August 17, 2022


Engineer's Line

China Soon May Fall Into Financial Crises says Economic Experts.

11 min read

Hello, friends! China has become the richest country in the world, You heard that right.

According to a McKinsey & Company report, China has overtaken America to become the World’s Richest Country.

but, many economic experts are pointing out that “China may soon fall into a major economic crisis.”but why? And what is this looming economic crisis? Come, let’s find

News Line:- “China has surpassed the United States to become the richest nation in the entire world.As the global wealth has tripled over the past two decades.” “The collapse of the Chinese property giant, Evergrande, unfolds. The shares of the highly indebted company have fallen 80% this year. Analysts fear that the crisis could spread throughout China’s property sector.”Housing affordability in China right now is among the worst in the whole world.”

“The problems in China could lead to a ‘sudden correction of real estate prices.'”First, what does it mean to be the richest country?

you can understand it as ‘wealth’ basically. How do you measure how rich a person is? By evaluating the landholdings of the person,

the total value of his properties, the businesses he owns, and the machinery in the businesses, the total value of all these is used to calculate the total wealth of the person.

This is different from the GDP. You can understand GDP to be the equivalent of the annual income of a person. The GDP of a country is the total value of goods sold in a country in a year.

The value of goods as well as services. The total market value of all goods and services in a country. And the GDP can be divided into 3 main sectors. When we talk about the GDP, we need to account for the population of the country.

Suppose a family earns ₹1,000 per month, and there are 2 children in the family. And there’s a family earning ₹2,000 per month, but there are 10 children in the family. If the same amount of money is distributed among so many people, then they would get less per person.

So even though the GDP of a country may be high, if the country has a high population as well, then it isn’t admirable.

That’s why we calculate the GDP Per Capita, that’s mainly the GDP per person. China has become the richest country in the world in terms of wealth.

If you add up the wealth of every person in China’s population, then it is the richest country in the world. But if we talk about GDP per capita,

China doesn’t stand anywhere near the top. If you look at the 2020 GDP Per Capita rank, China was at 63rd rank.

And the USA was in the 5th position. Even if we talk about the overall GDP, the USA is much ahead as the #1 country in the world in terms of overall GDP.At approximately $21 trillion.

China comes in second place, at around $15 trillion. And at present, India is a $3 trillion economy. Despite lagging in both cases,

China has overtaken the USA.In terms of overall national wealth.

According to the McKinsey Report.

This report was compiled after analyzing the National Balance sheets of 10 countries. Some other findings of this report. revealed that global wealth has tripled in the last two decades. From $156 trillion to now at $514 trillion.

Exponential growth was seen in China’s wealth. In 2000, about 20 years ago, China’s wealth was $7 trillion. And today it has become $120 trillion. An increase of 17 times.

During the same period, the total wealth of the USA increased 2x. Today it is at $90 trillion. This is the comparison of the overall wealth.

Currently, China is at $120 trillion and the USA at $90 trillion. You might start to wonder in the year 2000, the USA was richer than China. And every year, the annual GDP of the USA has been more than China’s.

So how did China become richer than the USA? Even though the USA’s GDP has been higher. The answer to it is very interesting.

Friends, the GDP growth can be because of many things. Things that are useless actually.

Imagine a country where people consume a lot of junk food; cold drinks and burgers. And the GDP of the country increases because of these. And after a person consumes so much junk food and becomes unhealthy,

he may need to go to the hospital. He’ll get a taxi to go to the hospital. He’ll get treatment in the hospital and after his treatment, he’ll get another taxi to get home. In the entire scenario, at every point, the GDP of the country increases. Eating junk food increases the GDP of the country. Riding in a taxi is increasing the GDP of the country. Even hospital treatment is increasing the GDP of the country.

Because money is exchanged at every point.

Money is being transferred. But in this scenario, is there any overall increase in the wealth of the person? No. There will be no overall benefit. Junk food is consumed.

The taxi ride is over. And after the treatment, there’s no more value. Now compare this to a country where the GDP is increasing mostly because of constructing new buildings,

building new highways, because of new construction, and new factories being set up. In the second country, the wealth would also increase

because all of these are increasing the wealth. And broadly speaking, this is the difference between the USA and China.

If I have to base this on data and statistics, then look at the comparison between the USA and China.

The contribution of the service sector and industries of both countries to its GDP. The service sector in China is at 54.5%and the contribution of the industries is at 37.8%.

On the other hand, the service sector of the USA contributes 77.3%. And only 18.2% of the contribution is from the industries.

I explained this same difference with the example. Eating junk food, using taxi services, and healthcare services, are all services. They come under the service sector.

And new construction comes under industries. So the question arises that despite so much ‘development’

why is China under so much scrutiny?

Why are experts saying that China may soon face an economic crisis?

To understand this, let’s look at the total wealth of China. Let’s see its breakdown. Globally, 35% of the wealth is in the form of land.33% being in houses and other buildings. So about a total of 68% of wealth is from real estate.

But for China, this number is at 78%. If you compare this pie chart with an individual’s wealth then there is nothing unusual here, this does happen. Most of the wealth of a person is in the form of the property he holds. His lands, his real estate. So 60%-70% of a country’s wealth in the form of real estate is not unusual.

But what happens when I tell you that you overestimated the value of your property? You feel that the value of your property should be ₹100 million, but in reality, it is only ₹10 million.

Since you aren’t actually selling your house, you won’t come to know about this. When you’ll go to sell it, you’ll find out the actual value of your property.

The same thing is starting to happen in China. A real-estate bubble is being formed in China.A bubble in the finance sector

was explained in my older video, ‘Dark Side of Stock Market’about how bubbles are formed in the stock market. It basically means that the actual price of something is low,

but the speculative price of it is very high.

It begs the question, why did this happen in China? The State Capitalism of the Chinese government plays a big role in it. The Chinese central government had set targets for the local governments for the minimum GDP growth rate in their regions.

So the local governments were under a lot of pressure. Because it is a dictatorship in China. The central government strictly sets the standards of performance failing which, the officials lose their posts.

So the local government was under a lot of pressure to bring in a certain GDP growth rate, and they saw that the easiest way to do this is by more and more buildings and constructions. And thus inflating the real estate prices. It was done to such an extent,

the construction was so rapid, that real estate made 29% of the contribution to the annual GDP of China. For comparison,

in India, real estate’s contribution is only 7% of India’s annual GDP.he ground reality is that in China, the average citizen could not earn enough

that could enable them to afford to live in these expensive apartments. Due to this, we see Ghost Towns in China. Many such apartments and buildings with no one to live in them. Because no one can afford to live in them.

More than 60 million apartments in China are sitting empty. Houses with no one living in them.

If you assume that 3 people live in an apartment, on average, then houses have been built for more than 200 million people in China.

More than 50 such towns in these small cities built in China have been labeled as Ghost Towns.

An obvious question now is,

If the apartments are so expensive to live in, why don’t the real estate companies lower the prices of the apartments? So that people can afford to live in them. The simple reason for this is that all the real estate companies had taken huge loans from banks

so that they could build these apartments.So that these properties could be built. And if they can’t sell them at these prices, they wouldn’t be able to repay the loans.

The companies would go into debt. And will become bankrupt. This has started happening.

The overall debt of the real estate companies in China has reached $5 trillion. The largest real estate company is Evergrande.

That’s why you would’ve heard recently that China is facing Evergrande Crisis. Of the 60 million or so empty apartments in China, this company owns 1.6 million of them.

This company had taken loans of $300 billion from the banks. And now it is facing uncertainties in repaying the loans.

This company is so large, that if it becomes bankrupt, the entire market can crash in China.

In September this year, the share price of the company fell 80%. And its bonds have been downgraded by the credit rating agencies.

The situation is so bad that

the companies are asking for loans from their employees. Many experts compare this situation to the 2008 USA Housing Bubble.

Which was the reason for the 2008 Global Economic Crisis. Evergrande is being seen as Lehmann Brothers.

The company was considered ‘too big to fail company’ in 2008.That the company was so big that it couldn’t possibly fail.

But it did fail. Evergrande is involved in other sectors as well. It is a giant. Electric cars, food, beverage productions, and they even own a football team. And more than 125,000 employees in the company in total.

Since the company is so huge, it has a huge impact on the stock market as well. When the shares of the company crashed, the same day, the top richest people in the world, including Jeff Bezos, Elon Musk, Mark Zuckerberg, total wealth fell by $26 billion that day.

The day when the price of the shares of this company crashed.

What is the solution to this situation? Some people claim that Evergrande can sell off its assets. To generate some revenue.

That it can sell off its ghost apartments at steep discountsso that it earns them at least some money.

But the last option for a revival of such companies is oftenthe Government.

To take help from the Government.Here you can see the hypocrisy of these large companies,that when these companies run successfully,

they ask the government not to interfere in their business,and that they want unregulated capitalism.

They don’t want any form of governmental interference.And that they believe in pure capitalism with an absolutely free market.

But when these companies face such situationsthat the companies are underwaterand they need bailouts,then they humbly submit to the governmentasking for socialism.

To give them the public funds for a bailout.Asking the government to give them the taxpayer’s money to save them.

You’d feel that this is outrageous and wonder if the government can do this.That the sinking company should be left alone.

But here, the companies use the logic thatsince their company is so large with so many employees,if their company goes underwater, the stock market will also crash,

so many people will become unemployed,and it would affect the economy of the country.That’s why it becomes necessary to save their company.That’s why the government should help them.

The same thing happened in the USA.And many people criticised this.

After the 2008 crisis, the government had bailed-out the sinking companies.There were even protests on the roads in the USA because of this.

It is very interesting to see what the Chinese government did in the response.Because the Chinese government is often proactive about these things.So the Xi Jinping government carried out major regulatory crackdowns recently.

To reduce bad loans, they introduced Regulation 3 Red Lines.3 new conditions have been put forth based on which the companies can now take loans.For example, one of the conditions is that

the net debt of the company should not be more than the overall equity of the company.

In October, it was found that of the 30 biggest property companies in China,20 of the companies had crossed the Red Lines.Apart from this, many big real estate companies are being forced by the government

to repay a portion of their debt instantly.And a new team has been formed in China to detect corruptionall the State-run Banks, National Financial Regulators and the companies,

are being scrutinised to detect corruption. To see the level of corruption in each of them.This is an interesting point,

because many people imagine that

there is no corruption in a country with a dictatorship.Because they assume that the dictator would severely punish corruption.But this isn’t the case actually.

In fact, it is the countries with outstanding democracy,that faces lower levels of corruptionthan compared to dictatorships.

Because in dictatorships, people are hesitant to question anything.There are no independent agencies to check

whether there is any corruption or not.Whistleblowers are oppressed.

There are no reliable independent mediato scrutinise the corrupt officials.

That’s the reason why we see corruption in countries like China.Today, the property rates in Beijing and Shenzhen are so highthat they are 55 times the annual income of the average Chinese citizen.

Suppose your salary is ₹100,000 per month,and you earn ₹1.2 million annually.The average price of the apartment then would be₹66 million.

It will take 55 years’ worth of your salary to afford an apartment in your city.

Can you imagine this?This is happening in China.You may think it is possible to buy houses by taking loans,but in China, there’s a rule that

one can get a loan of only 60% of the total amount.Thus, the downpayment will have to be at least 40% of the total amount.Which wouldn’t be possible.

The next option then is to rent the apartment.Even then, the rent is so high therethat fresh graduates are spending about 40% of their salaries on rent.

So if you earn ₹100,000 per month,you’re paying ₹40,000 only on rent.

Source and Credits:- wikipedia Economic Times Dhruv rathee

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