China’s Economic CRASH: Why It’s Coming & What It Means

One of the biggest risks to the global Economy right now is what is going on Over in china now while there have been Rumblings of this before which we’ve Covered right here on the channel recent Data shows that these rumblings are Turning into some serious thunder so Could this eventually lead to an Economic storm which engulfs us all and Which sectors are likely to be most Exposed to a chinese meltdown That’s exactly what i’ll be exploring Today so don’t you go anywhere [Music] Okay let’s start with the economic data That was released last week it gave Perhaps the widest perspective on the State of the chinese economy this year Firstly we had retail sales now these Were expected to come in at five percent Growth from the previous year however They came in at 2.7 Which was a pretty big miss Not only that but it’s also below the Growth of 3.1 that we saw in june Now retail sales are an important metric As they act as a key gauge of consumer Confidence so the fact that these sales Are down badly means that chinese Consumers are well not too confident Then we had the industrial production Numbers now these are even more Significant than retail sales as factory Output and exports are one of the main

Engines of china’s economic growth now There were hopes that the economy would Be able to weather the spring lockdowns And that international demand for these Exports would bounce back but alas those Numbers were also soft they came in at 3.8 percent for july lower than the Expectations of 4.5 As well as the previous june numbers Which came in at 3.9 percent now another Really important component of chinese Economic growth is of course its real Estate sector in fact according to most Estimates real estate accounts for Anywhere between 20 and 30 percent of China’s gdp it’s pretty crazy Anyways it looks as if things haven’t Been getting any better in this already Battered sector average new home prices In 70 major cities fell 1.67 In just one month and this was an even Larger fall than in june which saw a 1.29 fall On a to month-to-month basis average new Home prices have fallen for the 11th Consecutive month There were also hopes that the Government’s planned infrastructure push Would help to lift these lower stats but Alas they also fell short of Expectations Fixed asset investment slowed in july to 5.7 growth year on year which was lower Than the expectations of 6.2 percent and

Even lower than the previous month’s 6.1 Then yet another really alarming stat Was the fact that youth unemployment Those between the ages of 16 and 24 Reached a record 19.9 So If we take all of this data together it Means that people in china are feeling Poorer their incomes are lower if they Have a job and the country is not Producing as much as hoped and what’s Even more surprising about this is that These are the official numbers these are The numbers that were published by Chinese government agencies themselves And if you watch my video on chinese gdp You’ll know that these are dubious at Best So Given that these numbers are bad enough We’re left wondering what the actual Numbers look like Now perhaps one of the biggest signs of How rough things are getting for the Chinese economy was last week’s surprise Decision by the people’s bank of china To cut interest rates by 10 basis points This at a time when other central banks Around the world have entered their rate Hiking cycle What all this means is that china’s goal Of reaching 5.5 percent growth this year Appears to be a pipe dream something That i’m sure xi jinping isn’t happy

About as he heads into the 20th national Conference later this year however i Happen to think that missing an Arbitrary growth rate is the least of Comradesy’s concerns That’s because there is a real risk of a Much more severe economic collapse This starts with one of the biggest Risks to the chinese economy right now And that is of course the real estate Sector this is something we touched on Last year in our video about evergrand But since that time things have only Gotten worse However to understand just how bad it’s Getting and could get you have to Appreciate how much of a house of cards The chinese real estate sector is and Yes pun is very much intended Quite simply real estate has been viewed As one of the safest ways for your Average chinese citizen to invest Speculation in other assets like stocks Has been muted For example the chinese stock market Index has still not recovered from the 2008 crash Still That’s despite all the economic growth That the country has seen in intervening 14 years But when it comes to the property market It’s a completely different story For example if we were to take a look at

The average cost of owning a home Compared to median income china is off The charts For context in the u.s the average cost To income is about 4.5 times here in the Uk it’s eight times in canada it’s 8.9 Times in china however it’s 38 times What this means is that the average Chinese citizen has been pumping their Money into real estate And over the past 10 years this was the Best trade anyone could make in the Country Property prices were always going to go Up as china was modernizing and growing Well that was the theory at least Given this insatiable demand a number of Chinese property developers grew to Become some of the biggest companies in The country and indeed the world They would make money by building Expensive developments and would often Take on a huge amount of debt in order To do so Companies such as evergrand vanky and Country garden made this their primary Business model So high was the demand for these Properties that they would even sell Them off plan before a single beam had Been laid The people meanwhile were so keen to get Their hands on some property that they Would shell out down payments on homes

That only existed on paper in order to Continue growing these developers would Then take the prepayment funds and start To build further projects they also Started taking on inordinate amounts of Debt to fund these ambitious projects These included offshore bonds and bank Debt By some estimates evergrand was one of The most indebted companies in the world To the tune of over 300 billion dollars And perhaps the most troubling of all This debt was commercial paper this took The form of ious that evergrand and Other developers issued to contractors And other companies in the construction Supply chain These ious were viewed as rock solid and Essentially became a quasi-currency Now it’s hard to tell how much of this Commercial paper remains outstanding and There are concerns that it could lead to Solvency issues at banks Banks that are already strained from the Loans issued to these developers So essentially the chinese property Market was a massive ponzi where Developers fronted new properties with Other people’s money and a whole host of Debt This all worked well as long as there Were new people willing to invest in the Scheme But alas the tide began to turn even

Before covert broke out there were signs That china’s property sector was heading For trouble yet it was the lockdowns and The impact they had on consumer Confidence and budgets that started Putting a dent in this insatiable demand Given that newer buyers were no longer Guaranteed and that debt was piling up Property deposits couldn’t be guaranteed Moreover the government also sought to Rein in developer debt which meant that These companies would struggle to raise New funds And as we saw with evergrand last year They didn’t even have enough money to Service their current debts let alone Finish the properties they were building This means that those people who paid For pre-built properties over the past Few years still have not had them Delivered Some have only been partially built and Are hence uninhabitable Some people who bought houses have had To move into half-finished homes with no Running water or electricity I’ll leave a few links to stories about These poor people in the description Their situation really is dire Now of course as stories of developer Woes and unfinished properties start to Permeate through society the less likely New buyers are to shell out for a Deposit on a home

Moreover given those youth unemployment Figures and the relatively slower growth People in china appear to have been Taking a wait and see approach So with no new suckers to feed the Property ponzi scheme the developers Have grown desperate in some cases They’re giving away cars and live pigs In order to sweeten the deal when Signing for a new apartment don’t have All the money to make the deposit no Problem they’re also accepting deposits In garlic and wheat and i wish i was Joking It turns out that people would rather Eat food than pay for an imaginary Apartment who knew Now The result of this mess has been a Cataclysmic fall in property sales s p Estimates that this year china could see A 30 Fall in this area it’s worth pointing Out that during the 2008 crash property Sales fell by 20 So There are no more people feeding the Property ponzi scheme and that means That these developers won’t have enough Money to complete the promised Developments And this is only likely to get worse That’s because according to a bank of America report approximately nine

Percent of the housing floor space that Was pre-sold in 2020 and 2021 risks not Being completed on schedule because of Developers financial troubles affecting Roughly 2.4 million households These people will not be happy and many Have begun to protest now of course any Sort of public protest in china is Brutally suppressed so they’ve had to Express their anger in a different way And this has come in the form of Mortgage protests These started a few months ago as buyers Of a certain everground complex posted a Manifesto online they said that unless Work began on their properties again They would refuse to pay their mortgages Now despite the best efforts of the Online censors this spread like wildfire And has been used as a template for Protests around the country Within four weeks more than 320 projects In 100 cities were facing similar Demands This type of coordinated descent in so Many regions is the nightmare of any Authoritarian regime But the real concern should lie in the Risk that this could pose to an already Fragile banking sector According to estimates from s p in a Worst case scenario 356 billion dollars 6.4 percent of all Mortgages could be at risk

Deutsche bank had its own estimates Which placed the total at seven percent Of all home loans Now you can see just how much debt there Is in the chinese property sector over Here both the mortgages to people and Loans to the developers This means that chinese banks are Exposed to the property sector more so Than they are to any other sector of the Economy and already it appears as if Non-performing loans are beginning to Climb They recently reached a record as the Economy continued to sour this year Meanwhile bank’s capital adequacy ratios Fell for the second straight quarter to 14.87 percent at the end of june Even if these banks wanted to reduce Their risk to the property developers The ccp has other ideas That’s because they recently told the Banks that they should quote meet Developers financing needs where Reasonable so the government is asking The banks to take the hit and bail out These incredibly inefficient and Indebted firms The real question here though is how Much mortgage loan losses can the banks Take and how much loan losses to Developers can they write off before They start facing real trouble it’s also Not as if these banks are only exposed

To irregularities in the property market On the other side of the balance sheet There remains the risk of those rural Bank runs spreading to the larger and More established banks Now if you want a good breakdown of Exactly what these bank runs are then i Encourage you to watch my video on it And that will be in the top right Then there are the broader risks from Other sectors of the economy although Chinese banks are most exposed to the Property sector slowing economic growth In other sectors could have a drastic Impact on their balance sheets As i mentioned at the beginning of this Video industrial production and retail Sales missed estimates Lower earnings mean less expansion which Means less desire for bank loans or Financing And last but not least we have to Consider the pretty devastating impact That covet zero is having on the economy It seems that the only curve that this Policy is flattening is economic growth Despite nearly every other country Learning to live with it china appears Dogmatic in its approach to fighting the Virus Not only has this been one of the Primary reasons why growth in the first Part of the year was severely curtailed But it has also considerably damaged

Consumer confidence When the risk of being placed in Arbitrary lockdown exists people aren’t Too optimistic about the future even the Act of taking a short holiday to the Seaside could see tourists locked down For weeks Naturally if you aren’t too optimistic About the future then you’re not too Willing to buy a whole lot of goods That’s less demand for credit which Further crushes the bank’s balance Sheets So all of this then poses a very Important question could china face a Wide scale financial crisis and how Would this compare to the subprime loan Crisis that we saw in 2008 Well total u.s banking assets in 2008 Were 16 trillion dollars Today chinese bank assets stand at Almost 50 trillion dollars And this isn’t even counting the entire Shadow banking sector that china is well Known for financial institutions that Have become heavily embedded in the Property sector and who operate without Any of the capital requirements that Regulated banks do The chinese economy is the proverbial Iceberg it’s not what’s on the surface That is the most troubling Okay so it’s pretty clear that there are Some economic storm clouds brewing over

There in china but you may be sitting There wondering so what what does this Have to do with me Well perhaps the most immediate impact Could be from international asset sales By chinese companies and investors If there really is a collapse in the Country’s economy then they’re going to Look to offload these assets to raise Capital think about all those shares That they own in public companies or Real estate in hot property markets like New york melbourne toronto or london What about alternative assets like Crypto or precious metals Now it’s not so easy to ascertain the Risk of all this because often these International assets are held through Trusts offshore companies and other Vehicles But beyond the fire sale of International assets the global economic Impact could be far worse Without stating the obvious china is the World’s second largest economy it’s a Massive consumer of global exports and Any collapse in its economic growth will Mean that other countries will see their Trade with china collapsed too This will come at a time when the global Economy is already looking the worse for Wear Europe looks to be heading into a cold Winter of negative economic growth the

Us is still teetering on the brink of Recession as growth there begins to Sputter and one final risk that could Come from a chinese economic crash is a Full-blown war If china really does enter a period of Economic strife then the government There could look to distract from that With an aggressive and assertive foreign Policy One of the most prized targets for the Chinese both from a political and Economic standpoint is taiwan and i Talked about this in much greater detail In my recent video which you can find in The top right here Now of course i hope that none of this Happens i hope that the chinese banks Are able to help developers finance Projects which can subsequently be Completed this would allow those Citizens who bought those houses the Dignity of being able to actually live In them I also hope that the government will end Its nonsensical covert zero policy and Just get with the times there is no Point crushing people’s hope in an Attempt to beat a foe that cannot be Defeated quite simply the chinese Government is going to have a tough time Navigating some treacherous economic Waters over the next few months But whether it can do this without

Hitting that proverbial iceberg Is another question entirely And that’s it for my video today folks i Hope you enjoyed it but do you have any Views on what could happen in the Chinese property sector are these fears Potentially overblown i’d love to know In those comments below Oh and while you’re down there you may Want to check out my socials page it’s Over there where i have the links to all The other places that you can follow me Twitter telegram tick tock instagram you Name it You also must subscribe to my weekly Newsletter it’s over there where i share My once weekly take on the markets as Well as giving you the breakdown of my Personal portfolio it also comes with a Complete 100 Spam free guarantee All of that which you seek is down below And finally if you enjoyed this video Smash up that like button don’t forget To hit that subscribe button as well oh And the bell as well so youtube can give You a bell when my next video is Released till next time my friends this Is guy bidding you goodbye [Music]


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