We can´t hide it, here at VisualPolitik we love Asia, and that’s partly because, we
believe that the world’s centre is already on this continent.
But in the last few decades, one country has stood out of the crowd, and that is China.
For its huge size and the speed at which this country is growing, China deserves to be given
the chief role in this super production that is changing our planet.
But wait a second, let’s not rush into this.
China is not perfect, indeed the country has some pretty major problems.
(The last 23rd of May 2017, the rating agency Moody's, one of the three agencies in charge
of rating the solvency and the risk of its financial products, reduced the rating of
China´s debt)
And this is the first reduction Moody has made on China’s debt in 27 years.
Yes, Ok, I know what you are thinking: Moody’s?
Rating agencies in general?
I mean, they rarely seem to get it right...
Now that is true, but it’s also one of the only things that we have to judge this sort
of thing.
“Investors still overwhelmingly rely on Standard & Poor’s, Moody’s and Fitch when
deciding whether to buy bonds.
The three issue more than 95% of global bond ratings”.
The things is, dear viewers, China has faced two major threats in the last years: less
growth and much, much, more debt.
In fact, this has even lead to an important question: Can China go bankrupt?
(CHINA'S GREAT GROWTH)
If we had a time machine and the opportunity to travel to Mao Tse Tung’s China, the country
we would find would be completely different to the one we find today.
There wouldn’t be any skyscrapers, and malls, in fact, there wouldn’t really be much around
at all…
In the 1970s China was mainly an agricultural country, and it was extremely poor…
But a few years after Mao had died, a man known as Deng Xiaoping came to power and he
realized that communism…well, it hadn’t worked at all.
He immediately put into practise a set of measures that would change China forever…
These reforms, and the change China has gone through since, are going to be the subject
of an upcoming video, so please don’t forget to subscribe to this channel!
But, for now, it is important to remember something: Deng Xiaoping was a turning point
for the country.
(Since then, China has undergone the greatest economical revolution in the history of mankind.
In the last three decades, China has managed to take 500 million people out of poverty
and to become the largest industrial and trading power on the planet).
In other words, if we ask any Chinese person about his or her living standards, the answer
will be that now it is infinitely better that it was before.
And don't get me wrong, there is still a lot of poverty in China, but compared to how it
was, it’s a whole lot better today.
But, as I was saying earlier, it’s not all roses, and there are some serious clouds on
the horizon.
(A SYSTEM ADDICTED TO DEBT)
Have a quick look at this chart which shows what happened to China’s debt in the last
few years.
As you can see it goes up and up and up…
That is a seriously steep line…
On the other hand, look closely at what has happened to Chinese economic growth.
As you can see, this chart is headed in the opposite direction.
So, in other words, in China, the economy is declining and the debt won't stop rising.
Look, in gross terms, the Chinese debt has multiplied by four since 2007.
(The Chinese debt equals now more than 260% of the GDP and many analysts consider this
number to be especially high for a country that is yet to become one of the richest in
the world).
Well, most of the debt is actually the responsibility of Chinese companies.
Well, the thing is, there is a silver lining, but there is also a significant negative side:
All that international expansion needs money, and a great deal of it.
And while much of the debt has financed the expansion of Chinese companies, they have
also paid for this kind of nonsense:
“Throughout China, there are hundreds of cities that have almost everything one needs
for a modern, urban lifestyle: high-rise apartment complexes, developed waterfronts, skyscrapers,
and even public art.
Everything, that is, except one major factor: people”
So you can get an idea of the size of all of that has been built in China in the last
few years, pay attention to the following number: in just three years, China has used
more concrete than the United States in the entire 20th Century:
And as I said, everything, absolutely everything, has been paid for with debt.
So now, we come to a really important question: What the hell has happened in this country
to cause it to get into so much debt?
(THE CHINESE GOVERNMENT’S FORWARD FLIGHT)
For the last few decades, if you could say the Chinese people were good at one thing
it would be saving money...
Especially the oldest Chinese citizens, they work and save, that is all they do.
So, thanks to all that effort, China has had high investment rates.
But don’t be fooled, what has happened in the last years has nothing to do with this.
In order to know what has happened, we need to go back to 2008.
At that time, all developed countries were going through a major financial crisis, and
you can imagine how this affected China's exports, which are the engine that keeps driving
China’s forward.
The truth is that, at that time, the Chinese government was terrified that the country
would be affected by the international crisis.
So, in order to prevent it, they came up with an idea: the economic system had to be transformed,
and they had to bet on domestic demand.
And when it comes from a politician, that “domestic demand” thing almost always
means they are planning to start overspending.
And, well, that is exactly what Beijing did...
(In 2008, the Chinese government started a colossal programme of extra public spending
of 4 trillion yuans, around 600 billion dollars, meant to be used for building all kinds of
infrastructure: high speed trains, undergrounds, highways, houses, offices…)
But they went further.
The Chinese government thought that government overspending wasn't enough, so they had to
encourage the companies to do the same.
Well, how could they do it?
Well, they decided to use a traditional remedy:
(In 2008, China also started one of the most expansive monetary policies ever known.
The authorities lowered interest rates and banks gave money loans to everyone who asked
for them.
They practically established an open bar of cheap loans)
And as always happens, they got completely drunk.
In just three years, the price of housing was an average of 2.4 times more expensive.
So, an apartment which cost $100,000 three years before, would now be worth $240,000.
And, the result?
Companies started to make all kinds of investments: they built ghost towns, bought out companies
all over the world, and engaged in all kinds of projects.
They took on whatever crazy risky projects they felt like!
After all, with the Central Bank was almost giving the money away…
“Overproduction in key industries is damaging both China's economic sustainability and foreign
trade relations” Obviously, many of these projects have never
been profitable, so the companies can’t give the money back.
So what do they do then?
Well, they ask for new loans to pay back the old ones, and the snowball keeps rolling and
growing bigger and bigger.
And this is how the Chinese economy became addicted to debt.
And now I’ve probably got an idea of you are thinking…
Those stupid private companies, right?
Well, not exactly.
“More than half of the bank debt in China consists of loans from state-owned banks to
state-owned enterprises”.
And wait a second because there, ohh, there is much, much more…
(CHINESE BANKS: A WEAPON OF MASS DESTRUCTION)
We’ve already seen how China is currently going through a debt overdose, but, if this
wasn't enough, there is another danger hiding in the bushes: a bank in the shadows.
Banks face certain limitations on the amount of money they can loan.
But Chinese banks have managed to skip these controls and, in a way, these banks have copied
what the American banks did with their mortgages.
Let me explain: instead of just giving loans, they set up off-balance companies that issued
debt that banks bought.
And that is the money they lent, but… surprise surprise, in the bank’s accounts these aren’t
listed as loans, but as other investments.
A pretty smart workaround, right?
Well, it is estimated that Chinese banks have hidden more than $2 trillion.
And it has a straightforward consequence: Chinese banks can be way less solvent that
their official numbers might indicate.
And, besides, much of this debt is opaque, so the actual debt in China could be much
higher.
(“The fast spread of off-balance activities and bank investment actually means risk of
hidden loans which could threaten China’s financial security” Shang Fulin, Ex-President
of China’s Banking Regulatory Commision.)
And wait, because there’s more:
“A growing number of nonbank financial firms also market their own wealth management products
and invest the money with little disclosure of where the money goes”.
That’s right, in the last few years, those companies which get money from people to make
investments that are risky and opaque have become more and more popular.
And why is that?
Well, of course, that’s in exchange for higher rates of return.
The thing is this craving for loans can cause quite a bit of indigestion.
This is a risk and the government has admitted that it has tried to limit company loans.
But since there are a lot of unsold ghost towns, empty houses, and bankrupt real estate
agencies, the government told the banks in the last few years to give away loans as if
there were no tomorrow, because the family debt level is still so low…
“The Fed economists note that China's mortgage loans increased by 35% in 2016”.
And now, dear viewer, you might know why some analysts are warning that if they don´t stop
this debt vortex China could become a new Japan, a country that has been in crisis since
the 80s.
And there is still more, now we know why Xi Jinping and China need globalization so much
- their companies need foreign markets to deal with all the debt they have issued.
But not everything is doomed and the future is yet to come.
In China, the saving rate is still high, enough for foreign capital to arrive in the country.
But…there a risk, and Moody’s has given the first warning.
Now, it is time for the government to start working to make reforms…
And now we’d like to know your thoughts.
You can tell us what you think in this survey as well as the comments.
What do you think will happen in China?
Do you think stagnation will turn it into a new Japan?
Or will we see new reforms to open China even wider to the west?
So, I really hope you enjoyed that video, please hit like if you did, and don’t forget
to subscribe if you haven’t already, brand new videos every Monday and Thursday.
And don’t forget to check out the Reconsider Media podcasts - they provided the vocals
in this episode that aren’t mind.
And as always, I’ll see you in the next video.