Everything You Need to Know About China’s Ruthless Economy

0:00 For decades, many believed it was only a matter

0:02 of time before China became the world's dominant superpower.

0:04 Its rapid economic rise, massive infrastructure projects,

0:07 and expanding global influence made it seem unstoppable.

0:10 But that hasn't happened, at least not yet.

0:13 Instead, China's economy is slowing, debt is piling up,

0:15 and cracks are forming in its once unshakable financial system.

0:18 As the USA is mixing up the global order,

0:21 many are looking to China to finally pull ahead

0:22 like it has been expected to for a while now.

0:25 Maybe this still could be the Chinese century.

0:27 It's just starting a quarter of the way through.

0:29 But it's important to address that China has its own problems

0:31 that are just as, if not more serious than the USA's.

0:35 If anything, it's just better at hiding them.

0:37 Which is why we put this collection together to address those issues one by one.

0:41 Looking at how its reported numbers might not tell the whole truth,

0:43 why debt has become its biggest threat, and whether China is truly on the verge

0:47 of collapse or just facing temporary setbacks.

0:50 This is China's economic reality.

0:52 Growth, debt, and an uncertain future.

0:55 Economists should have known better.

0:57 In 1980, under the direction of this man, Deng Xiaoing,

1:00 the new paramount leader of the People's Republic of China,

1:03 a small town across the border from Hong Kong,

1:05 was given special economic privileges to trade

1:07 and do business with the outside capitalist world.

1:09 The city at the time was only home to around 330,000 people,

1:14 tiny by Chinese standards, because the country had just become the first nation

1:17 in history to be home to over a billion people.

1:20 In the 40 years since, Shenzhen, that once small town,

1:23 has turned into one of the largest

1:24 and most economically influential cities in the world.

1:27 In 2018, it exceeded the GDP of its direct neighbor, Hong Kong,

1:30 a global center of commerce that has stood for hundreds of years,

1:33 and is now the eighth largest city in the world by total population.

1:37 A huge change from an averagesized town just four short decades ago.

1:41 Shenzhen's story is not unique in China.

1:43 The country is home to hundreds of cities

1:45 that are each economic powerhouses in their own right.

1:47 And the reforms that started with a few

1:49 select regions have been almost universally adopted nationwide.

1:52 In that time, the economic development of China has

1:54 done some major good for the country and the world.

1:57 It has pulled hundreds of millions of people

1:58 out of poverty and made a lot of everyday

2:00 consumer goods that we take for granted far cheaper

2:02 than they would be if they were produced locally.

2:04 But of course, it hasn't been

2:06 without its problems domestically and internationally.

2:09 Perhaps the biggest of those problems within the country has

2:11 simply been the expectation that this economic growth would continue forever.

2:15 The country has been home to the most intense economic growth in history.

2:19 And a lot of social, political,

2:20 and economic systems have become reliant on that growth continuing forever.

2:24 Unfortunately for the country,

2:25 that has led to a lot of systems that in retrospect favor

2:27 short-term boosts to the economy at the expense of long-term economic stability.

2:31 And now, 40 years later,

2:33 the long-term may have arrived in some of the most unexpected ways imaginable.

2:37 So why are growth rates that would be remarkable

2:40 in any regular economy such a problem in China?

2:43 Similarly, why are things getting cheaper causing so many

2:46 economists to become concerned about the country's economic health?

2:49 How is a country with relatively low national borrowing facing a debt crisis?

2:53 And finally, and perhaps most importantly,

2:55 is this any different from the dozens of other times that economists

2:58 and commentators have predicted the inevitable

3:00 demise of the world's second largest economy?

3:03 Now, before we get too far into assessing China's current economic problems,

3:06 we need to give the big disclaimer

3:07 that the country obviously causes some international tensions.

3:10 From proposed hostilities with one of the most

3:12 technologically significant countries in the world to human

3:15 rights issues and simply been a dramatic shakeup

3:17 to the global status quo for the last century,

3:19 which has had the USA exist as the de facto economic power.

3:23 For these reasons and others, it's perhaps understandable that people are eager

3:26 to hear news about some kind of impending

3:28 collapse in a country that is now the second most dominant economy in the world.

3:32 But just because people might want something to be true doesn't mean that it is.

3:36 And it was just over a year ago that we had

3:37 to make an entire video discussing why China wasn't going to collapse yet.

3:42 But since then, a few things have changed.

3:45 The country has more or less completely reopened after the longest and most

3:48 severe lockdowns in the world as a response to the global pandemic.

3:51 The country's questionable case numbers were at least in theory maintained

3:54 by extreme measures that controlled when people could leave their homes,

3:57 go to work, go shopping, travel, start a business,

4:00 or really do much of anything that generates economic activity.

4:03 After these restrictions were lifted about a year ago,

4:05 the hope was that economic activity would bounce

4:07 back as people went out to do everything

4:09 they weren't able to do while I was stuck inside for the better part of 3 years.

4:13 This did happen, but it was not

4:14 as intense as economists and the government predicted.

4:17 The country went from posting close to doubledigit annual

4:20 growth rates from before the pandemic to around 5% today.

4:24 Simply put, that means that year-over-year

4:25 the Chinese economy is producing 5% more

4:27 net goods and services in a given year than it was 12 months ago.

4:31 A lot of media outlets and even some economists have pointed

4:33 to this as a sign that the end is nigh for China,

4:36 but they mostly failed to explain why.

4:39 Now, 5% is low by Chinese standards,

4:41 and it's following a trend of downwards growth statistics

4:44 that have existed for just over a decade in the country.

4:46 But that growth rate would be remarkable in most countries,

4:49 let alone the second largest economy in the world.

4:52 Advanced Western economies strive for a growth rate of around 2 to 3% annually,

4:56 effectively half of what China is achieving.

4:58 And even then, plenty don't achieve that.

5:00 So why are economic growth figures that would be

5:02 a miracle in the West considered a crisis in China?

5:06 Well, it all has to do with expectations.

5:08 If someone was earning $50,000 a year,

5:10 but they had planned their long-term budget

5:12 around getting 10% annual pay increases every year,

5:14 they might have taken on a bigger mortgage than they really should have,

5:17 maybe had an extra kid,

5:18 assuming that their income would grow enough to cover those expenses,

5:20 and generally adjusted their spending, saving,

5:22 and investing strategy based on an assumption of strong career growth.

5:26 The comparison of personal income to a country's GDP is not perfect,

5:30 but it should start to highlight the problem.

5:32 GDP is a timed measurement.

5:34 It effectively resets every year just like how much money a person

5:38 has earned in a year also by definition resets every year.

5:41 But they do both contribute directly to national

5:43 or individual wealth and debt levels respectively over time.

5:47 A higher GDP or a higher income will all other things been equal mean

5:50 that a country or an individual can pay off debt and build up assets faster.

5:54 And that's why things like debt to GDP is spoken about

5:57 in economics as much as debt to income is in regular finance.

6:00 This becomes especially important when

6:02 it's considered that growth rates compound.

6:04 The difference between a 5% and a 10% annual growth

6:07 rate over a decade is almost double the end output.

6:09 An economy with a $1 trillion GDP will have

6:11 a $1.65 trillion GDP with a 5% growth rate,

6:15 but a $2.71 trillion GDP with a 10% growth rate.

6:19 China has built its economy around the assumption that growth would remain

6:22 a lot stronger than 5% for a lot longer than it really has.

6:25 A lot of major investments made by the government at all levels

6:28 from individual to local as well

6:30 as companies within the country and perhaps most

6:31 crucially individual households were all predicated

6:34 on the idea that the economy would

6:35 continue to grow like it had been for the decades between 1980 and 2010.

6:40 Commentators have poked a lot of fun at things like ghost

6:42 cities where entire cities were developed on the outskirts of existing

6:45 major centers that could house millions of people but never had

6:48 anybody move into them so they sat mostly empty for years.

6:51 Other commentators were quick to defend this practice,

6:53 pointing to instances where these ghost cities ended up being fully populated.

6:57 The reality, as with most things, lay somewhere in the middle.

7:00 These development projects took investments

7:01 from governments to provide infrastructure,

7:03 companies to construct the buildings and provide amenities,

7:06 and individuals to invest into apartments in a city that nobody lived in yet.

7:09 With the country growing as fast as it was,

7:11 the expectation was that eventually these areas would

7:14 be filled by people moving into these new centers.

7:16 And the rate in which that was happening

7:17 meant that it only made sense to plan ahead.

7:19 With that style of economic planning, any kind of drop in growth,

7:23 even if it would still be strong by Western standards,

7:25 could mean the difference between an entire city being filled up or remaining

7:28 completely empty until everybody involved in the project runs out of money.

7:32 This is just the first place where economists really should have known better.

7:35 The simple fact that international migration rates from the country

7:37 to major cities has been slowing for decades now.

7:40 And for the first time in recorded history, outside of a war,

7:42 the population of China was decreasing

7:44 means that endlessly building with the expectation

7:46 that the country will grow into things just wasn't going to last forever.

7:50 Real estate has become the most obvious

7:52 and problematic sector where this kind of expectation

7:54 of strong future growth has encouraged optimistic

7:56 recklessness at every level of the economy.

7:59 But it's not the only place.

8:01 Everything from infrastructure development to trade deals all the way up

8:04 to massive international projects like the Belt and Road Initiative were

8:06 made with the expectation that the Chinese economy would swiftly grow

8:09 into markets that it wasn't yet big enough to fully utilize.

8:13 Now overly optimistic future planning is one thing,

8:15 but it doesn't constitute a crisis by itself.

8:18 It might though when we consider the one

8:19 thing that is still growing rapidly in China, debt.

8:23 China has always had a reputation for being

8:25 a prudent saver on a national and individual level.

8:27 The country does have the world's largest foreign currency reserves,

8:30 but it also has a rapidly growing pile of debt.

8:33 China's national debt to GDP ratio is about 77%,

8:36 which is up significantly in recent decades, but is still perfectly healthy.

8:40 The USA, by comparison, has a debt to GDP ratio of around 122%,

8:44 which is high, but still not really anything to be too concerned about.

8:47 The thing with China, though, is that that's not the full story.

8:50 And the country either intentionally or incidentally has fallen into a situation

8:54 where none of their debt metrics look too concerning individually.

8:57 But collectively they tell a very grim story.

9:00 National debt only measures debt taken on by the national government.

9:03 On top of that, there is also

9:04 provincial debt which is more concerning because provinces

9:07 within China do not have the authority

9:08 to print money so they can become insolvent.

9:11 Exact value on provincial debt is hard to track down because

9:14 all of the various regions report their borrowing in different ways.

9:17 Some don't report it to anybody but the central government.

9:20 And of course, potentially embarrassing economic

9:22 statistics in China are frequently misreported.

9:24 Anyway, a quick but very funny side note is that several stories of provincial

9:28 governments painting their grass green screen,

9:30 setting up completely fake pieces of infrastructure like drains

9:32 that lead nowhere and sticking rocks on top of rebar

9:34 to make it look like flowers in a field

9:36 have been reported ahead of visits from central government officials.

9:39 Of course, these are individual reports,

9:41 but if they're willing to go to that much effort and do

9:43 that much damage just to keep face

9:44 when highle government officials come to town,

9:47 it's not outside the realm of possibility

9:48 that they would also massage financial figures.

9:51 Anyway, the best estimates by Goldman Sachs put total provincial

9:54 debt in China at the equivalent of over $23 trillion,

9:58 effectively 150% of the country's total economic output,

10:01 on top of the 77% from the national government.

10:05 That provincial borrowing was mainly done to fund big infrastructure projects

10:08 with the anticipation that the country's industry would grow into fill them.

10:11 As we discussed earlier,

10:12 major cities all over the country who were becoming very wealthy by centers

10:15 of industry and other regions did not want to be left behind.

10:18 The main source of revenue for these municipal governments is

10:20 selling stateowned land to developers on 70 or 99year leases.

10:24 But they can only sell that land if people are willing to buy property.

10:27 And people are only willing to buy property

10:29 if the local government was investing in big projects.

10:32 Combined provincial and national government debt.

10:34 if the estimates are correct, would be over 200% of the country's GDP,

10:37 which is where alarm bells do start

10:39 ringing in even the most resilient economies.

10:41 Now, to be fair, the individual states within the United States that we

10:45 were using as a point of comparison do also have their own debts.

10:48 And collectively, they add up to $3.3 trillion in total borrowing.

10:52 So, still a significant amount,

10:54 but a tiny tiny fraction of provincial government borrowing in China,

10:58 which is still overall a smaller economy in nominal terms.

11:02 But the debt problem doesn't stop there.

11:04 Unfortunately, far from it.

11:06 A lot of borrowing to fund government initiatives

11:07 in China is not done by the government directly,

11:10 but instead through a series of thousands of state-owned companies.

11:14 Large stateowned companies have been the primary driving forces behind major

11:17 projects with less than amazing outcomes

11:19 both within the country and internationally.

11:21 The belt and road initiative in particular,

11:23 which was China's grand plan to fund infrastructure development in emerging

11:26 economies to build out trade partnerships and spread their influence,

11:29 was mostly funded and built out

11:30 by stateowned companies like the China Construction Bank,

11:33 China National Petroleum Corporation,

11:34 and the China State Construction Engineering Corporation.

11:37 The Belt and Road Initiative has not been a resounding success.

11:40 It's led to a lot of lending that is looking unlikely to ever be repaid,

11:44 and it's turning China into a global debt collector,

11:46 which is running contrary to the plan's original goal

11:48 of getting developing countries around the world on side with China.

11:52 Today, it has more or less been abandoned,

11:53 as no major projects have been pushed anymore.

11:55 At home, the story is not much

11:57 better for a lot of Chinese stateowned corporations.

11:59 A lot of these companies are just regular property

12:01 developers that would assist regional governments in building out cities.

12:04 And of course, that industry has been plagued

12:06 with problems ever since the spectacular collapse of Everrand,

12:09 which itself was not a stateowned company,

12:11 but did bring a lot of other developers that were down with it.

12:14 On top of all of this, companies like the China Railway

12:17 Corporation have also overinvested into infrastructure

12:19 based on the expectation of future

12:21 growth and have taken on debt burdens that would only be

12:24 manageable if the country's economic activity continued to grow very rapidly.

12:28 China's stateowned companies have total debts of over 15.6 6 trillion,

12:32 bringing the running total to $52.3 trillion,

12:35 or roughly 300% of the country's GDP.

12:38 This is all before considering perhaps the most important indebted group,

12:42 regular everyday households, which have also borrowed heavily,

12:45 mostly to invest into real estate,

12:46 which in major cities was amongst the most unaffordable in the world.

12:50 Again, people bought into the dream

12:51 of cities like Shenzhen going from a glorified

12:53 fishing village to one of the global centers of commerce within their lifetime.

12:57 Assuming that economic growth kept going, this success story could be replicated

13:00 in hundreds of other cities around the country.

13:02 And in many instances, it was.

13:04 Family members pulling together their life savings to buy a run-down one-bedroom

13:08 apartment in a complex with terrible

13:09 building standards sounds foolish in hindsight.

13:12 But if these cities continue to grow like they had been,

13:14 it would be a good investment.

13:16 Including household debt that has mostly been directed towards

13:18 unproductive assets that are losing a lot of market value,

13:20 the country now has a debt burden potentially as high as 360% of its GDP.

13:26 And if that wasn't concerning enough already,

13:28 it's becoming worse due to deflation.

13:31 Now, in the past 3 years on this channel,

13:33 we have spoken a lot about inflation for obvious reasons.

13:36 So, I don't want to repeat too much here, but simply put,

13:39 inflation is the general increase in the price

13:41 level of goods and services in the economy.

13:43 So, deflation is the opposite.

13:45 But then the question becomes,

13:47 why are goods and services becoming cheaper in China,

13:49 causing so many economists to get so worried?

13:51 Theoretically, cheaper stuff should be a positive economic outcome.

13:55 But it does cause some problems.

13:57 For starters, it can be a sign of bigger underlying issues.

14:01 This isn't a problem so much by itself,

14:02 just like a faster heart rate isn't a problem by itself in the human body.

14:06 But if it's unexplained and it goes on for long enough,

14:08 it can be a sign of something else going very badly.

14:11 Most deflation occurs when consumers aren't spending as much because

14:15 then businesses are forced to lower their prices to try

14:17 and encourage consumers to make more purchases and to compete

14:19 with other businesses for the few consumers still spending.

14:22 The reason that consumers would be spending less

14:24 is either if they are earning less because

14:26 employment is lower or because they're worried about

14:28 the future and are trying to save money.

14:30 Either a bad in an economy.

14:32 Deflation itself, if it goes on for long enough,

14:34 can also dramatically slow down growth.

14:36 A small amount of inflation can actually be a good thing

14:39 for an economy so long as wages keep up with that inflation.

14:42 A small bump in nominal wages every year can actually encourage people to go out

14:46 and spend or invest their money even

14:47 if their real buying power hasn't actually increased.

14:51 Deflation does the opposite.

14:52 If money is buying more every year,

14:54 businesses are going to find it harder to give people wage increases.

14:57 And long-term, they might even need to reduce people's wages or lay them off.

15:01 Even though people's incomes are technically becoming higher,

15:04 it's harder for people to see it in the same way

15:06 they would with a bigger number hitting their bank account every month.

15:09 Other people with more money to spend and invest

15:11 will also be less likely to do it.

15:13 Because if money is buying more every year,

15:15 it just makes sense to sit on it completely risk-f free.

15:18 Especially in an environment like China at the moment

15:20 where investments that were once considered safe

15:22 as houses are literally being demolished because it's

15:25 no longer worth it to keep them standing.

15:27 In China, this is especially bad because a lot

15:29 of their economic growth still depends on lowcost manufacturing.

15:33 If deflation persists and wages aren't lowered in line with it,

15:35 then it will make their problems even more severe as they

15:37 continue to lose their dominance in this industry to other regional rivals.

15:41 Now, all of these issues have a common trend.

15:44 They would be fine if the country still had double-digit growth.

15:47 And of course, nobody can predict the future, least of all economists,

15:50 but there was no reason to expect that now

15:52 would be the time where their economy slowed down.

15:54 By global standards, China is still at best a middle-income country,

15:58 and a large part of their population still lives in relative poverty.

16:01 So, there was still plenty of headroom for economic prosperity.

16:04 Of course, looking back, there are many reasons for this slowing growth,

16:07 but we've already made several videos covering those issues,

16:09 and they really do deserve a fulllength explanation.

16:13 China's rise has been incredible.

16:15 But if it's destined to become the world's dominant superpower,

16:18 why is its economy slowing down?

16:20 Some economists argue that the real problem isn't just stagnation.

16:23 It's that we don't actually know how strong China's economy really is.

16:27 China is one of the most important economies in the world.

16:30 Not only because of its sheer size,

16:32 but also because of the influence it has over its region,

16:35 the way it conducts business with other economies around the world,

16:38 its immense currency reserves, problematic foreign policies, and of course,

16:42 its population that represents a fifth of all people living in the world.

16:46 Even if China wasn't the second largest economy in the world,

16:49 it would still get a lot of attention for how

16:51 much of a tangible impact it has on our everyday lives.

16:55 Look around you right now and I'm sure there are dozens of items

16:58 that were made in Chinese factories

16:59 that are materially improving your standard of living.

17:02 Probably including the device that you're watching this video on right now.

17:06 The economic dependency that we may or may not like

17:08 to admit that we have on China is starting to wayne.

17:11 But it's still there and that's why

17:13 the validity and reliability of their economic data is

17:16 something that has a very real impact

17:18 on the way that we manage our own economies.

17:20 Anytime I've made a video that looks at the economy of China on this channel,

17:24 I normally give a brief disclaimer that economic

17:25 figures from Chinese agencies are potentially altered

17:28 by different levels of government to present

17:30 a more positive image of Chinese economic prosperity.

17:33 This could include anything from inflating

17:35 output figures to misrepresenting employment data.

17:38 There are very logical reasons that different levels

17:40 of government within China would try to do this.

17:42 Whether it be more funding for local projects,

17:45 gaining favor with party leaders for delivering good results,

17:47 and on an international level,

17:49 presenting a strong face to potential allies and adversaries alike,

17:53 misrepresenting economic figures can do a lot more harm than bruising

17:56 a few egos and allocating credit where it's not really due.

17:59 It can seriously impact the quality of life

18:02 of, in China's case, billions of people.

18:05 Beyond that, I think it's also important to recognize that misrepresenting

18:07 economic statistics is not a problem unique to China by any means.

18:11 But it is the second largest economy in the world and it

18:14 does have the reputation more than any other country for this practice.

18:17 So it makes a great case study to learn what to look

18:19 for to see if any other economy is doing the same thing.

18:22 So what evidence is there to suggest

18:25 that China is misrepresenting their economic figures?

18:28 What problems do these figures cause in the real economy?

18:31 And finally, what metrics can we look at to determine

18:33 the true prosperity of an economy if the official figures are unreliable?

18:38 When assessing information every type of scientist,

18:41 including social scientists like economists, must consider the accuracy,

18:44 precision, and relevance of the data and information that they are working with.

18:47 The classic way this is explained is by imagining a dart board.

18:51 If points of data are accurate and precise,

18:53 they will be grouped around the bull's eye very tightly.

18:56 If the data is precise but not accurate, they will still be tightly grouped,

19:00 but they will be in one corner of the board.

19:02 And if the data is accurate but not precise,

19:05 they will be grouped around the bullseye

19:07 with a lot of spacing in between each shot.

19:10 The relevance of data can be a little bit harder to determine,

19:13 but to stretch this example, if you were actually playing a game of golf,

19:16 the grouping of your darts on a dart board is kind of meaningless.

19:20 I actually don't like this example because

19:22 it's very easy to confuse accuracy with precision.

19:25 So let's use an example that actual

19:26 economists might work with in the real world.

19:29 Consider the GDP of a country like Australia.

19:32 The World Bank estimates that in 2021

19:34 Australia's output was 1 trill542 bill660 million.

19:39 That figure is precise down to the closest million.

19:43 But its accuracy might not be that great

19:45 because the IMF says that Australia's total output

19:48 was 1 trill724 bill787 million and the United

19:53 Nations says it was 1 trill423 bill473 million.

19:58 These estimates can't all be accurate.

20:01 There is a variance of more than $300

20:03 billion here which is roughly the economy of Portugal.

20:06 The reason for this is that all of these organizations use very

20:10 different techniques to collect and process

20:12 the data needed to estimate GDP figures,

20:14 which goes to show that there is a lot of wiggle room to interpret

20:17 information like this, even when dealing

20:19 with a very transparent and reliable country like Australia.

20:23 What's more is that these figures actually make

20:24 another mistake that economists should look out for.

20:27 They have oversold their precision.

20:30 There is no way that an organization would be able to measure

20:32 the total output of any national economy down to the closest $1 million.

20:36 Yet, they've expressed their figures down to this point,

20:39 which could give the reader the wrong

20:40 impression of how precise these figures really are.

20:43 Economists actually make mistakes like this all the time,

20:45 and people making big decisions based off this data definitely

20:48 know that it's not precise down to the nearest million dollars.

20:50 But if you ever making calculations like this yourself,

20:52 make sure to round it to the factor of 10 that you can be

20:55 confident of, and you can say that you're

20:56 making better economic figures than the UN.

20:59 Now the relevancy of Australia's GDP figures

21:01 depends on what you are trying to achieve.

21:04 If you want a snapshot of the general size of the Australian economy,

21:07 yeah, GDP figures are great for that.

21:10 But if you want to understand living standards

21:11 in Australia or the size of the German economy,

21:14 well then these figures are not really relevant at all.

21:16 At least not without additional information.

21:19 Now, apart from tricking you into learning something about statistics,

21:22 it's really important to understand the accuracy,

21:24 precision, and relevance of any figures you see.

21:26 Because even if they're not outright cooking their books,

21:28 there is a chance that they can be

21:30 carefully selected to give you the wrong impression.

21:32 If the people collecting and processing this data have no specific bias,

21:36 then small errors like this can balance themselves out,

21:39 especially if data points are collected broadly and in large numbers.

21:42 But in China, there is a very real incentive for all

21:45 levels of government to pick figures that present a more positive image.

21:49 If those points of bias data get passed

21:51 up the ranks to be aggregated into national figures,

21:54 the errors can compound on one another to produce

21:56 net results that are off in a very big way.

21:58 Beyond that, collecting GDP data is hard.

22:02 I think it's worth recognizing that the World Bank tracks the ability

22:04 of all countries to produce accurate

22:06 economic figures using the statistical capacity score.

22:09 In the past, China's score has been below the median.

22:13 It scored in the 38th percentile of low and middle

22:15 inome countries in 2004 and the 52nd percentile in 2015.

22:20 However, in the 2016 rankings, China was placed in the 83rd percentile,

22:25 meaning only 17% of low and middle inome countries were

22:28 able to produce more accurate aggregate figures than it was.

22:31 That's still not great because low and middle inome countries

22:34 tend to produce much worse economic figures than advanced countries.

22:37 But it does make sense that poor countries

22:39 have a harder time producing highquality economic data.

22:42 The actual formula for economic output is quite easy.

22:45 Consumption plus investment plus government spending plus an exports.

22:49 No problems there.

22:50 But if I gave you all of the resources

22:52 at the disposal of an average national statistics bureau,

22:55 where would you start on working out

22:57 the actual numbers to plug into this equation?

23:00 It's theoretically possible to sit an economist at the end

23:02 of every production line and service being provided in the country.

23:05 But that's obviously wildly impractical because well at that point a significant

23:10 portion of your economic output would be measuring your economic output.

23:14 In advanced economies with very formalized financial systems,

23:17 the government agencies in charge of producing economic figures can use data

23:20 collected by other agencies to track things that they might be interested in.

23:23 The US Bureau of Economic Analysis is responsible for producing

23:26 the GDP estimates for all of the American states

23:29 as well as the US as a whole and they

23:31 mostly use data collected from the IRS and customs.

23:35 You should be able to look up

23:36 the methodology that your own government uses to produce

23:38 economic estimates as most of them want

23:40 to make the process as transparent as possible.

23:43 The problem this creates for a country like China is

23:46 that a large portion of its economy is still very informal.

23:49 We have already explored in a recent video that only

23:52 around 2% of China's population actually pays regular taxes.

23:55 So getting a clear economic picture using tax records just isn't feasible.

23:59 This means that they have no other option

24:01 than to rely on more firstirhand data collection.

24:04 We also have to address the elephant in the room.

24:06 Corruption in China.

24:08 It's been known to happen.

24:10 So when a massive economy like China is dealing with a very complex set

24:13 of figures that are being collected

24:15 and interpreted by many layers of government employees,

24:17 all with a vested interest in presenting a positive message to their superiors.

24:21 It's no wonder that the figures become unreliable.

24:24 We also have to consider the compounding

24:26 effect of figures that are reported every year.

24:28 Casten Holes is a researcher at Stanford University that published a paper

24:32 on the quality of China's GDP statistics

24:34 called the quality of China's GDP statistics.

24:37 It's an old paper now, but it argued that after fabricating one report,

24:41 leaders struggled to go back to accurate numbers because they would have

24:44 to report lower than actual growth to rebalance the level of output.

24:48 If you are a local government leader that has accidentally

24:50 or willfully overestimated their output figures by 1% in a year,

24:54 you're going to need to add an extra 1% to next year's figures,

24:57 or else it's going to make it look like you've gone backwards.

25:00 Do this for long enough and the gap between

25:01 the correct figures and last year's figures will be

25:04 so large that reporting correct figures would cause such

25:06 a drastic drop that it would spark an investigation.

25:10 At that point, even if the officials

25:11 didn't want to blatantly report false figures,

25:13 it would be in their best interest to keep

25:15 doing it because the punishment would likely be severe.

25:18 Now, this is the important part.

25:20 The Chinese government recognized this problem as early as the 1990s.

25:24 Famously, a leaked comment by a top Chinese government

25:26 official openly admitted that GDP figures were purely man-made.

25:30 Because of this systemic problem,

25:32 international organizations and even the Chinese government itself

25:35 no longer uses data collected by provincial governments

25:38 to create national output figures without first making

25:40 corrections to account for the trend of overinflated figures.

25:44 The problem then is that the National

25:45 Bureau of Statistics of China is freely admitting

25:48 to making discretionary adjustments to its data and providing

25:51 no further transparency on what those adjustments are.

25:54 The research division of the American Federal Reserve

25:56 has argued that this lack of transparency is

25:58 actually worse than the blatantly false figures because

26:01 it's harder to know what those adjustments were.

26:04 So, it's fairly obvious to most economists that yes,

26:07 through a combination of data collection difficulties, incompetence,

26:10 corruption, and willful manipulation that yes,

26:12 Chinese economic figures are unreliable

26:15 and they are overestimated rather than underestimated.

26:18 So, the next question is how do we make better estimates?

26:22 The output of an economy is highly correlated with a lot of other data points

26:26 that can be observed without the help

26:28 or more importantly the interference of government organizations.

26:31 Lee Kai Chang, the Communist Party official

26:33 who admitted that their GDP figures were man-made,

26:36 very candidly discussed that the only three things he

26:38 looked at to evaluate the economy was electricity consumption,

26:41 rail cargo volume, and bank lending.

26:44 If an economy is using more electricity, moving more cargo via rail,

26:47 and lending more money to various projects,

26:49 it's almost certainly creating more output.

26:52 The benefit of using these data points is that they are centralized,

26:55 so they're easy to gather, and they're also very hard to manipulate.

26:59 Electricity consumption is measured directly from the grid.

27:01 Railards need to keep track of containers coming and going,

27:04 and banks obviously want to make sure that they're

27:06 keeping reliable records of who owes them money.

27:09 Now, this is great stuff.

27:11 If you are a high-ranking official from the CCP,

27:14 a foreign economist isn't going to have much luck asking a Chinese

27:17 stateowned bank for a comprehensive breakdown

27:19 of their new domestic lending activities.

27:21 This means that these figures are still prone to being

27:23 manipulated before anybody outside the party gets to see them.

27:27 But there are other sources of data that are admittedly worse,

27:29 but are much easier to collect.

27:32 One popular method is to measure the light

27:34 emitted from a country at night using satellite imagery.

27:37 The theory is that a country will emit

27:38 more light when it has more economic activity happening.

27:41 Road lights, factory lights, car lights,

27:43 even stadium lights are all direct results of some type of economic output.

27:47 So the more light, the higher the GDP.

27:50 This is a really fun theory because we

27:52 can roughly test it by looking at different imagery.

27:55 This is South Korea with a GDP of $1.8 trillion.

27:58 And then this is North Korea with a GDP of roughly $29 billion.

28:02 Now, while this is a fun theory,

28:04 I'm sure a lot of you are already thinking of problems with this system.

28:07 For example, there are many other factors that determine light output,

28:10 aside from pure economic activity.

28:13 A country with a larger population will naturally use more lights.

28:16 A country with more heavy industry will use more light when

28:19 compared to a country that mostly produces value in the service sector.

28:23 Even cultural differences around how bright residents want

28:25 their cities to be can change light output.

28:28 For example, compare Shanghai to Paris.

28:31 One is much more lit up than the other,

28:32 but Paris is actually the larger economic center.

28:35 Of course, you can add balances for these factors,

28:38 but then you run into the same problem

28:39 of changing outputs based on some level of discretion.

28:43 Louis Martinez, an economist at the University of Chicago,

28:46 published a paper on this theory that suggested

28:48 that the growth in China's light output over

28:50 previous decades was not sufficient to be in line

28:52 with their claimed growth in overall economic output.

28:55 He also found that autocratic governments in general

28:57 tend to overstate their actual economic figures

29:00 by an average of 35% when measured using light output as an indicator of growth.

29:05 The same paper went on to argue that China's growth may have

29:07 been overestimated by more than double in the years between 1993 and 2012.

29:13 Martinez did account for the differences in the countries he studied

29:15 in a way that has held up to widespread peer review.

29:18 But don't get too excited because that just

29:20 means that he drew rational conclusions from reliable data.

29:23 Autocracies, especially those with a communist focus,

29:26 tend to put a heavy emphasis on heavy industry even when they are very poor.

29:31 This means that their baseline light output would already be very high.

29:34 And the change in total light output wouldn't be

29:36 as heavily affected by households growing wealthier as it would

29:38 in a typical economy that takes the standard route of going

29:41 from agrarian farmers to factory laborers to service sector workers.

29:45 Lenin himself famously said in one of his speeches that communism

29:48 is Soviet power plus the electrification of the whole country.

29:52 So, communist nations obviously have a propensity

29:55 to supply electricity as a priority.

29:57 You could think of this like trying to work out how rich your neighbors

30:00 are by how many times they have food delivered to them every month.

30:03 The general theory is is that as people earn more money,

30:06 they can afford more restaurant food to be delivered to them.

30:08 But if you just happen to live next door to neighbors that are total foodies,

30:12 then they might order restaurant meals every night already.

30:15 If they get a big promotion at work,

30:17 they aren't going to order any more food because

30:19 there's only so much you can eat in a day.

30:21 But if you're basing your estimate of how much their income

30:24 has grown off how much extra food they are ordering,

30:26 you're unlikely to pick up on the fact that they did get that promotion.

30:29 Martinez did recognize this problem and he

30:31 wasn't seriously advocating for the idea

30:33 that international organizations should use

30:35 telescopes instead of government supplied figures.

30:38 But he did offer it up as a surprisingly viable verification check.

30:42 Now, just quickly, I want to mention that Money and Macro,

30:44 a smaller economics channel,

30:45 beat me to the punch once again on this particular paper when

30:48 he made quite a detailed video on the methodology of this research.

30:51 We covered different details, but he definitely deserves another shout out.

30:55 Now, the important part here is that all of these alternative ways to measure

30:58 GDP growth can be used to verify or raise doubts over different figures,

31:02 but they struggle to come up with accurate estimates themselves.

31:05 For the most part, that's actually good enough.

31:07 to actual decision makers and even the economies themselves.

31:11 GDP figures don't matter nearly as much as you might think they do.

31:14 GDP growth is so highly coveted because it can directly lead

31:17 to improvements in living standards for average people in the economy.

31:21 So GDP growth pays over a lot of other problems.

31:24 People are willing to put up with a lot if they think they're getting richer.

31:27 Of course, we know that GDP figures are just the ones that get the headlines.

31:31 And it's definitely possible for living

31:33 standards and economic influence to decrease, even when output is increasing.

31:37 If you need to see this counterintuitive trend in action,

31:40 well, look no further than China.

31:42 If China's economy isn't as strong as it looks on paper,

31:45 that raises an even bigger question.

31:47 How much of its rise has been built on borrowed money?

31:50 Debt has been a key driver of China's expansion,

31:52 but now it's reaching dangerous levels.

31:55 This is China, the most populous and second largest economy in the world.

32:00 This is a nation that has been home to the most

32:02 intense period of economic growth and development in history.

32:05 As the country has opened up to foreign trade and embrace the free market,

32:09 it has transitioned from a famine plagued

32:11 backwater into the superpower that we see today.

32:14 This sustained development has done some amazing things

32:17 both within the country and around the world,

32:20 not least of which was pulling hundreds

32:21 of millions of people out of absolute poverty.

32:24 But of course, it hasn't been without its problems.

32:27 Behind the futuristic facade of glassclad skyscrapers and mega projects,

32:31 the Chinese government is unfortunately regressing

32:33 back towards an increasingly authoritarian rule.

32:36 The type of rule that has already caused all of the problems

32:39 we've already seen in our three-part series on the country.

32:42 Now, up until this point,

32:44 a lot of these issues have been conveniently overlooked, let's say,

32:48 both by the citizens of the nation and the countries and companies that were

32:51 doing well for themselves by taking advantage of this new cheap pool of labor.

32:55 But this is starting to change.

32:57 Increasingly hostile relations between China and its largest trading

33:00 partners has meant that a lot of these institutions

33:03 and governments that were once happy to ride

33:04 the gravy train are starting to change their tune.

33:07 Perhaps more concerningly, the population of the nation itself is starting

33:11 to feel the pressure of an overleveraged economy.

33:14 Up until now, the country has enjoyed growth that is strong and consistent.

33:18 A population that is experiencing consistent growth will

33:21 be seeing their quality of life improve year

33:23 overyear and will naturally be less inclined to rock

33:26 the boat that is fing them to prosperity.

33:28 But no good thing lasts forever.

33:30 and everything from unusual business practices

33:33 to the most overinflated real estate market

33:35 in the world is starting to weigh down this growth at all cost mentality.

33:39 So, is China's period of rapid growth over?

33:42 If so, what is causing this slowdown?

33:45 And is this actually a bad thing?

33:48 Before we get into things, it's time for the big disclaimer.

33:51 Chinese data sources, particularly those that relate to the economy,

33:55 are not super reliable, to put it lightly.

33:58 We always try to use independently

34:00 verified sources where possible, but even still,

34:03 some of these are ultimately dependent on what the Chinese government reports.

34:07 These reports are often altered to present a more positive image of the nation.

34:11 This is by no means a problem exclusive to China,

34:14 and I always encourage my viewers to question the validity,

34:17 accuracy, and reliability of all pieces of data, no matter the publisher.

34:21 But it is particularly prevalent here,

34:23 which is why we need to make this disclaimer.

34:25 All right, with that out of the way,

34:27 let's look at perhaps the most pressing issue in the nation at the moment.

34:31 The real estate market in China is

34:32 a multi-t trillion dollar time bomb that is somehow

34:35 even more ingrained into economic systems than real

34:37 estate markets in places like the United States, Canada, Australia, and Europe.

34:42 Now, regular viewers of the channel will know

34:43 that real estate in China's major cities is unbelievably expensive,

34:48 especially when compared to average household incomes,

34:50 which are improving, but are still well behind advanced nations like the US,

34:55 Europe, and even their neighbors in South Korea and Japan.

34:58 Now, there are three major reasons for this insane pricing.

35:02 The first is obviously the expectation of future growth.

35:06 This is a major factor in determining the market demand for anything,

35:09 but especially things that are considered assets.

35:13 If you knew a stock was going to be

35:14 worth $100 tomorrow and it was trading at $50 today,

35:18 you would definitely buy that stock even

35:20 if the underlying company was complete garbage.

35:23 Now, normally this rule applies to a lesser degree

35:26 in real estate because real estate holdings are less liquid,

35:29 much more expensive, and less fungeable than stock in a company.

35:34 As in, if you buy a house, you probably need to take out a big loan

35:37 that you may or may not be approved for.

35:39 Then, when you go to sell it, it's not quite as simple as opening up your phone

35:42 and hitting sell on your brokerage platform of choice.

35:44 You need to employ a realtor, hold open homes,

35:47 and pay a pretty significant commission for the privilege of the whole ordeal.

35:50 What's worse is that if you just happen

35:53 to buy a house that gets infested with termites, well,

35:56 then the general market appreciation is all for nothing,

35:59 and you are probably still going to lose money on this investment.

36:02 Now, all of these issues aren't to be

36:04 a barrier to these expectations for future gains in China.

36:08 Why?

36:08 Well, because real estate is really viewed as a speculative

36:11 asset first and a place to keep people second.

36:15 Building standards are absolutely terrible in China,

36:18 but that doesn't really matter to most people.

36:20 Why?

36:21 Because despite how terrible the underlying building is,

36:24 it's almost guaranteed to be worth more tomorrow than it is today.

36:28 China's enthusiasm for real estate is so

36:30 strong that some provincial governments have tried

36:32 to cool demand by limiting the amount of real estate a single household can own.

36:37 The cunning investors way around this issue get divorced on paper so that one

36:41 household becomes two and the apparently separated

36:44 investors can double their holdings without penalties.

36:47 China's economic growth has been remarkable and the best way for people

36:50 to piggyback off that growth is to invest into real estate.

36:54 If China's economy continues to double in size every 8 years,

36:58 then paying 5 million R&B for a rundown

37:00 apartment is going to look like a savvy investment.

37:03 This is very similar in many ways to tech

37:06 companies in the US that might have terrible underlying fundamentals,

37:09 but have seen a long period of sustained

37:12 price growth based on projections of future growth,

37:15 which is further fueling price growth.

37:17 In the same way that investors in the West have accepted that some

37:20 stocks are worth a 100 times what the company makes in a year,

37:23 residents in China have accepted that homes cost as much

37:26 as 46 times what the average worker makes in a year.

37:30 Will these markets last?

37:32 Well, nobody's got rich by betting against them yet.

37:35 So, I guess time will tell.

37:37 This comparison also leads us along nicely to the next

37:40 reason that housing in China is so expensive.

37:42 And that's because people don't really have anywhere else to invest.

37:46 We covered this issue in detail in our video

37:48 on the Chinese stock market versus the American stock market.

37:51 So, I don't want to repeat too much here,

37:54 but the basic rundown is that average Chinese people just don't

37:57 invest into Chinese companies because they

38:00 have historically not been great investments,

38:02 especially when compared to the overall growth of the economy.

38:06 There have also been major issues

38:08 with things like peer-to-peer lending schemes in China,

38:10 which were very popular until the government cracked down on the practice

38:14 altogether because it was becoming rife with fraud and also,

38:17 let's be honest, taking some power away from the stateowned banks.

38:20 Basically, if you want to put your money to work in China,

38:23 it needs to be in real estate.

38:26 For what it's worth,

38:27 the government has actually tried to control this rampant speculation,

38:30 but so far it hasn't been particularly effective.

38:33 Now, these other two reasons potentially pale in comparison to the third

38:38 driver of the insane house prices we see in China,

38:40 which is the societal pressure to own a home.

38:44 You might think this is nothing unique.

38:46 In the US, everyone from prominent financial advisers to your know-it-all

38:49 in-laws will talk endlessly about the need to buy a house,

38:52 but China takes this social pressure and turns it up to 11.

38:56 Given the one child policy causing an imbalance of men and women in the nation,

39:00 a lot of Chinese gentlemen have found it

39:02 almost impossible to get married without owning a home.

39:06 Beyond that, there are very real structural advantages to owning a home.

39:10 The Chinese population is heavily restricted

39:12 by what is known as the hookco system,

39:15 which basically tracks household registration.

39:17 This system tracks where people's primary residence is,

39:20 and from that decides where they will have access

39:22 to public services like healthare and education for their children.

39:25 The internal migrant population within China is huge.

39:29 A lot of rural residents leave their small villages to move

39:32 to city centers where they can attract significantly higher wages.

39:36 The problem is that these migrant workers will still technically be

39:39 residents of their small village which will mean that they won't have

39:42 access to even the most basic public services in their cities

39:45 that they are living and working in because of this hookco system.

39:49 This is also one of the main reasons that we see Chinese children

39:53 left at home with grandparents while their parents are off working in the city.

39:57 It's not that the parents don't want to take them along.

39:59 It's that they won't be able to go

40:01 to school there because they are not counted as residents.

40:04 This would be like not being able to send your kid to a public

40:07 school in San Francisco because you were

40:09 unlucky enough to be born in North Dakota.

40:11 Now, the solution to this problem on an individual level is to buy a house.

40:15 Sure, it may be extremely expensive, but if you share a room with 10 colleagues

40:20 and save everything you earn while getting a loan from friends,

40:22 family, and a bank, maybe you'll be able to afford

40:25 a small one-bedroom apartment on the outskirts of one of these cities.

40:28 It may not be ideal,

40:30 but once you have the deed to that household you are in, and you're

40:34 no longer a second rate citizen in the city that you call home,

40:37 this is not a fringe issue either.

40:39 In cities like Beijing, as much as onethird of the population

40:42 is made up of these designated rural workers.

40:45 Now, this issue is not great at the best of times.

40:48 But what happens when all of these hopeful workers are suddenly

40:51 forced into lockdown without anything in the way of government assistance?

40:55 Yeah, it gets messy real fast and just how messy we will soon see.

41:00 But before that, this all begs the question,

41:02 why don't they just abolish the system?

41:05 The Chinese government is obviously trying to cool down this real estate bubble.

41:09 They have introduced laws such as high

41:11 deposit requirements for second and third properties.

41:13 They have recently proposed a nationwide property

41:16 tax and in many instances they have put

41:18 a hard cap on how many pieces of real estate people can own as we saw earlier.

41:23 The problem is none of these efforts have really worked.

41:26 In fact, in the case of provinces that have limited home ownership,

41:29 it's almost had the opposite effect.

41:31 If people can only own three houses, let's say,

41:34 they're going to make sure those houses are very valuable

41:37 because they basically represent their only

41:39 opportunity to consistently invest money.

41:42 This dries up development supply of the types

41:44 of homes that would be affordable because nobody's interested

41:47 in using up one of their three property

41:48 a lotments on a one-bedroom or small studio apartment.

41:52 But there is still an obvious solution.

41:55 Just get rid of this hookco system.

41:57 The problem is that this isn't one universal system.

42:00 It's actually dozens of individual systems specific

42:03 to different provinces and cities around the country.

42:06 Getting rid of this system would require

42:07 the cooperation of all of these individual

42:10 provinces who actually may not be too keen on the idea at all.

42:14 You see, you never actually own land in China.

42:17 You're rented off the government for a set period of time.

42:20 Normally, these land rentals are given to developers who will in turn build big

42:24 apartment buildings on them and sell out

42:26 the individual units for a nice healthy profit.

42:28 Historically, it has actually been provincial governments collecting

42:31 the revenue from the sale of these land parcels.

42:34 Wealthier areas have more expensive and desirable real estate

42:37 and therefore attract higher prices for their land rights.

42:40 Beyond this, building is a huge industry

42:43 that supports millions of workers in China.

42:46 And the area with the most development attracts the most jobs,

42:49 which in turn attracts further development.

42:51 We saw a very similar situation in Spain prior to 2008.

42:56 Go watch our video on that to learn

42:57 more about this quite remarkably similar situation.

43:00 But despite this, the national government has recently announced

43:03 that all this land rights revenue will now be collected centrally.

43:07 This is a huge deal because government revenue from these land

43:11 rights sales makes up a very significant portion of total government revenue.

43:15 Last year alone, these land lease agreements generated 8.41 trillion

43:20 R&B in revenue or the equivalent of about$ 1.3 trillion US.

43:25 This has been seen by many as a first step towards introducing a uniform land

43:29 tax which would simultaneously further increase

43:32 government revenue while at the same time reducing the demand

43:35 for real estate assets which would now represent an ongoing expense.

43:39 However, this may be more difficult than

43:41 one would think at least in the immediate

43:43 future because it very well could be the catalyst for a perfect storm.

43:49 The fallout of the Corona virus has not been easy on China.

43:52 And while their officially reported infection figures are quite low,

43:56 especially for a country of some 1.4 billion people,

43:59 it does not mean that it has sailed through the ordeal unscathed.

44:03 On the surface, it doesn't seem that way.

44:06 Exports are at their highest level in history

44:08 after suffering an understandable dip during early 2020.

44:11 But the thing is these impressive export figures are mainly due

44:15 to the price growth of commodities

44:16 rather than genuine growth in productive potential.

44:20 Port and factory closures across the nation have slowed down the workshop

44:23 of the world and heightened trade

44:25 tensions have certainly not helped the situation.

44:27 Unemployment is high especially amongst young workers even

44:31 by the very creative reporting standards of the government.

44:34 And what work does exist is becoming harder and less rewarding.

44:38 When everything is on the up and up,

44:40 people are happy to work a few extra hours because it

44:42 means they make more money and improve their quality of life.

44:45 But for the first time in a long time,

44:47 young workers are starting to see that this additional effort is

44:50 going more to support an aging and overleveraged society than them.

44:54 A new phenomenon known as lying flat is sweeping the nation.

44:58 It's a form of peaceful protest where mostly young people will refuse

45:02 to work in highintensity roles or perhaps refuse to work at all,

45:05 preferring to just lie flat.

45:07 This might just be another piece of straw on the camel's back,

45:10 but it's one that the government is seemingly quite concerned about.

45:14 China is still heavily reliant on hardworking

45:17 cheap labor to prop up its economy.

45:19 Without it, the domestic market it's worked

45:21 so hard to cultivate or collapse very quickly, and perhaps it already is.

45:25 The decades of debt that has piled up to support

45:27 an endless building spree is starting to come due.

45:30 Household debt has risen from 18% of GDP in 2008 to 61% of GDP in 2020.

45:37 in the same time that GDP has almost tripled.

45:40 Now, debtfueled growth isn't always a bad thing.

45:43 And for what it's worth, this debt to GDP figure is still well below

45:46 places like Switzerland and my own country of Australia.

45:50 But when that debt is primarily used to buy shoddily constructed

45:54 apartments sitting on land rented

45:55 from the government at massively inflated prices,

45:58 well, the kingdom has literally been built upon pillars of sand.

46:02 Debt collectors have seen a massive increase in the past few months and all

46:06 of the factors that we have seen might be starting to sway this tower of cards.

46:10 Historically, this is where the government would step in.

46:13 But this real estate bubble might genuinely be too big to manage.

46:17 Time will tell, of course, and I'm well aware that everyone in their dog

46:20 has predicted the inevitable demise of the Chinese economic miracle.

46:24 Admittedly, in part because they kind of want it to be true.

46:26 an authoritarian government that still purports to be

46:29 communist being the dominant economic superpower in the world.

46:32 I can't say I'm excited about it.

46:34 But regardless of when the economy slows down,

46:37 it's more a question of what happens next.

46:40 In modern advanced democracies, when there is an economic meltdown,

46:44 people lose their jobs, their houses, their cars, and it genuinely is terrible.

46:48 But we tend to turn it around and just vote for the other mob

46:51 of politicians that swears they would have totally

46:53 handled it better if they were in charge.

46:55 If even a slight hiccup in the promise of endless growth occurs in China,

46:59 people will very quickly become aware of all of the other

47:02 issues that they were willing to ignore while the going was good.

47:05 When there is only one mob of politicians

47:07 within the country that you wouldn't dare insult,

47:10 but you still need someone to blame,

47:12 those fingers are probably going to be pointed outwards.

47:16 With debt levels this high,

47:17 it's easy to assume that China's entire economy is on the brink of collapse.

47:20 But is that really the case?

47:22 Some experts argue that China has too many financial safeguards,

47:25 too much global influence,

47:26 and too much control over its economy to suffer a total meltdown.

47:30 China has not been having a good year.

47:33 Between extended lockdowns, real estate market collapses,

47:36 banking crises, trade wars, food insecurity,

47:39 and an unusually high level of civil unrest,

47:41 it's starting to look like the once invincible CCP is forming cracks.

47:46 Look, I know it's fun to speculate the demise

47:48 of a regime that has done some terrible things,

47:50 but now is probably the time to remember that just because

47:53 we want something to be true doesn't mean that it is.

47:57 It's easy to see why news stories, articles,

47:59 and so many YouTube videos speculating about how many

48:02 days left until China collapses is getting so much attention.

48:05 But if you hadn't guessed already, it's probably not going to happen.

48:09 At least not in X number of days.

48:12 We also shouldn't be hoping for it to happen.

48:15 As cathartic as the idea of our biggest global rival imploding might be,

48:19 we also have to realize that this would be good news to nobody.

48:23 And I'm not just talking about the 1.5 billion mostly

48:26 innocent people living their lives and raising their families in China.

48:30 I'm also talking about all of us that depend

48:32 on a delicate global finance and trade system,

48:34 which would not react well to the second largest player falling into disarray.

48:38 To make sense of these frankly very click- bay titles,

48:41 we must as always understand a few important things.

48:45 So, why is everyone suddenly predicting that China is on the brink of collapse?

48:50 What are the chances that these predictions will actually come true?

48:54 And finally, why is this most likely totally overblown?

48:58 Now, before I get into China's apparent collapse, I want to do two things.

49:02 The first is to give the standard big disclaimer

49:04 that internal Chinese economic figures are extremely unreliable and in multiple

49:08 instances have been found to be altered by authorities

49:11 to present the nation's economic situation in a more positive light.

49:15 The other thing I want to mention is

49:16 that while I was researching and writing this video,

49:19 I noticed that another smaller economics YouTuber by the name

49:21 of Money and Macro made a very similar video.

49:24 For the most part, we have explored completely separate

49:27 issues within the bigger theme of this collapse narrative,

49:30 but I want to mention his work anyway because he

49:32 is great at calling out journalists and YouTubers on their nonsense,

49:35 including myself in the past.

49:37 Although, I think I got the last laugh on that inflation situation.

49:40 All right, now that that's out of the way,

49:42 China's economy has not been having a very good time recently

49:46 for a laundry list of reasons that I think are worth addressing individually.

49:50 Most recently, it has had record heat waves and droughts.

49:54 Heat waves in any country are bad news,

49:56 but China is uniquely unprepared to deal with them.

50:00 Most of their industrial capacity comes from city centers,

50:03 which have effectively had to shut down due to extreme

50:06 heat causing conditions that make it difficult to go outside,

50:09 let alone perform physical work in the nation's factories.

50:12 Droughts are also bad news for the economy.

50:14 Now, the situation on the ground is probably not as bad as people are saying.

50:18 Nobody is going to run out of drinking water.

50:20 People don't drink municipal water in China anyway,

50:22 but water supply issues are going to have real impacts in other areas.

50:27 Industry in China is heavily concentrated along its rivers,

50:31 primarily the Yangze,

50:32 which is a waterway that has 175 cities built along its banks.

50:36 If the Yangze River was a sovereign nation,

50:38 it would be the third largest economy in the world

50:41 after the United States and of course, China itself.

50:44 The river is running dry along certain crucial

50:47 sectors which is directly interfering with hydroelectric power stations,

50:50 regular power stations that need the water for cooling,

50:53 internal shipping up and down the waterway,

50:55 waste management as sewage and industrial runoff becomes more concentrated,

50:58 and of course farming.

51:00 China is a very arable country with a lot of productive farmland,

51:04 but it also has a lot of mouths to feed.

51:07 As a country, it still relies on food imports to feed its large population.

51:11 International food markets have seen the price of staples like grains,

51:14 rice, and proteins skyrocket in the wake

51:16 of agricultural slowdowns, general inflation,

51:18 as well as the war taking place between Russia and Ukraine,

51:22 two of the top 10 largest wheat producing nations in the world.

51:25 In a cruel twist of irony,

51:26 China was already struggling with food production this year because of flooding.

51:31 Now, again, I want to emphasize that the population isn't

51:33 likely to starve in China because of these food shortages,

51:36 at least not for the next 27 days or whatever.

51:38 But feeding families is going to become a lot more expensive,

51:41 especially for cultural staples like pork,

51:44 which is actually where a good portion of grain production in China ends up.

51:47 It's important to remember that while Chinese citizens are

51:50 much richer than they were even a decade ago,

51:52 it's still a very poor country by Western standards,

51:55 with the average urban worker earning just $14,000 per

51:58 year and rural farmers earning far less than that.

52:01 If you are the majority of my audience from an advanced

52:04 economy and have been struggling with food prices yourself,

52:06 just imagine how difficult it is

52:08 for a population with significantly less disposable income.

52:11 There is an old saying that a society

52:13 is just three missed meals away from total collapse.

52:16 And perhaps we are starting to see a toned down version of this already.

52:19 Again, nobody is starving, but when people have to start making

52:22 decisions and sacrifices to feed their families,

52:25 unprecedented civil unrest is easy to sympathize with.

52:29 Now, if food and water shortages weren't enough,

52:31 there is also the ongoing issue with housing and jobs.

52:35 I first made a video on China's debt crisis a little over a year ago.

52:39 Since then, things have only become worse.

52:41 There were, of course,

52:42 the issues with Chinese property developers that threatened to leave millions

52:45 of people without their properties that they had already paid for.

52:48 And while the government has thus far managed to contain that issue,

52:51 it's not changing the fact that China's

52:52 biggest industry is built on pillars of sand.

52:56 It's very easy to grow an economy

52:57 through a combination of lowcost manufacturing,

53:00 government stimulus through infrastructure,

53:01 and building houses to supply an ever more speculative market.

53:05 The problem is that while this strategy

53:07 might be extremely effective in the short term,

53:09 it's unsustainable in the long term.

53:12 Trying to grow an economy by exploiting these three factors is like trying

53:15 to become an athlete by giving yourself an IV drip of 5hour energy.

53:19 You might very well break the 100 meter dash world record,

53:22 but your heart is probably going to explode before you finish a marathon.

53:26 Very simply, lowcost manufacturing in China has made the country lots of money.

53:30 The Chinese population is still not rich by Western standards,

53:33 but their incomes are many multiples of what they were even a decade ago.

53:38 This means that their cost competitiveness is not as strong as it once was,

53:41 and manufacturers are now looking to other options like Vietnam,

53:44 India, Indonesia, and even America.

53:47 Obviously, American factory workers demand much

53:49 higher wages than Chinese factory workers,

53:52 but shipping has been extremely expensive recently.

53:55 In July of 2021, it costs around $2,500 to send

53:59 a 40ft shipping container from Shanghai to Los Angeles.

54:02 In July of this year, that price was $20,000.

54:05 The average factory worker is going to produce more

54:08 than two shipping containers worth of product every year,

54:10 which means that even if American companies have

54:12 to pay their workers $35,000 a year more, they would still come out ahead.

54:17 They would be saving money while also having the benefit of shorter and less

54:20 complicated supply lines and been able to say

54:22 that their product is made in America.

54:24 In the past, the middle income trap, as this phenomenon is known,

54:27 has been dismissed in China's case because low labor costs were

54:30 just a small part of what made Chinese manufacturing so competitive.

54:34 The country had also benefited from lacked laws around environmental impacts,

54:37 cheap shipping through massive economies of scale,

54:40 a relatively skilled workforce,

54:42 low standards for working conditions, and technical lomeration.

54:45 Technical lomeration is the benefit that businesses get

54:48 from being close to other businesses in the same industry.

54:51 If suppliers, workers, consultants, customers,

54:53 and even competitors are very close together,

54:56 then it encourages the sharing of components,

54:58 skills, ideas, feedback, and competition, respectively.

55:01 Cities like Shanghai, Shenzhen, Shongqing,

55:04 and Guanghou all benefit greatly from being bustling hubs of business activity.

55:09 Or at least they did.

55:10 But the trade wars, external lockdowns,

55:12 and heat waves we explored earlier are all

55:14 putting a massive damper on this business activity,

55:16 which has the potential to snowball rapidly because

55:18 the benefits of elomeration require a critical mass of activity.

55:22 As soon as some business dries up, the rest quickly follow.

55:25 But maybe I've made the same mistake that a lot

55:27 of economists do when they are assessing China's economy,

55:30 which is to assume that they are still

55:31 an economy directly dependent on meantalous trade performance.

55:35 While exports are obviously still a very large part of China's economy,

55:39 it also has a domestic market which like

55:42 most economies accounts for a majority of its output.

55:45 The problem it's facing here though is that a large portion

55:48 of that output has come in the form of housing and infrastructure.

55:52 Infrastructure spending is a great way to stimulate an economy.

55:55 To build roads, railways, bridges, and all of the stuff that China's been

55:59 building on mass in the past three decades,

56:00 you need to employ a lot of people and spend a lot of money.

56:04 This gives money directly to workers and businesses in the same

56:07 way as direct stimulus like tax breaks or stimulus checks.

56:10 But it also has the added benefit of creating something that will

56:13 continue to add value to the economy for years and decades to come.

56:17 Sounds great, but if you have already watched

56:19 my video on China's $850 billion trains to nowhere,

56:23 you'll know that you can't do this endlessly.

56:25 Effective stimulus has to be performed to counter

56:27 the cyclical boom and bust nature of economies.

56:30 Governments should apply stimulus when an economy

56:32 is facing a downturn and they should

56:34 ease up or even reverse stimulus efforts when an economy is going very well.

56:38 China has basically been putting

56:40 the infrastructure stimulus accelerator to the floor

56:42 for the past two decades and has been pushing harder still since the GFC.

56:46 This has meant that they have been able to build

56:48 a lot of impressive things and make a lot of impressive headlines,

56:52 but they've been doing it all while spending a lot

56:54 of money during a time when they really didn't need to be.

56:57 They have also now run out of things to build.

56:59 Almost every possible piece of infrastructure that made

57:02 sense to build in China has already been built.

57:05 That means that now the government has been forced to rip up and redo

57:08 perfectly good projects or build stuff in areas that don't really need it.

57:11 You have all probably heard about China's ghost cities,

57:14 developments with thousands of apartments, but nobody living in them.

57:17 Well, all of those ghost cities have ghost road networks,

57:20 ghost utilities, and ghost public services, too.

57:22 Worse than simply providing no benefit,

57:25 this infrastructure is an ongoing liability because it needs to be

57:28 maintained and in many cases it was funded through municipal borrowing.

57:32 A big motivating factor of China's Belt and Road initiative is that it

57:35 could continue its infrastructure spending in areas

57:38 that would actually genuinely benefit from it.

57:40 China invested heavily into developing nations

57:43 in Southeast Asia and Africa by giving

57:45 big loans from stateowned banks to smaller

57:47 governments to fund the construction of ports,

57:48 railroads, and other trading focused capital.

57:51 Of the 54 countries in Africa, 49 have infrastructure loans from China.

57:56 The loans were generally given on the condition

57:58 that construction would be done largely or exclusively by Chinese

58:02 companies using Chinese workers so that the Chinese economy

58:05 would still benefit from the stimulating effects of government expenditure.

58:08 Of course, if China builds a port in Africa, it does not benefit from the added

58:12 efficiency that that port provides to the economy,

58:14 apart from opening up a new trading partner, which isn't insignificant,

58:18 but it is still not as good as building a muchneeded port

58:20 in their own country if their country had a need for any ports.

58:24 By investing in infrastructure in foreign countries, though,

58:27 the Chinese government substitutes domestic market efficiency for a stream

58:30 of income in the form of loan repayments.

58:33 This means that it gets to put money into the pockets

58:35 of its workers while getting itself a new trading partner and spreading

58:38 its economic influence all without actually needing to spend any money

58:42 in the long term because it will all be repaid to them.

58:45 Except that it hasn't been.

58:48 China has had to forgive a huge amount

58:50 of these loans because the governments that they

58:52 loan the money to were unwilling or in most cases unable to pay them back.

58:56 This can be for a number of reasons.

58:58 At the end of the day, most African economies are very small and unstable.

59:01 But in a lot of cases,

59:02 these defaults are coming as the result of the infrastructure

59:05 spending not providing the benefits it was promised to.

59:08 Either because it was poorly planned, poorly constructed or never finished.

59:12 In fairness, China has been generous with these loan forgiveness initiatives.

59:15 But that has normally come on the proviso that the indebted nations

59:19 fall in line with support for China

59:21 on its more controversial international ambitions.

59:24 Now, unpaid loans lead us nicely onto housing.

59:28 China is heavily overexposed to real estate.

59:30 In the US, housing contributes about 15 to 18% to the country's total output.

59:35 That's everything from new home construction to renovations,

59:38 landscaping, and even real estate agent commissions on sales.

59:41 At even a 15% rate, America is

59:44 arguably already overexposed to this highly speculative industry.

59:48 But in China, that number is 30%.

59:51 30% of China's output and an equally large portion of its

59:54 growth over the past decades have been fueled by housing.

59:58 That's because like infrastructure,

59:59 housing is a really easy way to boost employment and household spending.

1:00:03 Construction always requires a large amount of labor and people treat spending

1:00:07 on new homes very differently than

1:00:09 they would spending on regular consumer items.

1:00:11 Households in China have been willing to take

1:00:13 on astronomical amounts of debt to buy

1:00:16 apartments in poorly constructed buildings on top

1:00:18 of land that belongs to the government.

1:00:20 So far, this system has been a win-winwin for all of the participants involved.

1:00:24 Investors have seen the price of their homes

1:00:26 skyrocket off the back of endless debt fueled speculation.

1:00:29 Banks have been able to write huge loans

1:00:30 to an industry that most believe the government wouldn't let fail.

1:00:33 Provincial governments made lots of money

1:00:35 by selling land use rights to developers.

1:00:37 The developers made lots of money by building

1:00:39 cheap houses that they could sell for astronomical prices.

1:00:42 And the national government was happy because this merry-goround

1:00:44 of greed was great for employment and growth figures.

1:00:47 But like all feedback loops, this was bound to end in disaster.

1:00:51 And it has been.

1:00:52 We have already made multiple other videos covering housing, debt,

1:00:56 and government taxation in China before,

1:00:58 so I don't want to repeat too much here,

1:01:00 but I do want to highlight that the collapse

1:01:02 of this market is creating a panic that banks

1:01:04 will not be able to honor withdrawals since they

1:01:06 too are so heavily invested into the real estate market.

1:01:10 Chinese citizens are now facing what was once unthinkable,

1:01:13 which is that their homes,

1:01:14 which represent their investments, savings, retirement plannings,

1:01:17 and their housing allinone are now borderline unsellable.

1:01:21 and that's if they're lucky enough to actually have a house.

1:01:24 Developers are unable to finish projects that people have already paid for more

1:01:27 often than not with a combination of their own savings and a mortgage.

1:01:31 Those people who are unlikely to get

1:01:32 their houses are now refusing to pay their mortgages,

1:01:35 which means banks are running out of cash even faster than they were before.

1:01:38 In anticipation of cash shortages,

1:01:40 people are going to withdraw their savings from at risk institutions,

1:01:43 which is only further accelerating the problem.

1:01:46 This is a classic run on the banks

1:01:47 and most economists see this as basically financial Armageddon.

1:01:51 So there we are.

1:01:52 A housing market collapse at least twice

1:01:54 as potent as the GFC municipal bankruptcies, foreign investment breakdowns,

1:01:58 failing infrastructure, trade wars, droughts,

1:02:00 flooding, heat waves, extended lockdowns,

1:02:01 food shortages, civil unrest, industrial slowdowns, and bank runs.

1:02:05 That's the brief list of things going wrong in China right now.

1:02:08 This is to say nothing of an aging population,

1:02:10 a long-term loss of industrial competitive advantage,

1:02:12 and the gradual decline towards a less businessfriendly,

1:02:15 more authoritarian government.

1:02:17 We can ignore those factors for now because again,

1:02:20 we are just trying to work out if China is

1:02:21 going to collapse in the next 27 days or whatever.

1:02:24 But with all of this going on at the same time,

1:02:26 maybe it's more efficient to ask why China won't collapse.

1:02:31 Now, to explain this, we first have to define what a collapse is.

1:02:34 If we are defining a collapse as the total breakdown of civil order,

1:02:37 people marching in the streets,

1:02:39 governments being deposed, something like the Arab Spring,

1:02:41 in many ways, there are some similarities.

1:02:44 Those uprisings were kicked off by stagnating economic growth in Tunisia,

1:02:47 and they were directed at authoritarian

1:02:49 governments that were impeding on people's liberties.

1:02:51 So, it could very well collapse in the same

1:02:54 way that America could have collapsed during the GFC,

1:02:56 or in the same way that anything could theoretically happen at any time.

1:03:00 If government leadership gets backed into a corner

1:03:01 and tries to do something like invade Taiwan,

1:03:04 then yes, it's going to collapse and it

1:03:06 will very quickly turn into a failed state.

1:03:08 It's just extremely unlikely.

1:03:11 We as economists also don't know what we don't know.

1:03:14 There could be anything from further natural disasters to government infighting

1:03:17 to an alien invasion that could cause the state to collapse.

1:03:20 But that's not a situation unique to China.

1:03:22 It's just that China is in a slightly more precarious situation at the moment.

1:03:27 If I had to present a scenario probability report,

1:03:30 this would be a 1% chance where a regular economy

1:03:32 might be half% chance and something like Russia would be 25%.

1:03:37 Another potential collapse situation wouldn't so

1:03:39 much be a collapse in the traditional

1:03:41 sense as a regression towards becoming a closed off centrally planned economy.

1:03:45 Again, we can in many ways already see this playing out.

1:03:48 The country is becoming much more strict about who leaves and who enters.

1:03:52 It has undeniably taken on a more nationalistic persona and it's aligning itself

1:03:56 with countries who are themselves getting cut off from the rest of the world.

1:04:00 Now, I would argue that if this does happen, it will continue to be a very slow,

1:04:04 very gradual decline rather than a collapse in the sense that China

1:04:08 wakes up one day and realizes that it's North Korea 2.0.

1:04:11 It would also be much harder to pull off.

1:04:14 One of the reasons having a wealthy population is so

1:04:16 fantastic is that they have the capacity to be politically active.

1:04:20 China's population, while still not wealthy by Western standards,

1:04:23 is not living meal to meal like it was back

1:04:25 when the country was closed off from the outside world.

1:04:27 It's much harder to subjugate a population that has tasted wealth and freedom.

1:04:31 Not impossible, but much harder.

1:04:34 All right, now I've covered myself from the this didn't age well comments.

1:04:37 In the event that this whole situation actually does go south,

1:04:39 it's probably better to look at some

1:04:41 more realistic reasons why it probably won't.

1:04:44 The first is that China can afford some economic setbacks.

1:04:47 It has been home to the most intense period of economic growth in history.

1:04:51 It has gone from a mostly agrarian backwater to the second

1:04:54 largest economy in the world in the span of someone's working career.

1:04:58 Lots of other countries have economic setbacks and it's not too often

1:05:01 that we see these devolve into outright revolution or anything of that nature.

1:05:05 What's more is that a bit of an economic

1:05:07 slowdown might be exactly what the country needs.

1:05:10 Modern economies run on the business cycle.

1:05:12 This is a rough pattern of booms and busts with a frequency of around a decade.

1:05:17 This pattern is mostly caused by debt.

1:05:20 When on average people are taking on debt, the economy does really well.

1:05:23 And then when on average people are paying off or defaulting on their debt,

1:05:26 the economy slows down a bit.

1:05:28 Now, while those slowdowns might be painful, if well managed,

1:05:31 they play a really important role in the long-term health of an economy.

1:05:35 Downturns weeded out underperforming businesses, products,

1:05:38 and employees as everybody is forced to cut down to the essentials,

1:05:42 which means that only the most competitive,

1:05:44 value adding, and efficient entities survive.

1:05:46 I understand on a human level that sounds terrible,

1:05:49 but long-term it means that the economy can bounce back stronger,

1:05:52 which is a big part of the reason why on average

1:05:55 this cycle of booms and busts tends to trend upwards over time.

1:05:59 A pullback in the Chinese economy, again, if managed properly,

1:06:02 could be a huge opportunity for the economy

1:06:04 to shift away from its overdependence

1:06:06 on real estate and infrastructure and focus

1:06:08 more on value adding industries like high-tech manufacturing,

1:06:11 research and development, tourism, and finance.

1:06:14 The Chinese economy is also a lot more

1:06:16 robust than most economists are giving it credit for.

1:06:19 This might be confusing, especially since I said a lot of the biggest

1:06:21 industries are built on very shaky foundations,

1:06:24 but these two factors are not mutually exclusive.

1:06:27 Its real estate and infrastructure

1:06:28 industries are crumbling literally and figuratively.

1:06:32 But the Chinese government is more than capable of controlling

1:06:35 the damage from these issues in the short term.

1:06:38 China has the most foreign currency reserves of any

1:06:41 nation in the world by a huge margin.

1:06:44 This means that in a worst case scenario,

1:06:46 it could completely hold off bank runs just by printing

1:06:48 more money and dispersing it through a series of stateowned banks.

1:06:51 Normally, this would cause inflation, but China can afford that right now.

1:06:55 One positive side effect of all of this consumer hesitancy is that China is not

1:06:59 having the same problem with inflation that a lot

1:07:01 of other countries in the west are.

1:07:03 The Chinese central bank has actually bucked the global

1:07:05 trend and is lowering interest rates at the moment

1:07:07 in the hopes of offsetting some of the pain

1:07:09 caused by the collapse of the housing market.

1:07:11 It can further prevent this having any knock

1:07:13 on effects by using its foreign currency reserves

1:07:15 to protect the value of its currency so

1:07:17 that it doesn't end up like Turkey or Venezuela.

1:07:20 It turns out having a $3.4 4 trillion pile of money

1:07:23 is also very effective in shoring up food security as well.

1:07:26 China already imports more food than it exports and if it needs to spend

1:07:29 a little bit of extra money on making sure that its citizens are fed,

1:07:32 it's going to be more than happy to do so knowing the alternative.

1:07:36 There are also the non-economic factors.

1:07:38 Of course, this is outside of my specific area of expertise,

1:07:41 but the Chinese population does not have the same

1:07:43 opportunity for regime changing levels of civil unrest.

1:07:46 The government is authoritarian and they monitor everybody very closely.

1:07:51 People will no doubt voice their frustrations

1:07:53 especially if they are in a situation

1:07:54 where they are not going to get a house that they have paid for.

1:07:57 But these protests are not directed at the government or the country.

1:08:01 If anything, they are a very public way for these people to ask

1:08:03 their government to bail them out

1:08:04 of a situation that they have found themselves in.

1:08:07 Chances are the government probably will bail them out too.

1:08:10 People are happy to give up a lot

1:08:11 of liberties if it means they are getting rich.

1:08:14 But in many cases, entire families have pulled their life savings

1:08:17 of multiple generations to afford modest homes that won't be delivered.

1:08:21 The government is likely to do what it does best and invest

1:08:24 into building projects to soften the blow of this economic downturn.

1:08:27 Only now, instead of building roads to nowhere,

1:08:29 it has the opportunity to build something that really is in demand,

1:08:32 and that is the housing that people have already paid for.

1:08:34 It's another win-win.

1:08:35 It will provide economic stimulus at a time when the country actually needs it.

1:08:39 And it will avoid a situation where tens

1:08:41 of millions of people have nothing to lose.

1:08:43 The kinds of situations that tend to get a bit revolutionary.

1:08:46 Okay.

1:08:47 Well, even if all of these issues won't

1:08:50 cause a total collapse of the Chinese economy,

1:08:52 surely they at least spell the end of the Chinese miracle.

1:08:56 Most reasonable economists are predicting that these issues are going

1:08:59 to cause the end of strong sustained growth in China.

1:09:02 Most of them point to the experiences of Japan,

1:09:04 which was another country that grew rapidly

1:09:06 thanks to mass manufacturing and strong exports.

1:09:09 Their competitive advantage eventually faded

1:09:10 away as their population became wealthier,

1:09:12 and they started to lose a lot of their manufacturing to places like China.

1:09:16 They also had an overinflated housing market that dragged

1:09:19 the economy down and caused a prolonged period of economic stagnation.

1:09:23 Japan also suffers from an aging population.

1:09:25 Sure, China's was caused by direct

1:09:28 government intervention and Japan's was more socio-economic,

1:09:30 but the result is going to be the same.

1:09:32 Too many old, unproductive people to look after and not enough young,

1:09:36 productive people to take their place.

1:09:38 The parallels between Japan and China are truly remarkable.

1:09:41 And I can see why economists are saying

1:09:43 that this is the direction the country is headed towards,

1:09:46 but they are probably not correct,

1:09:48 at least in the way that you would think they are.

1:09:50 China and Japan had very similar growth trajectories.

1:09:53 They faced very similar challenges.

1:09:55 They even worked in very similar industries.

1:09:58 But China is not Japan.

1:10:00 For starters, China is still much poorer than Japan

1:10:03 was in the early 1990s when its stagnation began.

1:10:06 Yes, there is some fabulous wealth in concentrated city centers,

1:10:10 but this is not the experience of most Chinese citizens.

1:10:13 In 1995, Japan had a GDP per capita of $45,000.

1:10:18 Today, almost 30 years later, China has a GDP per capita of $105,000.

1:10:24 Yes, Japan's economy has stagnated with no real sustained

1:10:28 GDP growth been experienced over the past 30 years.

1:10:31 And yes, it's dealt with stagnation pretty well.

1:10:34 It's still a very stable, safe,

1:10:35 and productive economy that provides a good standard of living to its citizens.

1:10:39 If China's economy was to stagnate now,

1:10:41 it wouldn't be any of those things because most

1:10:44 people would still be very poor by global standards.

1:10:47 China is also a much more corrupt

1:10:49 and less representative country than Japan was.

1:10:52 Since the end of the Second World War, Japan has been a functioning democracy.

1:10:56 And while they have been overwhelmingly represented

1:10:58 by a single party through the years,

1:11:00 the people have the choice and the power to vote that party out if they see fit.

1:11:05 That is a luxury that Chinese citizens do not have,

1:11:07 which means that if the sentiment of the people

1:11:09 shifts in a direction of wanting change,

1:11:11 they do not have an easy and frankly nonviolent way to pursue that change.

1:11:15 There is a very good chance that if China was

1:11:18 a regular democracy that the Communist Party would be continually reelected.

1:11:22 Say what you will about a lot

1:11:23 of their actions on the world stage and authoritarian antics,

1:11:26 but for the majority of their people,

1:11:27 the last 30 years under their rule have been very rewarding.

1:11:31 People are willing to put up with a lot

1:11:32 if they can see their living conditions improving.

1:11:35 But historically, economic conditions have been one of the primary

1:11:38 deciding factors of if governments get reelected or not.

1:11:41 And if the people can't vote their government out,

1:11:43 tensions are bound to start building up.

1:11:45 The amount of power and lack of oversight the government has

1:11:48 also means that corruption is just a way of life in China.

1:11:51 Now, in a weird way, some of this corruption has actually

1:11:54 helped the economy grow because businesses can

1:11:56 cut through a lot of red tape with a small bribe or two.

1:11:59 Poly matter did a great video on this topic,

1:12:01 so go and watch that if you want more details there.

1:12:03 Corruption may very well have helped the economy grow,

1:12:06 but if the economy is not growing, corruption will eat it alive.

1:12:10 Paying a bribe or two to a government official to look the other

1:12:12 way on zoning laws or factory

1:12:14 pollution standards will have negative consequences,

1:12:17 but not the type that gets paid for with money.

1:12:19 If foreign investment stops, industry slows down, and new projects get halted,

1:12:23 then corrupt officials won't have the same

1:12:25 opportunities to make money through simply opening doors.

1:12:28 So, they'll be forced to take money by stealing it from the people.

1:12:31 Now, you know the line, nobody can predict the future, least of all economists.

1:12:36 But if I was a betting man, which I'm not,

1:12:38 my predictions would be that China doesn't end up looking like Japan,

1:12:41 but ends up looking more like other

1:12:42 countries that have become very wealthy very quickly,

1:12:45 but that wealth didn't translate into a sustainable economic model.

1:12:49 Not a collapse, but more of a slow, stable decline.

1:12:52 If you want the real reason that you've been

1:12:54 seeing headlines about China being on the brink of collapse,

1:12:57 then prepare to be disappointed.

1:12:59 The reality is that someone out there made a video with a thumbnail

1:13:02 that said something to the effect of 34 days until China collapses.

1:13:06 It's complete nonsense, but it got millions of views.

1:13:09 Other creators saw the success of this video and use the same clickbait

1:13:12 titles to bring in as many viewers as possible on their own videos.

1:13:16 Some of these videos were themselves nonsense,

1:13:19 and some were genuinely great commentary on the issues.

1:13:22 No hate.

1:13:23 I understand the game better than most people.

1:13:25 If you put a lot of effort into making a video,

1:13:27 you want to make sure that people watch it.

1:13:29 Let's let this be the takeaway.

1:13:31 China is in a difficult economic situation at the moment, no doubt.

1:13:35 But an outright collapse in the second

1:13:37 largest economy in the world with high levels

1:13:39 of control over a quasi reserve currency and very

1:13:42 little patience for public descent is very unlikely.

1:13:45 It's important not to let the understandable animosity we might feel

1:13:48 towards the CCP affect the way that we interpret news about them.

1:13:52 If any of you have read these headlines

1:13:54 or watched these videos and sensed a feeling of joy

1:13:56 or superiority over the fact that the bad guys

1:13:58 are finally getting what's coming to them, then no shame.

1:14:01 I'll be honest, I enjoy a bit of Sheldon Freud as well.

1:14:04 But please consider two things.

1:14:06 Were you more likely to accept the fact that these headlines

1:14:08 were true because you wanted them to be true?

1:14:11 And if so, I encourage you to go back and read

1:14:13 them as if they were talking about your own country.

1:14:15 I think that a lot of you would be

1:14:16 less likely to take the predictions at face value.

1:14:19 Also, this is perhaps the most important part of the video,

1:14:22 which is that you don't want China to collapse.

1:14:26 Never mind the mostly innocent citizens of the country

1:14:28 that are just trying to make a better life for themselves.

1:14:30 Even if we think about this from a purely selfish point of view,

1:14:33 the second largest economy in the world,

1:14:35 collapsing would do a lot of collateral damage.

1:14:38 China is a large buy of material exports from countries like Australia,

1:14:42 Japan, the EU, and the US.

1:14:44 Losing that export market would cause steep downturns in any of these economies.

1:14:49 China also produces a lot of the products that we use

1:14:52 in our daily lives at a price point that we have become accustomed to.

1:14:55 If you want to turn the inflation that we have

1:14:57 been experiencing at the moment from a problem to a crisis,

1:15:00 then cut off Chinese exports without time to arrange an alternative supplier.

1:15:04 Finally, a collapse is not going to solve any of China's problems.

1:15:07 Even if the government ceased to exist in a somehow totally peaceful way,

1:15:11 there would be a massive power vacuum that was

1:15:13 likely only to be filled by another authoritarian regime.

1:15:17 Anybody who has watched my channel for long enough will

1:15:19 know that I am not a fan of the Chinese government.

1:15:22 But a collapse is not the mechanism to bring about productive change.

1:15:26 Instead, what we should all be hoping

1:15:27 for is a slow gradual shift towards a system

1:15:30 that is more open to the international

1:15:31 community and less suspicious of its own citizens.

1:15:34 So, after looking at China's economic slowdown,

1:15:36 unreliable data, growing debt crisis,

1:15:38 and shifting role in the global economy, one thing is clear.

1:15:40 China's economic rise isn't as unstoppable as many once believed.

1:15:44 But whether it stabilizes, stagnates, or eventually surpasses the US,

1:15:48 its future will shape the global economy for decades to come.