexico in fact has been the biggest beneficiary of FDI moving out of China so the Chinese are caught in this situation too much investment too much debt too little too little economic growth and that is a that is a trap that's very difficult to get out of how do we list the problems the Chinese have I told you next time multi debt multiplied by six or maybe debt raised to the power six because debt is such a terrible Scourge the debt is bad for an individual a company anybody too much debt can be a killer so in China's case most of its problems come out of debt debt has come in because there's been pressure to drive up growth whether there is demand or not because because also the Chinese Communist party wants to show that they are growing fast and there's been there's been this political objective also of making their economy bigger than America's that's been the competition for the moment that competition is lost and there is nothing on the ground to suggest that the Chinese are going to catch up with America for a very long time in fact America at this point is pulling away whatever you might might say about the American system so the Chinese Chinese problems I'm just listing them for you one debts in property have gone wrong there too much debts in property which have gone wrong of the 100 biggest real estate companies in China and China is humongous real estate companies in China I don't think India has any real estate company which will feature in China's top 100 companies because these are so big India's real estate companies tend to be confined to some cities or the odd City or the same one city or maybe a couple of cities but India's real estate companies are not multi City multi-state they are not spread across the country or across the coastline or across a bunch of business cities or new or new developments they are they are smaller local in China's case they are bigs of the 100 biggest companies there 50 have already defaulted 50 have defaulted on their offshore debt of these 50 of the largest 100 property property companies compies who've defaulted the top five the biggest five together have defaulted 266 billion in their offshore debt $266 billion doar is not small change and this is just five of China's biggest Builders I told you 50 of the 100 biggest have defaulted so remaining 45 will also account for quite a bit but I'm only giving you the finger figure for the top five that went belly up that went Bell up there were many efforts to try and revive it its owner some of the top people were arrested for misdemeanors government also tried doing something they got the regulator to take over ever grants insurance company for example finally nothing worked and a Hong Kong court on 29th of January that's just a couple of weeks back announced or ordered the closure liquidation of ever Grand so that is what's happened to China's property sector so one the biggest problem is debt in property now because there is is debt in property there is also debt in local governments how does that work I told you just a while back that the Chinese Communist Party says oh we need 5% growth so every local government also has to make its contribution to that growth it's like having growth targets or quotas growth targets everybody gets marketing and sales people also get grow growth Targets in some organizations journalists also might get growth targets how many people will read your story or how many people will watch your video Etc so growth targets are not unhealthy but when you are the government you are giving you are the big government party party owned government you give targets to your local governments who are also party owned governments then everybody has to please the boss how do these local governments get that growth now these local governments then borrow money because they have to drive up growth when they make these borrowings how do they hope to repay these loans they hope to repay these loans by selling land because the party owns the land the state owns the land so they can auction that land and repay their debt how much value they can get by auctioning that land would then depend on how good is the genuine good quality economic growth that's one problem and second how good are the real estate prices because if the real estate prices remain high then these local governments will get more value for selling this land if the real estate prices collapse then they get very little value so what happens in the processes that everybody defaults on their debt first of all the builders Builders have already pre-sold these houses at this point estimates tell us and these are estimates by reputed China Watcher economists estimates are that that there are at this point more than 20 million units that is more than 2 CR houses two CR Flats more than 2 CR units of uncompleted and delayed pre-sold houses which means people have paid for these these houses they paid they paid their collateral and they've also borrowed their money now the buyers who have borrowed from Banks or institutions many of them have stopped servicing their own loans paying their emis because they don't see these houses getting ready for for them to take over builders on the other hand pre-sold these houses borrowed money all of this you see in NOA greater NOA area that is the area that say Supreme Court and and government of India are now trying to intercede into to help home buyers get their houses for which they paid but these are just but the scale of this problem say around Delhi maybe a few thousand apartments in the rest of the country also maybe another 10,000 20,000 30,000 50,000 100,000 maybe maybe half a million Apartments I'm exaggerating it can't be half a million in India in China it's 20 million such apartment so the buyer for of the apartment stop repaying their debt to the banks the buyer of the apartment also stops paying further installments to the Builder the Builder who's already collected The Upfront money collateral from the buyer has invested this money or maybe in some cases stolen this money they need more money now to complete these projects to complete this projects where will the money come from money will come from borrowing from the same Banks and institutions the same Banks and institutions are now no longer trust the trust the Builder or developer because his buyers are not paying so the banks refuse to pay the Builder and that's how the Builder goes Belly Up and because the Builder goes Bell up Builder cannot repay the banks the debt they had taken from the Banks Banks Shadow banks financial institutions so they also go belly up so so when in India we had this problem of the banks having bad debts and also borrowers going bankrupt and not and not being able to service their debt arind Arin suban are our then chief economic adviser had called India's double balance sheet problem what you're seeing in China right now and I'm oversimplifying it is China's triple balance sheet problem and that is the biggest weight on China's economy right now then you have then you have other problems I told you about debts in property uh in the entire property business from the Builder to the buyer to the banker number two debt in local local governments that also I told you number three low household confidence now families don't have the confidence to borrow more and buy it's also linked to China's demographics which I will come to because China is producing too few babies so China is now bringing in too few young people into their Workforce and families don't have growing children these are these are families of the second generation of single child families in China and they they are not so optimistic about the future future that they will borrow but it's only when people are optimistic that they will borrow and invest not otherwise otherwise they are they are collecting for their pensions next there are geopolitical tensions that is something that purely XI Jin ping has invited upon himself because I think he gets his Thrills doing that so he's picked up pangas with with the us over Taiwan with all his neighbors Japan the Philippines everybody most importantly with India as well he's opened up all his front so they are geopol iCal tensions everywhere then of course declining birth rate it's declining much faster than anybody I'd imagine and then China's total Factor productivity now let me not explain this to you you can Google it but just see it as productivity that is declining rapidly so between 1980s and '90s in 1980s and '90s China's boom years it ranged between say 3.1 to 3.5 supposedly very healthy by 1998 it it had come to 2.8 still quite robust now between 2009 and 2018 it's been declining rapidly and it's come to 7% so declining so household debt Bank debt Builder debt B Builders going bankrupt mostly mostly construction driven local consumption and local growth debt in local governments debt at the national level low household confidence geopolitical tensions declining birth rate and heavily declining productivity this is how you define a perfect storm in the world's Deputy superpowers economy now how did some of this problem start in the Chinese Chinese construction Center Chinese building sector the fact that it was overleveraged that everybody was borrowing too much that had become known to the Chinese government at the central level it's a very Central C ized government that had come become known to them by 2016 17 18 when they had seen many years of growth by that time they decided to answer it and how does how does an authoritarian government try to answer a problem once they've identified a problem they go at it with a sledgehammer so in 2020 August Chinese Communist Party came up with their own idea of disciplining this Market or or of controlling this excess of B borrowing and overspending by coming up with the policy of what was called as three red lines so what was these three red lines is important to watch these three red lines were number one that that for anybody any Builder their liabilities have to be less than 70% of their assets so if somebody has an inventory of say $100 billion their liabilities cannot be more than $70 billion that's their borrowing some money that they owe to others number two the second red line debt to equity ratio has to be below 100% so you cannot borrow more than your Equity right very tight number three Cash to shortterm debt should be at least 100% so whatever a short-term debt is they Define short-term debt in different ways at different stages at any point of time the cash in your bank should be more than your short-term debt which means if you're all all your short-term lenders want their money money back you should be able to write out the checks right away now most companies found it difficult by this time companies had got overleveraged already most companies found it difficult to meet this criteria because with this criteria they were punitive follow-up actions if you did not meet one of the three the first of the three if you met all three criteria you could borrow 15% more you could borrow 15% more of your current borrowings right you could go up I've met all my all my criteria I can borrow I'm already a 500 billion uh dollar company I can borrow another $75 billion if you don't meet one of the three conditions then this 15% became 10% if you could not meet two of the three conditions you could only borrow 5% more and if you did not meet any of the three conditions then you could borrow nothing so that what was that that was the script being written for China's triple balance sheet problem now what is happen as a result so I take you back now to one of Richer's article rer sharma's articles who says that China's rise is now reversing I'll share this article with you you also see a screenshot on on your screens China's rise is reversing and he said the last two years have seen the largest drop in China's share of the global GDP I told you that by 2020 21 China was 18% of the global GDP that's almost one in five almost one fifth now it has come down and it has come down quite substantially and this is the highest fall in China share of the global GDP since the Mao era how does it work I will tell you through rucher in this case he says that before 1990 China's China's share in the global economy Global GDP was below 2% below 2% India's at this point is close to 4% China's before 1990 was below 2% it Rose by 2021 to 18.4% I told you almost almost 1 in five almost 1/5th no other country had risen so much so fast in 2022 it slowed down a bit so the share declined 2023 a bit more it has now come to 177% So within 2 years what was 18.4% of global GDP has become 177% of global GDP this is the heaviest fall in China's share of the global GDP from from from the mauo era now this has this has many this has many reasons one is the Chinese economy has slowed down but the second is also that other major countries economy economic growth has gone up first of all most importantly America's economic growth has gone up but also other countries Mexico Poland etc etc and very importantly India's economic growth also on a larger base has been quite robust and that's how the Chinese share in the global GDP is declining so where is this where is this growth going global economy has grown post the pandemic so if you see the global economy between 2022 and 23 it grew by $8 trillion that's from R's article in F $8 trillion that is to $8 trillion it went up to $ 105 trillion so I told you India is about 4% so India is closer to close to $4 trillion so thereabout so that's how I calculated and I said generally 4% but I use the rounding error in a manner to suit ourselves that said 105 trillion the global economy became in 2023 growing by $8 trillion over the previous year of this $ 45% went to America once again never never underestimate America 45% of this growth went to America also include India China's real potential growth rate if I read everything on International media even from enthusiasts of China or if I if I watch what what Martin wolf tells fared Zakaria on on his show GPS in fact I will share a link link of that tweet with you which has this little clip of Martin wolf talking if you see all of that nobody imagines that the Chinese economy can now grow at more than 2.5% Ro also tells us that in nominal dollar terms Chinese economy will decline it has decline in 2023 for the first time since the devaluation of the Chinese currency Reni in 1994 and today because China is a unique country at a time when all the rest of the world is battling inflation China has actually had deflation that's because of the command economy of the kind that they have followed because Chinese have had deflation and they've also had property bust in this situation to expect growth is very tough and when net FDI become negative to expect growth is very very very tough and he says rer says and I quote from him almost no matter what she does his nation's share in the global economy is likely to decline in the foreseeable future it is a post China world now now in conclusion I will take you back to an editorial that K is almost a free world Chinese website very respected and very pro market very pro market very reform so in an editorial that got published on December 25 last year that is that that is just over over 6 weeks back a day before ma Dong's 130th birth anniversary in that territorial kashian pointed out to all the problems trouble and the crisis in Chinese economy and they said and it's a very cheeky line and you are smart enough you'll figure out why why I call it cheeky that line said one can only correct inappropriate policies in a timely manner if one sticks to seeking truth from Facts within hours that editorial disappeared nobody's explained what happened to that Ed editorial why why disappeared nor has it been found elsewhere now why did I say this is a mischievous line because seeking truth from Facts is is is is an idiom of Chinese wisdom that maidong made famous in 1936 he used used for the first time and made it famous all the time for all all times to come and it became an internationally Global Marxist dictum so kaian used that Edom effectively to mock the current Chinese government and no wonder that teritorial was taken off within hours but that in fact tells us also the problem in China the problem with the Chinese economy problem that's come from arrogance over borrowing over investing not cons consuming enough not producing enough babies and also most importantly from having an authoritarian style of working where everything is done in a centralized Manner and that system does not respect the markets it may have benefited from the markets but it does not let Market forces play out and that's the reason you find so many investors also giving up on China at this point of [Music] time

Channel: ThePrint

Views: 219,016

Keywords: theprint, shekhar gupta, ThePrint, ThePrint news, ThePrint videos, ThePrint Hindi, China’s economic gloom, Investment, debt, real-estate bust, China economy fades, 18 percent of the global GDP

Id: 6IeObMDIZY4

Length: 28min 58sec (1738 seconds)

Published: Wed Feb 14 2024