- There's so many things to think about right now,
and those are nothing compared to what's lurking in the distance,
the distance, threatening to disrupt our peaceful lives.
The world's second largest economy,
the largest real estate market,
the manufacturing hub of the planet,
And a collapse here would send shockwaves
around the world, including your own wallet.
Because the thing is, whether it's stocks, real estate
or crypto, China has a hand in it all.
And the more I learn about China's economy, the
more worried I get about my own investments.
China's economy has been a miracle of the 21st Century,
an absolute rags to rich's adventure.
But now that miracle is beginning to crack and crumble.
It's shaping up to be one of the
worst years for China's economy in decades.
And you might be thinking
one bad year can't matter that much.
But let me give you a different perspective.
You could say one bad hand in poker
doesn't matter that much.
But what if you're all in?
You have everything riding on that bet hitting
if you miss, disaster.
China's economy is built on
the expectation of rapid growth.
Its own central bank says if growth falls
below 4%, they'll be in serious trouble.
And leading the charge into disaster
is the Chinese housing market.
Chinese real estate is the world's largest asset class,
and things are turning for the worst.
People are taking to the streets and refusing to pay.
And this is partially due to the
thing that they've come to expect: growth.
It's gone.
Imagine you're a 50 year old
Chinese person living today in China.
Over the course of your life, you've seen
the country that you live in change completely.
When you were born, this was one
of the poorest places in the world.
But in your lifetime, you've watched Shanghai
go from a shanty town
to this.
Since the 1970s, China had a
policy of aggressive modernization.
You and your friends began manufacturing consumer
goods for Western markets, and the government
heavily focused on your education.
And things were going pretty well.
But you had no idea how good they were about to get.
China joined the World Trade Organization in 2001, and
your country's economy took off like a rocket,
growing 15 times the size in 20 years.
China did this with their own version
of a free market, where the government never
completely let go of the steering wheel.
China's most crucial businesses are state owned, and
most large companies have major government backing.
Though it might look like a free market economy
from the outside, nearly everything
remains controlled by the state.
It's all planned, and that's been fine by you.
Things have been wonderful riches, success.
But here's the thing.
Having a plan doesn't mean it will work forever.
It's beginning to crumble.
Meanwhile, here we are, mowing our lawns,
living life totally unaware of what's brewing
on the other side of the world.
Part 1: China's Real Estate Boom In History
In the past few decades, China has seen
the largest real estate boom in history.
People think of its economy as factories and exports.
But real estate is on another level.
As factories open, people moved to
cities, land prices skyrocketed, and this
created an absolute buying frenzy.
Today, real estate accounts for nearly
one third of China's entire economy.
To put this in perspective, for
most countries, 20% is high.
One third is absolutely bananas.
So why this craze for buying homes?
Well, again, put yourself in the shoes
of that 50 year old Shanghai resident.
You landed a decent job in the early 2000s,
and as soon as you could, you rushed to buy a condo.
And your logic here is simple.
Your whole life, your entire life, you've
been hearing about China's overpopulation issue.
From the 1950s to the day,
China's population has nearly tripled.
Combine that with an economy on steroids and
limited ways to invest your cash, and you
turn home ownership into the ultimate status symbol.
In the past 50 years, the home ownership rate
in China has jumped from 30% to 90%.
So again, you're thinking rationally here, like,
you better get into this market before
a billion other people do.
And this means prices soar.
And developers developed until Chinese real estate
became the largest asset class
in the world, worth $62 trillion.
That's more than the entire US stock market
and double the US real estate market.
And of course, like everywhere, all that real
estate construction was done on borrowed money, mortgages,
a mountain of debt beginning to pile up.
But here's the thing.
As a resident of China, you begin to
hear less and less about this population problem.
To stop so many babies being born, the government
enacted a one child policy, like 40 years ago.
And today you look around and you notice there
just aren't younger people to replace the older workers.
China may soon see a shrinking population.
The working age population has already fallen.
China now expects its workforce to shrink by
35 million people in the next ten years.
That's equal to the entire labor force of Great Britain.
China's biggest resource, its
giant workforce, is running dry.
So you're sitting there thinking about this.
There's way less people, way less growth, way
less output, and way less money coming in.
Maybe that Shanghai condo I bought wasn't
the guaranteed investment I thought it was.
The mood is turning sour.
Chinese home prices have now fallen for
ten months straight, and we haven't even
Now, the mood in China didn't
just change among home buyers.
It also changed in the government.
China's leader Xi Jinping seems to have caught the
populace bug lately when he decided that China's growing class
of the ultra rich were just too rich
or maybe saw them as a threat.
Whatever the reason, Xi promised
a crackdown on financial speculation.
They limited the total debt that these
massive real estate developers could carry, forcing
the riskier companies into a tight, tight squeeze.
The first victim was China's second
largest real estate company EverGrande.
And I did a bit of digging to try and understand
the sheer size of this company and had my mind blown.
They've built the homes of 12 million people.
They hold $300 billion in debt.
That's more than any company in the world,
more than some countries.
And here's the thing.
Last year, their interest rates jumped as high as 20%.
It's like these developers were putting
their construction costs on a mastercard.
It's not sustainable.
And the real estate contagion began to
spread when Evergrande defaulted on its debt
back at the end of 2021, it
was clearly not what Beijing wanted.
But in trying to stop a
debt crisis, they actually triggered one.
And that crisis created something truly
unique in China, a mortgage rebellion.
Over the past few months,
a growing number of people across China
have outright stopped paying their mortgages.
And it's not for the reasons you'd think.
Not because they lost their jobs
or hate the government.
They've gone on strike against the
developers who are building their homes.
Or maybe, more accurately put,
not building their homes.
Imagine you just bought yourself your first
condo in a booming Chinese city.
You start by paying the mortgage on it
right away, despite it not being built yet.
And you're okay with this because construction
in China is typically pretty fast.
So you thought, because then the pandemic shows up
and your moving date keeps
on getting delayed over and over again.
The developer says it's supply chain issues,
nothing they can really do about it.
But you're hearing all these stories.
Developers are in a debt crisis.
They can't borrow, they can't pay.
So you're thinking, what's really going
on with my new condo?
I've been paying rent and a mortgage this whole time.
And now I'm hearing about developers
going bust, projects getting canceled.
Will I ever see my home?
Will I ever get anything for this
money I've been paying for years?
Or have I just been robbed?
Then you hear on social media that thousands of people
just like you are refusing to pay their mortgages.
And that sounds about right to you?
Why should I pay for something that I might never get?
The Chinese mortgage strike has spread to 86 cities,
covering $700 billion in real estate.
Protests against banks have broken out.
Demonstrators are asking for a bailout.
And things are getting out of hand.
You're looking around, and everything in
your economy is just getting worse.
Now, some say the mortgage rebellion is
a big threat to China's finances.
Others say it isn't.
At least for now, it's a relatively small
chunk to the total mortgage lending market.
The bigger problem is contagion.
Real estate issues are spreading from developer to developer,
and country to country.
But one thing's for sure
Xi Jinping's campaign against the super rich has worked.
China's richest woman has lost half
her wealth this year alone.
But it's not just China's rich.
This could have an impact on people around the world,
because the world is dependent on China's economy.
If your investment portfolio has Chinese holdings, there's
a good chance you've lost money on it.
China's real estate slowdown is creating all kinds
of secondary consequences as well, like appliance makers
who may go out of business.
And this could cause the prices of big
ticket items to soar in America, because after all,
these things are mostly made in China.
And then there's the impact on
your local real estate market.
You might think that this has nothing to with this,
but you'd be wrong.
Chinese investors have become major buyers of homes
around the world, especially on the US West coast.
Canada, Australia, New Zealand and Singapore.
Many argue that house prices have been
pushed up by rich Chinese buyers.
And a slowdown in China's economy could force
these investors to sell, pushing prices lower.
And what about all the American people and
businesses that invest in and depend on China?
But, hey, maybe it's not all bad.
US home prices are insane right now.
Maybe a dip wouldn't be the worst thing ever.
Also, a slowdown in China means lower demand
for commodities, which would cause lower prices for
oil, gas, nickel, lumber and other essential supplies.
So maybe there's kind of a silver lining here.
But what we do know is the days of
China doubling in size every few years are over.
But that's not to say China
is going out without a fight. No way.
In fact, Beijing is now doing everything
it can to revive real estate.
It's subsidizing home purchases by young people,
pressuring banks to lower mortgage rates, and
it's working on a massive multi-billion dollar
rescue package for stalled housing projects.
They're even thinking about seizing
developers land to cover costs.
Basically, the government is fiddling with these
mechanisms, trying to just keep everything afloat.
But what's not clear is just
how effective this response will be.
Have we seen the worst of it?
Or is there more to come?
I can only say one thing.
For all of its problems, China isn't about
to crash and revert back 50 years.
It's built up too much wealth, too much knowledge,
and too much power for that to happen.
But it's will have growing pains and a
correction before reaching a new level of prosperity.
All we can really do from the other side of the world
is make sure our personal debts are in check.
And when people start offering to
pay you in parking spots, RUN.