Over 400 thousand people in China have lost access to their money since banks are running
out of money and are on the brink of bankruptcy. And that's the official number. If we dig
deeper, the number is most likely higher. When you put your money in the bank, you expect
the bank to pay you some interest. Ideally, the bank would lend your money to someone
else and collect higher interest. Interest rates on savings accounts are around 1 percent,
while credit card rates are around 20 percent. That difference after paying you is the profit
that the bank is supposed to make. However, whenever you check your bank account, it still
says that your money is in the bank, and you can withdraw it whenever you want. And that's
because of a system we have called fractional reserve banking. Banks are allowed just to
keep 10 percent of their money and lend out the rest. So if your bank account shows that
your money is there, it’s actually not. That’s not a problem when the economy is
doing great. People don't often withdraw all of their savings overnight, especially if
it's millions of dollars. A bank is where you hide your money, especially considering
the minimal interest they pay you, which is usually significantly lower than inflation.
But the moment people feel that their money isn't safe in the bank, they would rush to
the bank to withdraw their savings, but because of fractional reserve banking, the banks won't
be able to pay people, causing the bank to go bankrupt. 4,000 Banks in China are on the
verge of Going Bankrupt. Even if a fraction of those banks collapses, the consequences
could be devastating since that could push the economy into a crisis that would lead
the entire economy to collapse. And that's just one side of the problem. The
other side is the housing crash that china is facing that we have discussed in the previous
video, China Banks May Face $350 Billion in Losses From Property Crisis. S&P Global Ratings
estimated that 2.4 trillion yuan ($356 billion), or 6.4% of mortgages, are at risk, while Deutsche
Bank AG is warning that at least 7% of home loans are in danger. The property market is
the foundation of china’s economy, which seems like it’s about to burst. The government
is spending hundreds of billions of dollars to save it but can only soften the crisis
and not avoid it. Even if china somehow, through some miracle,
saves its real estate market, it’s far from over. Will China’s economy survive the next
6 months is a big question. Why exactly is china’s economy about to crash? And why
are investors such as Cathie Woods selling off their shares and leaving china for good?
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.
Despite China's rich history, for the past couple of centuries, China has suffered at
the hands of foreign invaders such as Europe and Japan. And for the better part of the
20th century, the country was impoverished to the point where millions could not afford
to put food on the table. In just a few years, from 1959 to 1961, 15 to 55 million died due
to starvation. After a few decades of the Chinese Great Famine,
Deng Xiaoping rose to power and changed the entire ideology of china.
China was isolated. It didn't trade with the world and looked at it with much skepticism.
But Deng Xiaoping decided to open the country to foreigners and created special economic
zones where foreign companies could come in and exploit China’s cheap labor. Working
16 hours a day in a factory is far better than starving to death.
Companies flooded into china and economic zones such as Shenzhen and Shanghai became
some of the wealthiest cities in the entire world. In 40 years, China’s GDP rose from
191 billion dollars to almost 15 trillion dollars. It literally became the factory of
the world. It manufactures everything from cheap clothes
to advanced tech such as iPhones. Despite the tension between China and the US, the
United States is its largest trade partner. It exports almost half a tillion dollars worth
of goods to the US, and the EU is its second largest partner.
While 15 trillion dollar GDP looks huge, China’s GDP per capita is far lower than you might
think. It’s around 10K dollars, making it a developing country like Russia or Turkey.
It still has to go a long way if you compare it to advanced economies like Germany, Japan,
or the United States. One of the main challenges any developing
country faces is the middle-income trap. It’s a situation where a nation becomes wealthy
enough, where workers become too wealthy. Naturally, they will demand higher wages.
Higher wages make manufacturing goods more expensive, and suddenly the country will lose
its competitive advantage of being a cheap manufacturer, so the corporation that initially
came to China for cheap labor will pack their bags and move somewhere else, where the cost
of labor is still affordable. Just a few days ago, Bloomberg reported that
Apple plans to start making the iPhone 14 in India about two months after its release
out of China. The company has been working with suppliers to ramp up manufacturing in
India, and the first iPhone 14s from the country are likely to be finished in late October
or November. India is where China was back in the 1990s,
and it's investing in the infrastructure that will allow companies to easily move their
manufacturing to India. Why pay higher wages when you can do that in India for a fraction
of the price? Apple is not alone. A study by the UBS Evidence
Lab found that a staggering 76% of US companies with factories in China were in the process
of moving operations to other countries in 2020. That includes brands such as Nike, Microsoft,
dell, intel, and many more. The tension between the United States and
China is rising. What would the United States' response be if China decided to invade Taiwan?
Similar sanctions that it imposed on Russia? How will American companies continue functioning
with such sanctions? That's why most of them plan to relocate their plants. Even non-US
companies such as Hyundai Motor Group have also taken steps to shift manufacturing away
from China.
The united states have been heavily investing in ASEAN. The Association of Southeast Asian
Nations is a political and economic union of 10 member states in Southeast Asia, which
the US wants to use as an alternative for US companies to move to.
After the west’s severe sanctions over Russia, where international companies such as Mcdonald's
and Starbucks had to sell their business for pennies, not a single country will risk staying
in China.
While it might seem like china is wealthy enough to survive on its own without western
companies, look, China is producing smartphones, electric cars, and drones! It can compete
with the United States!
Unfortunately, that’s not entirely true. While some Chinese companies have seen great
success, like BYD or Huawei, they depend highly on American companies for their components.
Take Huawei. The company was growing so fast that it almost
overtook Samsung and Apple as the largest smartphone seller in the world, but something
went wrong in 2019 when the United States imposed sanctions on the company. Despite
Huawei’s technological might, it highly depended on semiconductors, the most important
component in a smartphone. And if you take a look at the companies that dominate this
sector, they are all American. Think of Nvidia, Intel, Qualcomm, Broadcom,
AMD, etc. The other 3 companies that are not US companies, such as TSMC, ASML, or Samsung,
highly depend on American companies such as Cadence or Synopsis to design their chips.
That’s why after American sanctions, the company is barely surviving.
How China will escape the middle-income trap and develop new technologies without relying
on the west is a challenge that China will have to overcome over the next decade. Will
it be able to do that once most US companies will leave the country is another big question.
But that’s just one part of the problem. China’s 2 largest trade partners are about
to get into a recession. Without Russian gas, investors are so worried that the EU will
go through a rough financial crisis and are selling off their euros to the point where
the euro hit all time low. Without the required energy, factories will have to shut down,
which many already did in Germany, leading to higher unemployment and lower demand. The
United States is going through a crisis of its own. Since the beginning of the year,
the fed has been raising the rates pushing experts to anticipate a recession. I mean,
the US is already in a recession. But what does that has to do with China?
A financial crisis leading to lower demand in its top 2 largest trade partners is a disaster
for a country that's highly dependent on exports. If this was the only problem, it wouldn't
be a big deal, but since china is on the brink of a housing catastrophe and banks are running
out of cash. The combination of all of these factories is likely to push the economy into
a serious of a financial crisis. Thanks for watching, and until next time.