Internet is filled with videos where protestors are taking into the streets of China demanding
their money that the banks have frozen. A bank run is dangerous. When people realize that their
money isn't safe in the bank, everyone will rush to withdraw all the money they have been
keeping in the bank, thus leading other stable banks to run out of money as well.
But that’s just one side of the story. The scale of the crisis that China is about to experience
is much bigger than we imagine. China is about to have its own version of
the 2008 housing crash where major corporations such as Lehman brothers failed, thousands lost
their houses, and the global economy tanked into a recession. The only difference is, china’s housing
crisis seems like it will get much worse, a housing crash on steroids if you would like.
This is China’s GDP since 1960. Until the 1990s, its economy was barely growing,
but at the beginning of the late 1990s, China’s economy exploded. It grew from
half a trillion dollars in 1994 to almost 15 trillion dollars by 2021 (14.72T). That’s
probably the fastest economic growth in modern human history. It sounds almost like a miracle.
But not everything is sunshine and rainbows. Behind fancy numbers and shiny buildings,
there is a dark side of it. One of the main sectors that was driving China’s GDP is the real
estate market. It accounts for 13 percent of the country’s GDP and makes a third of it’s economic
output. That includes houses, rental and brokering services; industries producing white goods that
go into apartments; and construction materials. The only problem is that china has built way too
many homes than it needs to the point where it has turned the sector into a bubble. China has
at least 65 million empty homes, that’s as much as the entire population of France, and half the
population of the largest country in the world, Russia. It even created replicas of the Eiffel
tower in Paris, the historic Austrian Alpine village, and even Swedish and Italian villages.
The only difference between the real Eiffel tower and the Chinese version is that the Chinese copy
of Paris is empty where no one lives. But why has China built 65 million empty houses? How did china
end up creating the biggest housing bubble in history? And how is it finally about to collapse
and take down with it the entire world economy? We will answer all of these questions and many
more, but before we do that, give this video a thumbs up and let’s dive in.
You have multiple options when you want to invest in the United States. You have the real estate,
the stock market where you can start investing with as little as a few dollars, government bonds,
or at least keep your money in the bank, generating some interest over the years. You
are not worried that on one beautiful morning, the government is going to intervene in the business,
kidnapping a CEO just because he said something against the president or the ruling party. The
stock market has been stable for over a century, with sp500 growing at an average rate of 10
percent. And US Governments bonds are considered the safest investments in the world since the US
has never defaulted on its debts. The credit of the United States is built on centuries
of stability and responsibility. But not all countries are like that, especially China, where
the government controls pretty much everything. There is the luck of transparency and freedom.
CEOs who oppose the ruling party can dissapea r overnight, and their company’s
destroyed. Nothing is going to save you from the anger of the ruling party, even if you are
the richest person in the country. Even an average person knows that in China.
So not many are willing to risk investing in the stock market or government bonds. That's
why everyone in China turns to real estate. At the end of the day, you can’t just save money.
You have to invest it, especially in china people save much more than in the United States or pretty
much anywhere else in the world. There are far more people second home buyers in China
than first home buyers, and the number of third home buyers are almost as much as the first home
buyers. Real estate is your best option in China. On top of that, China is isolated from the rest
of the world. An average Chinese doesn't really have access to the US stock market,
and getting money out of the country is not an easy job, so we can confidently
say that - real estate is your only option. So let’s go back for a moment to the graph
we took a look at the beginning of the video. This unprecedented GDP growth was mostly fuelled
by real estate, which now has turned into a bubble that's ready to burst. That's how
properties in Shenzhen and shanghai became more expensive than in Los Angles despite the fact that
GPD per capita in China is 10K dollars while in the US it is over 60K dollars.
If these 65 million homes are listed in the market tomorrow, it will definitely crash the market but
not the economy since CHINA is simply too big. Its population is almost 5 times the United States.
However, that's just a tiny part of the problem. When a developer wants to build an apartment block
in China. Before even starting the project, the developer starts selling apartments
before they are even built. Using that cash, the developer starts building the rest and,
in the process selling the apartments. At the end of the day, it often takes years to complete such
a project. But because the economy is booming and hundreds of millions of people are buying homes.
The developers in China can’t wait for the project to be completed. So they use the cash from
previous projects to start building new apartment blocks in hopes of selling them in the process.
And while they are building the new project, they use the funds from it to start the
third project and so on on. And if there aren’t enough funds to start new projects,
the developers can simply take loans to continue building. Banks are more than happy to provide the
loans since they will be backed by real apartments that are in high demand and rising in price every
year. There is no way they will ever go bankrupt since if they can’t afford to pay back the loan,
they can simply sell the apartments to do that. The developers kept taking huge loans to continue
building, and people kept taking mortgages to continue buying homes.
Does it remind you of something? (2008) This strategy works only when everything
is growing. When the economy is booming, people make money and continue buying homes.
But what happens if the economy stops growing? What happens when people are forced to stay at
home because of some kind of virus and would no longer make enough money to buy new homes?
The answer is simple - Evergrande. It's so weird that people always make the
assumption that things will grow forever. Humanity is pathetic, to say the least.
Anyways, the “unthinkable” happened. A virus spread throughout the world, and the Chinese
government implemented a zero covid policy where it forced the entire population to vaccinate and
stay at home long enough to finally get rid of the virus. So, the Chinese developers began
to crumble. Since people stopped buying homes, the money stopped coming in, so the developers
couldn't finish hundreds of apartment projects they had started back before the pandemic.
The first major developer that began defaulting on its debt was Evergande. It’s the second largest
property developer in China and 122nd largest company in the world. With over 300 billion
dollars in debt, its only hope was a government bailout. People stopped making their mortgage
payments since the construction of their homes has been delayed causing an even bigger crisis.
More than $220bn worth of loans could be tied to unfinished projects.
China's government issued $148bn in loans to help property developers. Mortgage holders may be
given a payment holiday without it affecting their credit score. The government perfectly knew that a
bubble was forming, but it was perfectly fine with it since it was driving those annual GDP numbers,
and now it’s trying its best to burst that bubble in a way that it won't crash the economy.
Whether it will be able to do that or not. Only time will tell.
However, there is an even bigger problem. People have lost faith in the housing market.
As people viewed the stock market and government bonds as unreliable assets,
they will now view real estate as an unreliable and speculative asset as well, which means - no
more 7 or 8 percent GDP growth from now onwards. That doesn't mean people will stop buying real
estate, but it would be much slower than it was before the pandemic.
If the bubble burst as it did in 2008 in the USA, the crash could be much worse. And secondly,
if it happens now, inflation globally will only get worse since, first of all we are
not yet out of the pandemic, and Russia’s invasion is causing a global energy crisis.
The world economy is barely surviving. Europe can’t even fix its energy crisis. The US
can’t lower the rates and is suffering from High inflation and a potential housing crisis as well.
So the implications of the Chinese housing crash could end up taking the global economy for another
few years of recession, if not a depression. Thanks for watching and see you in the next one.