Why You Should Be Worried About China's Debt Crisis

this is china the most populous and second largest economy in the world this is a nation that has been home to the most intense period of economic growth and development in history as the country has opened up to foreign trade and embraced the free market it has transitioned from a famine plagued backwater into the superpower that we see today this sustained development has done some amazing things both within the country and around the world not least of which was pulling hundreds of millions of people out of absolute poverty but of course it hasn't been without its problems behind the futuristic facade of glass-clad skyscrapers and mega-projects the chinese government is unfortunately regressing back towards an increasingly authoritarian rule the type of rule that has already caused all the problems we've already seen in our three-part series on the country now up until this point a lot of these issues have been conveniently overlooked let's say both by the citizens of the nation and the countries and companies that were doing well for themselves by taking advantage of this new cheap pool of labor but this is starting to change increasingly hostile relations between china and its largest trading partners has meant that a lot of these institutions and governments that were once happy to ride the gravy train are starting to change their tune perhaps more concerningly the population of the nation itself is starting to feel the pressure of an over-leveraged economy up until now the country has enjoyed growth that is strong and consistent a population that is experiencing consistent growth will be seeing their quality of life improve year over year and will naturally be less inclined to rock the boat that is ferrying them to prosperity but no good thing lasts forever and everything from unusual business practices to the most over-inflated real estate market in the world is starting to weigh down this growth at all costs mentality so is china's period of rapid growth over if so what is causing this slowdown and is this actually a bad thing after all most advanced economies tend to have much more modest growth rates of course once we have looked at all of these issues we can put china on the economics explained national leader board over on our second channel this video is brought to you by public.com the internet's premier social network for investors financial advisors and investing gurus will oftentimes give suggestions on names to invest in without actually following their own advice or eating their own cooking so to speak and that's where public comes in public is about transparency the app enables you to see what your friends co-workers as well as industry thought leaders are actually invested in the app also has a feature called town halls which lets you interact in real time with ceos of billion dollar public companies unlike a wall street earnings call where the ceos usually only take questions from analysts at big investment banks public lets you join the conversation so you can ask questions to the company's ceo just like a wall street analyst sort of like a reddit ama and guys here's the best part because you're a fan of economics explained public will hook you up with up to 70 dollars in free stock when you sign up with our link and fund your account with as little as one dollar just use your phone's camera app to scan the qr code that you see on screen to download the app now if you're watching this on your phone you can also sign up at public.com economics explained the link is also in the video description below okay before we get into things it's time for the big disclaimer chinese data sources particularly those that relate to the economy are not super reliable to put it lightly we always try to use independently verified sources where possible but even still some of these are ultimately dependent on what the chinese government reports these reports are often altered to present a more positive image of the nation this is by no means a problem exclusive to china and i always encourage my viewers to question the validity accuracy and reliability of all pieces of data no matter the publisher but it is particularly prevalent here which is why we need to make this disclaimer alright with that out of the way let's look at perhaps the most pressing issue in the nation at the moment the real estate market in china is a multi-trillion dollar time bomb that is somehow even more ingrained into economic systems than real estate markets in places like the united states canada australia and europe now regular viewers of the channel will know that real estate in china's major cities is unbelievably expensive especially when compared to average household incomes which are improving but are still well behind advanced nations like the us europe and even their neighbors in south korea and japan now there are three major reasons for this insane pricing the first is obviously the expectation of future growth this is a major factor in determining the market demand for anything but especially things that are considered assets if you knew a stock was going to be worth a hundred dollars tomorrow and it was trading at 50 today you would definitely buy that stock even if the underlying company was complete garbage now normally this rule applies to a lesser degree in real estate because real estate holdings are less liquid much more expensive and less fungible than stock in a company as in if you buy a house you probably need to take out a big loan that you may or may not be approved for then when you go to sell it it's not quite as simple as opening up your phone and hitting sell on your brokerage platform of choice you need to employ a realtor hold open homes and pay a pretty significant commission for the privilege of the whole ordeal what's worse is that if you just happen to buy a house that gets infested with termites well then the general market appreciation is all for nothing and you are probably still going to lose money on this investment now all of these issues aren't a big barrier to these expectations for future gains in china why well because real estate is really viewed as a speculative asset first and a place to keep people second building standards are absolutely terrible in china but that doesn't really matter to most people why because despite how terrible the underlying building is it's almost guaranteed to be worth more tomorrow than it is today china's enthusiasm for real estate is so strong that some provincial governments have tried to cool demand by limiting the amount of real estate a single household can own the cunning investors way around this issue get divorced on paper so that one household becomes two and the apparently separated investors can double their holdings without penalties china's economic growth has been remarkable and the best way for people to piggyback off that growth is to invest into real estate if china's economy continues to double in size every eight years then paying five million rmb for a rundown apartment is gonna look like a savvy investment this is very similar in many ways to tech companies in the u.s that might have terrible underlying fundamentals but have seen a long period of sustained price growth based on projections of future growth which is further fueling price growth in the same way that investors in the west have accepted that some stocks are worth 100 times what the company makes in a year residents in china have accepted that homes cost as much as 46 times what the average worker makes in a year will these markets last well nobody's got rich by betting against them yet so i guess time will tell this comparison also leads us along nicely to the next reason that housing in china is so expensive and that's because people don't really have anywhere else to invest we covered this issue in detail in our video on the chinese stock market first the american stock market so i don't want to repeat too much here but the basic rundown is that average chinese people just don't invest into chinese companies because they have historically not been great investments especially when compared to the overall growth of the economy there have also been major issues with things like peer-to-peer lending schemes in china which were very popular until the government cracked down on the practice altogether because it was becoming rife with fraud and also let's be honest taking some power away from the state-owned banks basically if you want to put your money to work in china it needs to be in real estate for what it's worth the government has actually tried to control this rampant speculation but so far it hasn't been particularly effective now these other two reasons potentially pale in comparison to the third driver of the insane house prices we see in china which is the societal pressure to own a home you might think this is nothing unique in the u.s everyone from prominent financial advisors to your know-it-all in-laws will talk endlessly about the need to buy a house but china takes this social pressure and turns it up to 11. given the one child policy causing an imbalance of men and women in the nation a lot of chinese gentlemen have found it almost impossible to get married without owning a home beyond that there are very real structural advantages to owning a home the chinese population is heavily restricted by what is known as the huko system which basically tracks household registration this system tracks where people's primary residence is and from that decides where they will have access to public services like healthcare and education for their children the internal migrant population within china is huge a lot of rural residents leave their small villages to move to city centers where they can attract significantly higher wages the problem is that these migrant workers will still technically be residents of their small village which will mean that they won't have access to even the most basic public services in their cities that they are living and working in because of this huco system this is also one of the main reasons that we see chinese children left at home with grandparents while their parents are off working in the city it's not that the parents don't want to take them along it's that they won't be able to go to school there because they are not counted as residents this would be like not being able to send your kid to public school in san francisco because you were unlucky enough to be born in north dakota now the solution to this problem on an individual level is to buy a house sure it may be extremely expensive but if you share a room with 10 colleagues and save everything you earn while getting a loan from friends family and a bank maybe you'll be able to afford a small one-bedroom apartment on the outskirts of one of these cities it may not be ideal but once you have the deed to that household you are in and you're no longer a second-rate citizen in the city that you call home this is not a fringe issue either in cities like beijing as much as one-third of the population is made up of these designated rural workers now this issue is not great at the best of times but what happens when all of these hopeful workers are suddenly forced into lockdown without anything in the way of government assistance yeah it gets messy real fast and just how messy we will soon see but before that this all begs the question why don't they just abolish the system the chinese government is obviously trying to cool down this real estate bubble they have introduced laws such as high deposit requirements for second and third properties they have recently proposed a nationwide property tax and in many instances they have put a hard cap on how many pieces of real estate people can own as we saw earlier the problem is none of these efforts have really worked in fact in the case of provinces that have limited home ownership it's almost had the opposite effect if people can only own three houses let's say they're going to make sure those houses are very valuable because they basically represent their only opportunity to consistently invest money this dries up development supply of the types of homes that would be affordable because nobody's interested in using up one of their three property allotments on a one bedroom or small studio apartment but there is still an obvious solution just get rid of this huco system the problem is that this isn't one universal system it's actually dozens of individual systems specific to different provinces and cities around the country getting rid of this system would require the cooperation of all of these individual provinces who actually may not be too keen on the idea at all you see you never actually own land in china you're rented off the government for a set period of time normally these land rentals are given to developers who will in turn build big apartment buildings on them and sell out the individual units for a nice healthy profit historically it has actually been provincial governments collecting the revenue from the sale of these land parcels wealthier areas have more expensive and desirable real estate and therefore attract higher prices for their land rights beyond this building is a huge industry that supports millions of workers in china and the area with the most development attracts the most jobs which in turn attracts further development we saw a very similar situation in spain prior to 2008 go watch our video on that to learn more about this quite remarkably similar situation but despite this the national government has recently announced that all this land rights revenue will now be collected centrally this is a huge deal because government revenue from these land rights sales makes up a very significant portion of total government revenue last year alone these land lease agreements generated 8.41 trillion rmb in revenue or the equivalent of about 1.3 trillion us dollars this has been seen by many as a first step towards introducing a uniform land tax which would simultaneously further increase government revenue while at the same time reducing the demand for real estate assets which would now represent an ongoing expense however this may be more difficult than one would think at least in the immediate future because it very well could be the catalyst for a perfect storm the fallout of the coronavirus has not been easy on china and while their officially reported infection figures are quite low especially for a country of some 1.4 billion people it does not mean that it has sailed through the ordeal unscathed on the surface it doesn't seem that way exports are at their highest level in history after suffering an understandable dip during early 2020 but the thing is these impressive export figures are mainly due to the price growth of commodities rather than genuine growth in productive potential port and factory closures across the nation have slowed down the workshop of the world and heightened trade tensions have certainly not helped the situation unemployment is high especially amongst young workers even by the very creative reporting standards of the government and what work does exist is becoming harder and less rewarding when everything is on the up and up people are happy to work a few extra hours because it means they make more money and improve their quality of life but for the first time in a long time young workers are starting to see that this additional effort is going more to support an ageing and over-leveraged society than them a new phenomenon known as lying flat is sweeping the nation it's a form of peaceful protests where mostly young people will refuse to work in high-intensity roles or perhaps refuse to work at all preferring to just lie flats this might just be another piece of straw on the camel's back but it's one that the government is seemingly quite concerned about china is still heavily reliant on hard-working cheap labor to prop up its economy without it the domestic market it's worked so hard to cultivate or collapse very quickly and perhaps it already is the decades of debt that has piled up to support an endless building spree is starting to come due household debt has risen from 18 of gdp in 2008 to 61 percent of gdp in 2020 in the same time that gdp has almost tripled now debt fuel growth isn't always a bad thing and for what it's worth this debt to gdp figure is still well below places like switzerland and my own country of australia but when that debt is primarily used to buy shortly constructed apartments sitting on land rented from the government at massively inflated prices well the kingdom has literally been built upon pillars of sand debt collectors have seen a massive increase in the past few months and all the factors that we have seen might be starting to sway this tower of cards historically this is where the government would step in but this real estate bubble might genuinely be too big to manage time will tell of course and i'm well aware that everyone in their dog has predicted the inevitable demise of the chinese economic miracle admittedly in part because they kind of want it to be true an authoritarian government that still purports to be communist being the dominant economic superpower in the world i can't say i'm excited about it but regardless of when the economy slows down it's more a question of what happens next in modern advanced democracies when there is an economic meltdown people lose their jobs their houses their cars and it genuinely is terrible but we tend to turn it around and just vote for the other mobile politicians that swears they would have totally handled it better if they were in charge if even a slight hiccup in the promise of endless growth occurs in china people will very quickly become aware of all of the other issues that they were willing to ignore while the going was good when there is only one mob of politicians within the country that you wouldn't dare insult but you still need someone to blame those fingers are probably going to be pointed outwards this video is made possible by public public is the platform for those who enjoy participating in sophisticated conversations about investing at its core public is an open forum rooted in meritocracy a place where the best investment themes are openly debated by thought leaders celebrity investors as well as aspiring ones alike i personally enjoyed participating in one particular discussion about the recent surge in lithium-ion battery prices which has been exacerbated not only by pandemic induced supply chain issues but also by more automakers manufacturing electric vehicles what's also really cool is that if you see a particular stock or etf that is in someone else's portfolio that you want to add to your own you can actually purchase the securities directly from the app just like a traditional brokerage account publix platform offers thousands of stocks and etfs to choose from and guys the best part is because you're a fan of economics explained public will hook you up with up to seventy dollars in free stock when you sign up with our link and fund your account with as little as one dollar use your phone's camera app to scan the qr code that you see on screen to install a public app right now or if you're watching this on your phone feel free to claim this offer by signing up at public.com economics explained again that's public.com economics explained the link is also in the video description below thanks for watching mate bye

Channel: Economics Explained

Views: 2,948,432

Rating: 4.7480116 out of 5

Keywords: china, china debt crisis, china debt problem, china debt default, china debt trap, chinese debt crisis, china housing market, china housing bubble, china debt bubble, china housing price index, china debt crisis explained, china economy, economy of china, economics, economics explained

Id: lbH_8Nj51HU

Length: 18min 10sec (1090 seconds)

Published: Fri Aug 20 2021

Reddit Comments

[u/MikeyOnions]

Thx for post!

[u/DacheinAus]

Far too many similarities to the US. Especially, “laying flat”.

[u/CuriousCatNYC777]

Excellent breakdown. Thanks for posting !