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

0:03 superpower.

0:04 Its rapid economic rise, massive infrastructure projects and expanding global

0:08 influence made it seem unstoppable.

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

0:13 Instead China's economy is slowing,

0:14 debt is piling up and cracks are forming in its once

0:17 unshakable financial system.

0:17 As the USA is mixing up the global order, many are looking

0:21 to China to finally pull ahead like it has been expected to for a while now.

0:24 Maybe this still could be the Chinese century,

0:26 it's just starting a quarter of the way through.

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

0:32 that it just has 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

0:39 address those issues one by one,

0:40 looking at how its reported numbers might not tell the whole

0:43 truth why debt has become its biggest threat and

0:45 whether China is truly on the verge of collapse

0:48 or just facing temporary setbacks.

0:49 This is China's economic reality, growth, debt and an uncertain future.

0:54 Economists should have known better.

0:56 In 1980, under the direction of this man,

0:59 Deng Xiaoping, the new paramount leader of the People's Republic of China,

1:02 a small town across

1:03 the border from Hong Kong was given special

1:05 economic privileges to trade and do business

1:07 with the outside capitalist world.

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

1:13 tiny by Chinese standards,

1:14 because the country had just become the first nation in history

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

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

1:22 has turned into one of the largest and

1:25 most economically influential cities in the world.

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

1:30 a global centre of commerce

1:31 that has stood for hundreds of years and is now

1:33 the eighth largest city in the world by total

1:35 population.

1:36 A huge change from an average sized town just four short decades ago.

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

1:42 The country is home to hundreds of cities that are

1:45 each economic powerhouses in their own right,

1:46 and the reforms that started with a few select

1:49 regions have been almost universally adopted nationwide.

1:51 In that time, the economic development

1:53 of China has done some major good for the country and the world.

1:56 It has pulled hundreds of millions

1:58 of people out of poverty,

1:59 and made a lot of everyday consumer goods that we take for granted

2:01 far cheaper than they would be if they were produced locally.

2:04 But of course, it hasn't

2:05 been without its problems, domestically and internationally.

2:08 Perhaps the biggest of those

2:10 problems within the country has simply been

2:12 the expectation that this economic growth would

2:13 continue forever.

2:14 The country has been home to the most intense economic growth in history,

2:18 and a lot of social,

2:20 political and economic systems have become reliant on that growth

2:22 continuing forever.

2:23 Unfortunately for the country, that has led to a lot of systems that,

2:26 in retrospect,

2:27 favour short-term boosts to the economy at the expense of long-term

2:30 economic stability.

2:30 And now, 40 years later, the long-term may have arrived in some of the

2:35 most unexpected ways imaginable.

2:36 So, why are growth rates that would be remarkable in any

2:40 regular economy such a problem in China?

2:43 Similarly, why are things getting cheaper

2:45 causing so many economists to become

2:47 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

2:57 times that economists and commentators have predicted

2:59 the inevitable demise of the world's

3:01 second largest economy?

3:02 Now, before we get too far into assessing China's current economic

3:05 problems, we need to give the big disclaimer

3:08 that the country obviously causes some international

3:10 tensions from proposed hostilities with one of

3:12 the most technologically significant countries in

3:14 the world to human rights issues and simply being

3:16 a dramatic shake-up to the global status quo

3:18 for the last century,

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

3:22 For these reasons, and others,

3:24 it's perhaps understandable that people are eager

3:26 to hear news about some kind of

3:27 impending collapse in a country that is now

3:30 the second most dominant economy in the world.

3:32 But,

3:32 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

3:37 had to make an entire video discussing why China

3:39 wasn't going to collapse yet.

3:41 But, since then, a few things have changed.

3:45 The country has more or less completely reopened

3:46 up to the longest and most severe

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

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

3:54 theory maintained by extreme measures that controlled when people

3:56 could leave their homes, go to work, go shopping,

3:58 travel, start a business, or really do much of

4:00 anything that generates economic activity.

4:02 After these restrictions were lifted about a year ago,

4:05 the hope was that economic activity would bounce back as people went out to do

4:08 everything they weren't able to do while they were

4:10 stuck inside for the better part of three years.

4:13 This did happen,

4:14 but it was not as intense as economists and the government predicted.

4:17 The country went from posting close to double

4:19 digit annual growth rates from before the pandemic

4:21 to around 5% today.

4:22 Simply put, that means that year over year the Chinese economy is producing

4:27 5% more 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

4:33 pointed to this as a sign that the end is

4:35 nigh for China, but they mostly fail to explain why.

4:38 Now 5% is low by Chinese standards and it's

4:42 following a trend of downwards growth statistics that have

4:43 existed for just over a decade in the

4:45 country, but that growth rate would be remarkable in most countries,

4:49 let alone the second largest

4:50 economy in the world.

4:51 Advanced Western economies strive for a growth rate of around 2-3% 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

5:04 in China?

5:05 Well it all has to do with expectations.

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

5:10 plan their long term budget around getting 10%

5:12 annual pay increases every year and they might

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

5:17 maybe had an extra kid assuming

5:18 that their income would grow enough to

5:20 cover those expenses and generally adjusted their

5:21 spending,

5:22 saving 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,

5:29 but it should start to highlight

5:32 GDP is a time to measurement,

5:34 it effectively resets every year, just like how much money a

5:37 person has earned in a year also by definition resets every year,

5:41 but they do both contribute

5:42 directly to national or individual wealth

5:44 and debt levels respectively over time.

5:47 A higher GDP or a higher income will all other things be

5:50 equal mean that a country or an individual can pay off

5:52 debt and build up assets faster,

5:54 and that's why things like debt to GDP is spoken about in economics

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

6:00 This becomes especially important when it's

6:02 considered that growth rates compound.

6:03 The difference between a 5% and a 10% annual growth rate

6:07 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.

6:18 China has built its economy around the assumption

6:20 that growth would remain a lot stronger than

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

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

6:28 levels from individual to local as well as

6:30 companies within the country and perhaps most crucially

6:32 individual households were all predicated on the idea

6:34 that the economy would continue to grow like

6:36 it had been for the decades between 1980 and 2010.

6:39 Commentators have poked a lot of fun at things

6:41 like ghost cities where entire cities were

6:43 developed on the outskirts of existing major

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

6:47 had anybody move into them so they sat mostly

6:50 empty for years.

6:51 Other commentators were quick to defend

6:52 this practice pointing to instances where

6:54 these ghost cities ended up being fully populated.

6:56 The reality as with most things lay somewhere in

6:59 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

7:05 amenities and individuals to invest into apartments

7:07 in a city that nobody lived in yet.

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

7:12 was that eventually these areas would be filled by

7:14 people moving into these new centers and the

7:16 rate in which that was happening meant that it only made sense to plan ahead.

7:19 With that style of

7:20 economic planning any kind of drop in growth even

7:22 if it would still be strong by western standards

7:24 could mean the difference between an entire city

7:27 being filled up or remaining completely empty until

7:29 everybody involved in the project runs out of money.

7:31 This is just the first place where economists

7:33 really should have known better.

7:34 The simple fact that international migration rates from the country

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

7:39 and for the first time in record history outside

7:42 of a war the population of China was

7:44 decreasing 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

7:51 most obvious and problematic sector where this kind

7:53 of expectation of strong future growth has

7:55 encouraged optimistic recklessness at every level of the

7:58 economy but it's not the only place.

8:00 Everything from infrastructure development to trade deals

8:02 all the way up to massive international

8:04 projects like the Belt and Road Initiative were

8:06 made with the expectation that the Chinese economy

8:08 would swiftly grow 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.

8:17 It might though when we consider the one

8:20 thing that is still growing rapidly in China.

8:22 Debt.

8:22 China has always had a reputation for being a

8:25 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.

8:32 China's national debt to GDP ratio is about 77%

8:35 which is up significantly in recent decades but

8:38 is still perfectly healthy.

8:39 The USA by comparison has a debt to GDP ratio of around 122% which is

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

8:47 The thing with China though is

8:48 that that's not the full story and the

8:50 country either intentionally or incidentally has fallen

8:52 into a situation where none of their debt

8:55 metrics look too concerning individually but collectively

8:57 they tell a very grim story.

8:59 National debt only measures debt taken on by the national government.

9:03 On top of that there is also provincial

9:05 debt which is more concerning because provinces within

9:07 China do not have the authority to print money so they can become insolvent.

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

9:14 because all the various regions report their borrowing in

9:16 different ways.

9:17 Some don't report it to anybody but

9:19 the central government and of course potentially

9:21 embarrassing economic statistics in China are frequently misreported anyway.

9:24 A quick but very

9:25 funny side note is that several stories

9:27 of provincial governments painting their grass

9:29 green setting up completely fake pieces of

9:31 infrastructure like drains that lead nowhere

9:33 and sticking rocks on top of a rebar to make

9:35 it look like flowers in a field have been reported

9:37 ahead of visits from central government officials.

9:39 Of course these are individual reports but if

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

9:43 that much damage just to keep face when high

9:45 level government officials come to town it's not

9:47 outside the realm of possibility that they

9:48 would also massage financial figures.

9:50 Anyway the best estimates by Goldman Sachs put total

9:53 provincial debt in China at the equivalent of over 23 trillion US dollars.

9:58 Effectively 150% of the country's total economic output on

10:02 top of the 77% from the national government.

10:04 That provincial borrowing was mainly done to

10:06 fund big infrastructure projects with the anticipation

10:08 that the country's industry would grow into filthum as we discussed earlier.

10:12 Major cities all over the country were becoming very

10:14 wealthy by the incentives of industry and other regions

10:16 did not want to be left behind.

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

10:20 selling state owned land to developers on 70 or 99

10:23 year leases but they can only sell that land if

10:26 people are willing to buy property and people are

10:27 only willing to buy property if the local

10:29 government was investing in big projects.

10:31 Combined provincial and national government debt if the

10:34 estimates are correct would be over 200% of the

10:36 country's GDP 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

10:44 United States that we were using as a point

10:46 of comparison do also have their own debts and

10:48 collectively they add up to 3.3 trillion US dollars

10:51 in total borrowing so still a significant amount

10:53 but a tiny tiny fraction of provincial government borrowing

10:57 in China which is still overall a smaller

10:59 economy in nominal terms but a debt problem

11:03 doesn't stop there unfortunately far from it.

11:05 A lot of borrowing to fund government initiatives in

11:08 China is not done by the government directly

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

11:13 Large state owned companies

11:14 have been the primary driving forces behind major

11:17 projects with less than amazing outcomes both

11:19 within the country and internationally.

11:20 The Belt and Road Initiative in particular which was China's

11:23 grand plan to fund infrastructure development and

11:25 emerging economies to build out trade partnerships

11:27 and spread their influence was mostly funded and

11:29 built out by state owned companies like the

11:31 China Construction Bank,

11:32 China National Petroleum Corporation and the China State Construction

11:36 Engineering Corporation.

11:36 The Belt and Road Initiative has not been a resounding success.

11:40 It's led to a lot of lending that is looking

11:43 unlikely to ever be repaid and is turning China

11:45 into a global debt collector which is running

11:46 contrary to the plan's original goal of getting

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

11:51 Today it has more or less been abandoned as

11:53 no major projects have been pushed anymore.

11:55 At home the story is not much better for a lot of

11:58 Chinese state owned corporations.

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

12:02 that would assist regional governments in building out

12:04 cities and of course that industry has been

12:06 plagued with problems ever since the spectacular collapse

12:08 of Evergrande which itself was not a

12:10 state owned company but did bring a lot

12:12 of other developers that were down with it.

12:14 On top of all

12:15 this companies like the China Railway Corporation

12:17 have also over invested into infrastructure based

12:19 on the expectation of future growth and have taken

12:22 on debt burdens that would only be manageable

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

12:27 China's state owned companies

12:29 have total debts of over $15.6 trillion bringing

12:32 the running total to $52.3 trillion or roughly

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

12:37 This is all before considering perhaps the most important indebted

12:41 group, regular everyday households which have also borrowed

12:44 heavily mostly to invest into real

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

12:50 Again people bought into the dream of cities like Shenzhen going

12:52 from a glorified fishing village to one of the global

12:54 centres of commerce within their lifetime.

12:56 Assuming that economic growth kept going,

12:58 this success story could be replicated in hundreds of

13:01 other cities around the country and in many

13:02 instances it was.

13:03 Family members pooling together their life savings to buy a rundown one bedroom

13:08 apartment in a complex with terrible building

13:10 standards sounds foolish in hindsight but if

13:12 these cities continue to grow like they had been it would be a good investment.

13:15 Including household debt that has mostly been directed towards

13:18 unproductive assets that are losing a lot of

13:19 market value the country now has a debt burden potentially

13:23 as high as 360% of its GDP and if

13:26 that wasn't concerning enough already it's becoming worse due to deflation.

13:30 Now in the past

13:32 three years on this channel we have spoken a

13:34 lot about inflation for obvious reasons so I don't

13:37 want to repeat too much here but simply put

13:39 inflation is the general increase in the price

13:40 level of goods and services in the economy so deflation is the opposite.

13:45 But then the question

13:46 becomes why are goods and services becoming cheaper in

13:48 China causing so many economists to get so

13:51 worried?

13:51 Theoretically cheaper stuff should be a positive

13:54 economic outcome but it does cause some

13:56 problems.

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

14:00 This isn't a problem so much

14:02 by itself just like a faster heart rate isn't a

14:04 problem by itself in the human body but if it's

14:06 unexplained and it goes on for long enough it can

14:09 be a sign of something else going very badly.

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

14:13 as much because then businesses are forced

14:15 to lower their prices to try and encourage consumers

14:17 to make more purchases and to compete with other

14:19 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

14:28 about the future and are trying to save money either a bad in an economy.

14:32 Deflation itself if it goes on for long

14:34 enough can also dramatically slow down growth.

14:36 A small amount of inflation can

14:38 actually be a good thing for an economy so

14:40 long as wages keep up with that inflation.

14:42 A small bump in nominal wages every year can actually encourage

14:44 people to go out and spend or invest their money

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

14:50 Deflation does the opposite.

14:52 If money is buying more every year businesses are going

14:54 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 it's harder

15:03 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

15:10 money to spend and invest will also be less likely

15:12 to do it because if money is buying more every

15:14 year it just makes sense to sit on it

15:17 completely risk-free especially in an environment like China

15:19 at the moment where investments that were

15:21 once considered safest houses are literally been

15:23 demolished because it's no longer worth it to keep them standing.

15:27 In China this is especially bad

15:29 because a lot of their economic growth still depends on low cost manufacturing.

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

15:35 it then it will make their problems even more

15:37 severe as they continue to lose their dominance

15:39 in this industry to other regional rivals.

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

15:43 They would be fine if the country still had

15:45 double digit growth and of course nobody can

15:48 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

15:56 middle income country and a large part of their

15:58 population still lives in relative poverty so there

16:01 was still plenty of headroom for economic

16:02 prosperity.

16:03 Of course looking back there are many reasons

16:05 for this slowing growth but we've already

16:07 made several videos covering those issues and they

16:10 really do deserve a full length explanation.

16:12 China's rise has been incredible but if it's

16:15 destined to become the world's dominant superpower

16:17 why is its economy slowing down?

16:19 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

16:30 world not only because of its sheer size but

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

16:34 the way it conducts business with other

16:36 economies around the world, its immense currency reserves,

16:39 problematic foreign policies and of

16:41 course 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

16:49 world it would still get a lot of attention

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

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

16:57 dozens of items that were made in Chinese factories

16:59 that are materially improving your standard of

17:01 living probably including the device that you're

17:03 watching this video on right now.

17:05 The economic dependency that we may or may not like to admit

17:08 that we have on China is starting to wane but

17:11 it's still there and that's why the validity and

17:14 reliability of their economic data is something that has

17:16 a very real impact on the way that we

17:18 manage our own economies.

17:19 Anytime I've made a video that looks at the economy of China on this

17:23 channel I normally give a brief disclaimer that

17:25 economic figures from Chinese agencies are potentially

17:28 altered by different levels of government to present

17:30 a more positive image of Chinese economic

17:32 prosperity.

17:32 This could include anything from inflating output figures to misrepresenting

17:36 employment data.

17:37 There are very logical reasons that different levels of government within China

17:41 would try to do this whether it be more funding for local projects,

17:44 gaining favour with party

17:46 leaders for delivering good results and on an

17:48 international level presenting a strong face to

17:50 potential allies and adversaries alike.

17:52 Misrepresenting economic figures can do a lot more harm than

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

17:59 It can seriously impact the

18:01 quality of life of, in China's case, billions of people.

18:04 Beyond that I think it's also important

18:06 to recognise that misrepresenting economic statistics is

18:08 not a problem unique to China by

18:10 any means but it is the second largest economy in

18:12 the world and it does have the reputation more

18:15 than any other country for this practice so it makes

18:17 a great case study to learn what to look

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

18:22 So what evidence is there to suggest

18:24 that China is misrepresenting their economic figures?

18:27 What problems do these figures cause in

18:30 the real economy?

18:30 And finally what metrics can we look at to determine the true prosperity of an

18:34 economy if the official figures are unreliable?

18:37 When assessing information every type of scientist

18:40 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

18:49 imagining a dartboard.

18:50 If points of data are accurate and precise they will be grouped around

18:54 the bull's eye very tightly.

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

18:59 tightly grouped but they will be in one corner of

19:01 the board and if the data is accurate but not

19:04 precise they will be grouped around the bull's eye

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

19:09 The relevance of data can be a little bit harder

19:12 to determine but to stretch this example if you

19:15 were actually playing a game of golf the grouping of

19:17 your darts on a dartboard is kind of meaningless.

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

19:22 very easy to confuse accuracy with precision so

19:25 let's use an example that actual economists might work with in the real world.

19:28 Consider the GDP of a country like Australia.

19:31 The World Bank estimates that in 2021 Australia's output was

19:35 $1,542,660 million.

19:36 That figure is precise down to the closest million dollars but its accuracy

19:44 might not be that great because the IMF

19:48 says that Australia's total output was $1,724,787

19:51 million and the United Nations says it was $1,423,473 million.

19:57 These estimates can't all be accurate.

20:00 There is a variance of more than $300 billion

20:04 here which is roughly the economy of Portugal.

20:06 The reason for this is that all

20:08 of these organisations use very different techniques

20:10 to collect and process the data needed to estimate GDP

20:13 figures which goes to show that there is a

20:16 lot of wiggle room to interpret information like

20:18 this even when dealing with a very transparent

20:20 and reliable country like Australia.

20:22 What's more is that these figures actually make another

20:25 mistake that economists should look out for.

20:27 They have oversold their precision.

20:29 There is no way

20:30 that an organisation would be able to measure the

20:32 total output of any national economy down to the

20:34 closest $1 million.

20:35 Yet they have expressed their figures down to this point which could give the

20:39 reader the wrong impression of how precise these figures really are.

20:43 Economists actually make mistakes

20:44 like this all the time and people making

20:46 big decisions based off this data definitely know

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

20:50 dollars but if you are making calculations like

20:52 this yourself make sure to round it to the

20:53 factor of 10 that you can be confident of

20:55 and you can say that you're making better economic figures than the UN.

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

21:01 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

21:09 for that.

21:09 But if you want to understand living standards

21:11 in Australia or the size of the German

21:13 economy well then these figures are not really

21:15 relevant at all at least not without additional

21:18 information.

21:18 Now apart from tricking you into learning something about statistics it's really

21:22 important to understand the accuracy precision and

21:24 relevance of any figures you see because

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

21:28 is a chance that they can be carefully

21:30 selected to give you the wrong impression.

21:32 If the people collecting and processing this data

21:34 have no specific bias then small errors like

21:37 this can balance themselves out especially if data

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

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

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

21:49 If those points of bias data get passed up the

21:51 ranks to be aggregated into national figures the errors can

21:54 compound on one another to produce net results that are off in a very big way.

21:58 Beyond that collecting GDP data is hard.

22:01 I think it's worth recognising that the World Bank tracks

22:04 the ability of all countries to produce

22:06 accurate economic figures using the statistical capacity

22:08 score.

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

22:12 It scored in the 38th percentile of

22:15 low and middle income countries in 2004 and the 52nd percentile in 2015.

22:20 However in the 2016

22:22 rankings China was placed in the 83rd percentile meaning

22:25 only 17% of low and middle income countries

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

22:31 That's still not great because low

22:33 and middle income countries tend to produce much

22:35 worse economic figures than advanced countries but

22:37 it does make sense that poorer countries have

22:40 a harder time producing high quality economic data.

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

22:45 Consumption plus investment plus government

22:47 spending plus net exports no problems there but if I

22:50 gave you all of the resources at the disposal

22:53 of an average national statistics bureau where would

22:55 you start on working out the actual numbers

22:57 to plug into this equation?

22:59 It's theoretically possible to sit an economist at the end of every

23:02 production line and service being provided in

23:05 the country but that's obviously wildly impractical

23:08 because well at that point a significant

23:10 portion of your economic output would be

23:12 measuring your economic output.

23:13 In advanced economies with very formalised financial systems

23:16 the government agencies in charge of producing economic

23:19 figures can use data collected by other

23:21 agencies to track things that they might be interested in.

23:23 The US Bureau of Economic Analysis

23:25 is responsible for producing the GDP estimates for all

23:27 the American states as well as the US as

23:30 a whole and they mostly use data collected from the IRS and customs.

23:34 You should be able to look

23:35 up the methodology that your own government uses to

23:38 produce economic estimates as most of them want

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

23:42 The problem this creates for a country like China

23:45 is that a large portion of its economy is still very informal.

23:49 We have already explored in a recent

23:51 video that only around 2% of China's population

23:53 actually pays regular taxes so getting a clear

23:56 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 first-hand data collection.

24:03 We also have to address the elephant in the room.

24:06 Corruption in China.

24:07 It's been known to happen.

24:09 So when a massive economy like China is dealing

24:12 with a very complex set of figures that have

24:14 been collected and interpreted by many layers of

24:16 government employees all with a vested interest in

24:18 presenting a positive message to their superiors

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

24:23 We also have to consider the compounding effective

24:26 figures that are reported every year.

24:28 Carsten Holes is a researcher at Stanford University that

24:31 published a paper on the quality of China's

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

24:36 statistics.

24:36 It's an old paper now but it argued

24:39 that after fabricating one report leaders struggled

24:41 to go back to accurate numbers because they would

24:44 have to report lower than actual growth to

24:46 rebalance the level of output.

24:47 If you are a local government leader that has accidentally or willfully

24:51 overestimated their output figures by 1% in a year you're

24:54 going to need to add an extra 1% to

24:56 next year's figures or else it's going to

24:58 make it look like you've gone backwards.

24:59 Do this for long enough and the gap between the

25:02 correct figures and last year's figures will be so large

25:04 the reporting correct figures would cause such a

25:07 drastic drop that it would spark an investigation.

25:09 At that point even if the officials didn't

25:11 want to blatantly report false figures it would

25:13 be in their best interest to keep doing

25:16 it because the punishment would likely be severe.

25:18 Now this is the important part.

25:20 The Chinese government recognised this problem as early as the

25:23 1990s.

25:23 Famously a leaked comment by a top

25:25 Chinese government official openly admitted that GDP

25:28 figures were purely man-made.

25:30 Because of this systemic problem international organisations

25:33 and even the Chinese government itself no longer

25:35 uses data collected by provincial governments to

25:38 create national output figures without first making

25:40 corrections to account for the trend of

25:42 overinflated figures.

25:43 The problem then is that the National Bureau of Statistics of China is

25:47 freely admitting to making discretionary adjustments to

25:49 its data and providing no further

25:51 transparency on what those adjustments are.

25:53 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

26:00 because it's harder to know what those adjustments were.

26:03 So it's fairly obvious to most economists

26:06 that yes through a combination of data collection difficulties,

26:09 incompetence, corruption and willful

26:11 manipulation that yes Chinese economic figures are

26:14 unreliable and they are overestimated rather

26:17 than underestimated.

26:17 So the next question is how do we make better estimates?

26:22 The output of an economy is highly correlated with

26:24 a lot of other data points that can be

26:26 observed without the help or more

26:29 importantly the interference of government organisations.

26:31 Li Kaicheng,

26:32 the Communist Party official who admitted that their GDP figures were man-made,

26:36 very candidly discussed that the only three things

26:38 he looked at to evaluate the economy

26:40 was electricity consumption, rail cargo volume and bank lending.

26:43 If an economy is using more

26:45 electricity,

26:45 moving more cargo via rail and lending more money to various projects,

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

26:51 The benefit of using these data points is that

26:54 they are centralised so they're easy to gather

26:56 and they're also very hard to manipulate.

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

27:01 rail yards need to keep track of

27:03 containers coming and going and banks obviously want

27:05 to make sure that they're keeping reliable

27:07 records of who owes them money.

27:09 Now this is great stuff, if you were a high ranking official from

27:13 the CCP, a foreign economist isn't going to have much

27:16 luck asking a Chinese state-owned bank for a

27:18 comprehensive breakdown of their new domestic lending activities.

27:20 This means that these figures

27:22 are still prone to being manipulated before anybody

27:24 outside the party gets to see them,

27:26 but there are other sources of data that are

27:29 admittedly worse but are much easier to collect.

27:32 One popular method is to measure the light emitted

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

27:36 The theory is that a country will emit more

27:39 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

27:45 type of economic output, so the more light, the higher the GDP.

27:49 This is a really fun theory

27:51 because we can roughly test it by looking at different imagery.

27:54 This is South Korea with a

27:56 GDP of $1.8 trillion and then this is North

27:58 Korea with a GDP of roughly $29 billion.

28:02 Now while this is a fun theory,

28:03 I'm sure a lot of you are already thinking of problems with this

28:06 system.

28:06 For example,

28:07 there are many other factors that determine light output aside from pure

28:11 economic activity.

28:12 A country with a larger population will naturally use more lights.

28:16 A country with more heavy industry will use

28:18 more light when compared to a country that

28:20 mostly produces value in the service sector.

28:22 Even cultural differences around how bright

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

28:28 For example, compare Shanghai to Paris.

28:30 One is much more lit up than the other,

28:33 but Paris is actually the larger economic centre.

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

28:37 but then you run into the same problem of changing

28:40 outputs based on some level of discretion.

28:42 Lu Martínez, an economist at the University

28:45 of Chicago,

28:45 published a paper on this theory that suggested that the growth in China's

28:49 light output over previous decades was not sufficient

28:51 to be in line with their claimed

28:53 growth in overall economic output.

28:54 He also found that autocratic governments in general tend to

28:58 overstate their actual economic figures by an average

29:01 of 35% when measured using light output

29:03 as an indicator of growth.

29:04 The same paper went on to argue that China's growth may have been

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

29:12 Martínez did account for

29:14 the differences in the countries he studied in a

29:16 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

29:22 reliable data.

29:22 Autocracies, especially those with a communist focus, tend to put a heavy

29:27 emphasis on heavy industry even when they are very poor.

29:30 This means that their baseline light

29:32 output would already be very high,

29:33 and the change in total light output wouldn't be as heavily

29:36 affected by households growing wealthier as it would

29:38 in a typical economy that takes the standard

29:40 route of going from agrarian farmers to

29:43 factory labourers to service sector workers.

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

29:48 communism is soviet power plus the electrification of the

29:51 whole country, 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

29:59 how rich your neighbours are by how many times they

30:01 have food delivered to them every month.

30:03 The general theory 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

30:10 door to neighbours that are total foodies and

30:12 they might order restaurant meals every night already,

30:15 if they get a big promotion at work they

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

30:19 only so much you can eat in a day,

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

30:23 has grown off how much extra food they are

30:25 ordering you're unlikely to pick up on the

30:27 fact that they did get that promotion.

30:29 Martinez did recognise this problem and he wasn't seriously

30:32 advocating for the idea that international

30:34 organisations should use telescopes instead

30:36 of government supplied figures,

30:37 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

30:47 paper when he made quite a detailed video on

30:49 the methodology of this research.

30:51 We cover different details but he definitely deserves another shout

30:54 out.

30:54 Now the important part here is that all of

30:56 these alternative ways to measure GDP growth can

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

31:01 but they struggle to come up with accurate

31:03 estimates themselves.

31:04 For the most part that's actually good enough.

31:07 To actual decision makers

31:09 and even the economies themselves,

31:10 GDP figures don't matter nearly as much as you might think

31:13 they do.

31:14 GDP growth is so highly coveted because it

31:16 can directly lead to improvements in living

31:18 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

31:28 that GDP figures are just the ones that get

31:31 the headlines and it's definitely possible for living

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

31:36 If you need to see this

31:38 counter-intuitive trend in action, well look no further than China.

31:42 If China's economy isn't as

31:44 strong as it looks on paper, that raises an even bigger question.

31:47 How much of its rise has been

31:48 built on borrowed money?

31:49 Debt has been a key driver of China's expansion but now it's reaching

31:53 dangerous levels.

31:54 This is China, the most populous and second largest economy in the world.

31:59 This is a nation that has been home to the

32:03 most intense period of economic growth and development in history

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

32:09 it has transitioned from a famine plagued backwater

32:11 into the superpower that we see today.

32:14 This sustained development has done some amazing things,

32:16 both within the country and around the

32:19 world, not least of which was pulling hundreds of

32:22 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 glass-clad

32:29 skyscrapers and mega projects,

32:31 the Chinese government is unfortunately regressing back

32:33 towards an increasingly authoritarian rule,

32:35 the type of rule that has already caused all of the

32:38 problems we have 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,

32:46 let's say, both by the citizens of

32:48 the nation and the countries and companies that

32:51 were doing well for themselves by taking advantage

32:53 of this new cheap pool of labour.

32:55 But this is starting to change.

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

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

33:03 governments that were once happy to ride the

33:05 gravy train are starting to change their tune.

33:07 Perhaps more concerningly,

33:08 the population of the nation itself is starting to feel the pressure of

33:12 an over-leveraged economy.

33:13 Up until now, the country has enjoyed growth that is strong and

33:17 consistent.

33:17 A population that is experiencing consistent growth will be seeing their quality

33:22 of life improve year over year and will naturally be

33:24 less inclined to rock the boat that is ferrying

33:27 them to prosperity.

33:28 But no good thing lasts forever, and everything from unusual business

33:32 practices to the most over-inflated real estate market

33:34 in the world is starting to weigh down

33:36 this growth at all cost mentality.

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

33:42 If so, what is causing

33:44 this slowdown?

33:45 And is this actually a bad thing?

33:47 Before we get into things, it's time for the

33:50 big disclaimer.

33:51 Chinese data sources,

33:52 particularly those that relate to the economy, are not super

33:56 reliable to put it lightly.

33:58 We always try to use independently verified sources where possible,

34:01 but even still,

34:02 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

34:12 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

34:22 prevalent here, which is why we need to make this disclaimer.

34:25 Alright, with that out of the way,

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

34:30 The real estate market in China is a multi-trillion

34:33 dollar time bomb that is somehow even more

34:35 ingrained into economic systems than real estate

34:37 markets in places like the United States,

34:40 Canada, Australia and Europe.

34:41 Now, regular viewers of the channel will know that real estate in China's

34:44 major cities is unbelievably expensive,

34:47 especially when compared to average household incomes,

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

34:54 Europe and even their neighbors in South Korea and Japan.

34:58 Now, there are three major reasons

35:00 for this insane pricing.

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

35:05 This is a major

35:06 factor in determining the market demand for anything,

35:09 but especially things that are considered

35:11 assets.

35:12 If you knew a stock was going to be worth

35:15 $100 tomorrow and it was trading at $50 today,

35:18 you would definitely buy that stock,

35:20 even 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

35:28 less liquid, much more expensive and less fungible than stock in a company.

35:32 As in, if you buy a house,

35:35 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

35:39 to sell it, it's not quite as simple as opening up

35:42 your phone and hitting sell on your brokerage

35:43 platform of choice, you need to employ a realtor,

35:46 hold open homes and pay a pretty significant

35:48 commission for the privilege of the whole ordeal.

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

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

35:55 then the general market appreciation is all for

35:58 nothing and you are probably still going to lose money on this investment.

36:02 Now, all of these issues

36:03 aren't to be 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

36:12 asset first and a place to keep people second.

36:15 Building standards are absolutely terrible in China,

36:17 but that doesn't really matter to most

36:19 people.

36:19 Why?

36:20 Because despite how terrible the underlying building is, it's almost guaranteed

36:25 to be worth more tomorrow than it is today.

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

36:31 provincial governments have tried to cool demand by

36:33 limiting the amount of real estate a single

36:35 household can own.

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

36:41 one household becomes two and the apparently

36:43 separated investors can double their holdings

36:45 without penalties.

36:46 China's economic growth has been remarkable and the best way for people to

36:51 piggyback off that growth is to invest into real estate.

36:54 If China's economy continues to double

36:56 in size every eight years,

36:58 then paying 5 million RMB for a rundown apartment is going to look like

37:02 a savvy investment.

37:02 This is very similar in many ways to tech companies in the US that might have

37:07 terrible underlying fundamentals but have seen a long

37:10 period of sustained price growth based on

37:13 projections of future growth, which is further fuelling price growth.

37:16 In the same way that investors

37:18 in the West have accepted that some stocks are worth

37:21 100 times what the company makes in a year,

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

37:26 much as 46 times what the average worker makes

37:29 in a year.

37:30 Will these markets last?

37:31 Well nobody's got rich by betting against them yet so I guess

37:36 time will tell.

37:36 This comparison also leads us along nicely to the next reason that housing in

37:40 China is so expensive and that's because people

37:43 don't really have anywhere else to invest.

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

37:49 the Chinese stock market first the American stock market

37:51 so I don't want to repeat too much here but

37:54 the basic rundown is that average Chinese people just

37:57 don't invest into Chinese companies because they

37:59 have historically not been great investments

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

38:05 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

38:13 cracked down on the practice altogether because it was

38:15 becoming rife with fraud and also let's be

38:17 honest taking some power away from the state-owned banks.

38:20 Basically if you want to put your money

38:22 to work in China it needs to be in real estate.

38:25 For what it's worth the government has actually

38:28 tried to control this rampant speculation but

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

38:33 Now these are the two reasons potentially pale in

38:36 comparison to the third driver of the insane

38:38 house prices we see in China which is the societal pressure to own a home.

38:43 You might think this is

38:45 nothing unique.

38:45 In the US everyone from prominent financial

38:48 advisors to your know-it-all in laws will

38:50 talk endlessly about the need to buy a house but

38:53 China takes this social pressure and turns it up to

38:55 11.

38:56 Given the one-child policy causing an imbalance of men

38:58 and women in the nation a lot of Chinese

39:01 gentlemen have found it almost impossible to get married without owning a home.

39:05 Beyond that there are

39:07 very real structural advantages to owning a home.

39:10 The Chinese population is heavily restricted by

39:12 what is known as the Hukou system which basically tracks household registration.

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

39:20 that decides where they will have access to public

39:22 services like healthcare and education for their children.

39:25 The internal migrant population within

39:27 China is huge.

39:28 A lot of rural residents leave their small villages to move to city centres

39:33 where they can attract significantly higher wages.

39:35 The problem is that these migrant workers will

39:38 still technically be residents of their small village

39:40 which will mean that they won't have

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

39:44 their cities that they are living and working in

39:46 because of this Hukou system.

39:48 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.

39:56 It's not that the

39:57 parents don't want to take them along.

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

40:02 they are not counted as residents.

40:03 This would be like not being able to send your kid to public

40:06 school in San Francisco because you were unlucky

40:09 enough to be born in North Dakota.

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

40:16 Sure it may be extremely expensive but

40:18 if you share a room with 10 colleagues and

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

40:22 friends family and a bank maybe you'll be able

40:24 to afford a small one-bedroom apartment on the

40:27 outskirts of one of these cities.

40:28 It may not be ideal but once you have the deed to that household

40:32 you are in and you're no longer a second-rate

40:34 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 one third of the population is made

40:43 up of these designated rural workers.

40:44 Now this issue is not great at the best of times but what

40:49 happens when all of these hopeful workers

40:51 are suddenly forced into lockdown without anything

40:53 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

41:10 such as high deposit requirements for second and third properties,

41:13 they have recently proposed a

41:15 nationwide property tax and in many instances they have

41:17 put a hard cap on how many pieces of

41:20 real estate people can own as we saw earlier.

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

41:25 worked in fact in the case of provinces that

41:28 have limited home ownership it's almost had the opposite

41:30 effect.

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

41:34 they're gonna make sure those houses are very

41:36 valuable because they basically represent their

41:39 only 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

41:46 interested in using up one of their three property

41:49 allotments on a one bedroom or small studio apartment

41:52 but there is still an obvious solution just get rid of this hookah system.

41:56 The problem is that this

41:58 isn't one universal system it's actually dozens

42:01 of individual systems specific to different

42:03 provinces and cities around the country.

42:05 Getting rid of this system would require the cooperation of

42:08 all of these individual provinces who actually may not

42:11 be too keen on the idea at all.

42:14 You see you never actually own land in China you're

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

42:20 Normally these land rentals are given to developers

42:22 who will in turn build big apartment

42:24 buildings on them and sell out 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

42:32 land parcels.

42:33 Wealthier areas have more expensive and

42:35 desirable real estate and therefore attract

42:38 higher prices for their land rights.

42:40 Beyond this building is a huge industry that supports millions

42:44 of workers in China and the area with the

42:47 most development attracts the most jobs which in

42:49 turn attracts further development.

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

42:55 go watch our video on that to learn

42:58 more about this quite remarkably similar situation but

43:00 despite this the national government has recently announced

43:02 that all of this land rights revenue

43:04 will now be collected centrally.

43:06 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

43:19 trillion RMB in revenue or the equivalent of about

43:22 1.3 trillion US dollars.

43:24 This has been seen by many as a first step towards introducing a uniform

43:29 land tax which would simultaneously further increase

43:31 government revenue while at the same time

43:34 reducing the demand for real estate assets

43:36 which would now represent an ongoing expense.

43:39 However this may be more difficult than one would think

43:42 at least in the immediate future because it very

43:45 well could be the catalyst for a perfect storm.

43:48 The fallout of the coronavirus has not been easy

43:51 on China and while their officially reported

43:54 infection figures are quite low especially for

43:56 a country of some 1.4 billion people it does not

44:00 mean that it has sailed through the ordeal unscathed.

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

44:05 Exports are at their highest level in history after suffering

44:09 an understandable dip during early 2020 but the

44:11 thing is these impressive export figures are mainly

44:14 due to the price growth of commodities

44:17 rather than genuine growth in productive potential.

44:19 Port and factory closures across the nation have

44:22 slowed down the workshop of the world and

44:24 heightened trade tensions have certainly not helped the situation.

44:28 Unemployment is high especially

44:29 amongst young workers even by the very creative

44:32 reporting standards of the government and what

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

44:37 When everything is on the up and up

44:39 people are happy to work a few extra hours because

44:42 it means they make more money and improve their

44:44 quality of life.

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

44:47 young workers are starting to see that this

44:49 additional effort is going more to support an

44:52 aging and over leveraged 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

45:00 mostly young people will refuse to work in high

45:03 intensity roles or perhaps refuse to work at all

45:05 preferring to just lie flat.

45:06 This might just be another piece of straw on the camel's back but

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

45:14 China is still heavily

45:15 reliant on hardworking cheap labor to prop up its economy.

45:18 Without it the domestic market

45:20 has worked so hard to cultivate or collapse

45:22 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%

45:34 of GDP in 2020 in the same time that GDP has almost

45:39 tripled.

45:39 Now debt fuel growth isn't always a bad thing

45:42 and for what it's worth this debt to GDP

45:45 figure is still well below places like

45:47 Switzerland and my own country of Australia.

45:50 But when that debt is primarily used by a shoddily

45:53 constructed apartment sitting on land rented from the government

45:56 at massively inflated prices well the kingdom has

45:59 literally been built upon pillars of sand.

46:02 Debt collectors have seen a massive increase in the past

46:04 few months and all of the factors that we

46:06 have seen might be starting to sway this tower of cards.

46:10 Historically this is where the government

46:12 would step in 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

46:19 everyone and their dog has predicted the inevitable demise of

46:22 the Chinese economic miracle admittedly in part because

46:24 they kind of want it to be true.

46:27 An authoritarian government that still purports to be communist

46:29 being the dominant economic superpower in the world

46:32 I can't say I'm excited about it but regardless of

46:35 when the economy slows down it's more a question

46:38 of what happens next.

46:39 In modern advanced democracies when there is an economic meltdown people lose

46:44 their jobs their houses their cars and it genuinely is

46:47 terrible but we tend to turn it around and just

46:50 vote for the other mobile politicians that swears they

46:52 would have totally handled it better if they

46:54 were in charge.

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

47:00 will very quickly become aware of all of the

47:02 other issues that they were willing to ignore

47:04 while they're going was good.

47:05 When there is only one mobile politicians within the country that you

47:08 wouldn't dare insult but you still need someone to

47:11 blame those fingers are probably going to be

47:14 pointed outwards.

47:14 With debt levels this high it's easy to assume that China's entire economy is on

47:19 the brink of collapse but is that really the case?

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

47:24 safeguards too much global influence and too much control

47:27 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 and

47:38 an unusually high level of civil unrest

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

47:45 Look I know it's fun to

47:47 speculate the demise of a regime that has done

47:49 some terrible things but now is probably the time

47:52 to remember that just because we want something

47:54 to be true doesn't mean that it is.

47:56 It's easy to see why news stories articles and so

47:59 many youtube videos speculating about how many days left until

48:02 China collapses is getting so much attention but

48:05 if you hadn't guessed already it's probably not

48:08 going to happen.

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

48:11 We also shouldn't be hoping for it to happen.

48:14 As cathartic as the idea of our biggest global

48:17 rival imploding might be we also have to realise

48:20 that this would be good news to nobody and

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

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

48:29 I'm also talking about

48:30 all of us that depend on a delicate global finance

48:33 and trade system which would not react well to

48:35 the second largest player falling into disarray.

48:38 To make sense of these frankly very clickbaity

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

48:45 So why is everyone suddenly

48:47 predicting that China is on the brink of collapse?

48:50 What are the chances that these predictions will

48:52 actually come true?

48:53 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.

49:01 The first is to give the

49:03 standard big disclaimer that internal Chinese economic

49:06 figures are extremely unreliable and in

49:08 multiple instances have been found to be altered

49:10 by authorities to present the nation's economic

49:12 situation in a more positive light.

49:14 The other thing I want to mention is that while I was

49:17 researching and writing this video I noticed that

49:19 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

49:26 separate issues within the bigger theme of this

49:28 collapse narrative but I want to mention his

49:30 work anyway because he is great at calling

49:33 out journalists and youtubers on their nonsense

49:35 including myself in the past although I think I

49:37 got the last laugh on that inflation situation.

49:40 Alright now that that's out of the way China's

49:42 economy has not been having a very good time

49:45 recently for a laundry list of reasons

49:48 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.

49:59 Most of their industrial capacity comes from city

50:02 centres which have effectively had to shut down

50:04 due to extreme heat causing conditions that make

50:07 it difficult to go outside let alone

50:09 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

50:17 are saying.

50:18 Nobody is going to run out of drinking water.

50:19 People don't drink municipal water in

50:21 China anyway but water supply issues are going

50:24 to have real impacts in other areas.

50:27 Industry in China is heavily concentrated along its rivers

50:30 primarily the Yangtze which is a waterway that

50:33 has 175 cities built along its banks.

50:35 If the Yangtze River was a sovereign nation it would be the

50:39 third largest economy in the world after the

50:41 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

50:49 stations, regular power stations that need the water for cooling,

50:52 internal shipping up and down

50:54 the waterway,

50:54 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 but it

51:04 also has a lot of mouths to feed.

51:06 As a country it still relies on food imports to feed its large

51:10 population.

51:10 International food markets have seen the price of staples like grains,

51:14 rice and proteins, skyrocket in the wake of agricultural slowdowns,

51:17 general inflation as well as the war taking

51:19 place between Russia and Ukraine,

51:21 two of the top 10 largest wheat producing nations in the world.

51:25 In a cruel twist of irony China was

51:27 already struggling with food production this year because

51:29 of flooding.

51:30 Now again I want to emphasise that the

51:32 population isn't likely to starve in China

51:34 because of these food shortages at least not for

51:37 the next 27 days or whatever but feeding families

51:39 is going to become a lot more expensive especially

51:42 for cultural staples like pork which is actually

51:44 where a good portion of grain production in China ends up.

51:47 It's important to remember that while

51:48 Chinese citizens are much richer than they were even a

51:51 decade ago it's still a very poor country by

51:54 western standards with the average urban worker earning

51:57 just $14,000 per year and rural farmers

52:00 earning far less than that.

52:01 If you are the majority of my audience from an advanced economy and have

52:04 been struggling with food prices yourself just imagine

52:06 how difficult it is for a population

52:08 with significantly less disposable income.

52:10 There is an old saying that a society is just

52:13 three missed meals away from total collapse and perhaps

52:15 we are starting to see a toned down version

52:18 of this already.

52:19 Again nobody is starving but when people have to start making decisions and

52:23 sacrifices to feed their families unprecedented civil

52:26 unrest is easy to sympathise with.

52:29 Now if food and water shortages weren't enough there

52:31 is also the ongoing issue with housing and

52:34 jobs.

52:34 I first made a video on China's debt crisis a

52:37 little over a year ago since then things have

52:40 only become worse.

52:41 There were of course the issues with Chinese property developers that

52:44 threatened to leave millions of people without their

52:46 properties that they had already paid for

52:47 and while the government has thus far managed to

52:50 contain that issue it's not changing the fact that

52:52 China's biggest industry is built on pillars of sand.

52:55 It's very easy to grow an economy through a

52:57 combination of low-cost manufacturing,

52:59 government stimulus through infrastructure and building

53:02 houses to supply an ever more speculative market.

53:04 The problem is that while this strategy might be

53:07 extremely effective in the short term it's unsustainable in the long term.

53:11 China growing economy by exploiting these three factors is like

53:14 trying to become an athlete by giving yourself an

53:17 IV drip of five hour energy.

53:19 You might very well break the 100 meter dash world record but your

53:22 heart is probably going to explode before you finish a marathon.

53:26 Very simply low-cost manufacturing

53:27 in China has made the country lots of money.

53:30 The Chinese population is still not rich by

53:32 western standards but their incomes are many multiples

53:35 of what they were even a decade ago.

53:38 This means that their cost competitiveness is not as

53:40 strong as it once was and manufacturers are now

53:42 looking to other options like Vietnam, India, Indonesia and even America.

53:47 Obviously American factory workers demand much higher wages

53:50 than Chinese factory workers but shipping has been

53:53 extremely expensive recently.

53:54 In July of 2021 it costs around $2,500 to send a 40 foot shipping

54:00 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

54:07 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

54:15 they would still come out ahead.

54:16 They would be saving money while also having the benefit of

54:19 shorter and less complicated supply lines and being able

54:21 to say that their product is made in

54:23 America.

54:23 In the past the middle income trap as

54:26 this phenomenon is known has been dismissed in

54:28 China's case because low labor costs were just

54:30 a small part of what made Chinese manufacturing

54:32 so competitive.

54:33 The country had also benefited from lax laws around environmental impacts,

54:37 cheap shipping through massive economies of scale,

54:40 a relatively skilled workforce,

54:41 low standards for working conditions and technical agglomeration.

54:45 Technical agglomeration is the benefit that businesses

54:47 get from being close to other businesses

54:50 in the same industry.

54:51 If suppliers, workers, consultants, customers and even competitors

54:54 are very close together then it encourages the sharing of components,

54:58 skills, ideas, feedback and competition respectively.

55:01 Cities like Shanghai, Shenzhen, Chongqing and Guangzhou all benefit

55:05 greatly from being bustling hubs of business activity or at least they did.

55:10 But the trade wars,

55:11 external lockdowns and heat waves we explored earlier

55:13 are all putting a massive damper on

55:15 this business activity which has the potential

55:17 to snowball rapidly because the benefits of

55:19 agglomeration require a critical mass of activity.

55:21 As soon as some business dries up the rest quickly

55:24 follow.

55:25 But maybe I've made the same mistake that a

55:27 lot of economists do when they are assessing

55:29 China's economy which is to assume that they

55:31 are still an economy directly dependent on

55:33 mercantilist trade performance.

55:34 While exports are obviously still a very large part of China's economy

55:39 it also has a domestic market which,

55:41 like most economies, accounts for a majority of its output.

55:45 The problem it's facing here though is that a large

55:48 portion of that output has come in the form

55:50 of housing and infrastructure.

55:51 Infrastructure spending is a great way to stimulate an economy.

55:55 To build roads, railways,

55:56 bridges and all of the stuff that China's been building on mass in the

55:59 past three decades 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

56:06 same way as direct stimulus like tax breaks or stimulus

56:09 checks.

56:09 But it also has the added benefit of creating

56:12 something that will continue to add value to the

56:14 economy for years and decades to come.

56:16 Sounds great but if you have already watched my video

56:19 on China's 850 billion dollar trains to nowhere

56:22 you'll know that you can't do this endlessly.

56:25 Effective stimulus has to be performed account of

56:27 the cyclical boom and bust nature of economies.

56:30 Governments should apply stimulus when an economy is facing

56:32 a downturn and they should ease up or

56:34 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 for

56:42 the past two decades and has been

56:44 pushing harder still since the GFC.

56:45 This has meant that they have been able to build a lot of

56:49 impressive things and make a lot of impressive

56:51 headlines but they've been doing it all while

56:53 spending a lot of money during a time when they really didn't need to be.

56:57 They have also now

56:58 run out of things to build.

56:59 Almost every possible piece of infrastructure that made sense to build

57:03 in China has already been built.

57:04 That means that now the government has been forced to rip up and

57:07 redo 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

57:16 nobody living in them.

57:17 Well all of those ghost cities have ghost road networks, ghost utilities

57:20 and ghost public services too.

57:22 Worse than simply providing no benefit this infrastructure is an

57:26 ongoing liability because it needs to be maintained and

57:29 in many cases it was funded through municipal

57:31 borrowing.

57:31 A big motivating factor of China's built

57:34 road initiative is that it could continue

57:36 its infrastructure spending in areas that

57:38 would actually genuinely benefit from it.

57:40 China invested heavily into developing nations in

57:42 south-east Asia and Africa by giving big

57:45 loans from state-owned banks to smaller governments

57:47 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

57:55 loans from China.

57:56 The loans were generally given on the condition that construction would be done

58:00 largely or exclusively by Chinese companies using

58:02 Chinese workers so that the Chinese economy

58:04 would still benefit from the stimulating effects of government expenditure.

58:08 Of course if China

58:09 builds a port in Africa it does not benefit

58:11 from the added efficiency that that port provides to

58:13 the economy apart from opening up a new trading partner.

58:16 Which isn't insignificant but it is

58:18 still not as good as building a much needed port

58:20 in their own country if their country had a need

58:22 for any ports.

58:23 By investing in infrastructure in foreign

58:26 countries though the Chinese government

58:28 substitutes domestic market efficiency for a stream of

58:30 income in the form of loan repayments.

58:33 This means that it gets to put money into

58:35 the pockets of its workers while getting itself

58:37 a new trading partner and spreading its economic

58:39 influence all without actually needing to spend

58:41 any money 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 of

58:50 these loans because the governments that they loaned

58:52 the money to were unwilling or in most cases unable to pay them back.

58:55 This can be for a number

58:57 of reasons.

58:57 At the end of the day most African economies are very small and unstable but in

59:01 the lot of cases these defaults are coming

59:03 as the result of the infrastructure spending not

59:05 providing the benefits it was promised to either

59:08 because it was poorly planned poorly constructed

59:10 or never finished.

59:11 In fairness China has been generous with these loan forgiveness initiatives

59:15 but that has normally come on the proviso that

59:18 the indebted nations fall in line with support for

59:20 China on its more controversial international ambitions.

59:23 Now unpaid loans lead us nicely

59:26 onto housing.

59:27 China is heavily overexposed to real estate.

59:30 In the US housing contributes about 15

59:33 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 arguably

59:44 already overexposed to this highly speculative industry

59:47 but in China that number is 30%.

59:51 30% of China's output and an equally large

59:53 portion of its growth over the past decades

59:56 have been fueled by housing.

59:57 That's because like infrastructure housing is a really easy

1:00:01 way to boost employment and household spending.

1:00:03 Construction always requires a large amount

1:00:05 of labor and people treat spending on new

1:00:07 homes very differently than they would spending on

1:00:10 regular consumer items.

1:00:11 Households in China have been willing to take on astronomical amounts of

1:00:15 debt to buy apartments in poorly constructed buildings

1:00:17 on top of land that belongs to the

1:00:19 government.

1:00:19 So far this system has been a win-win-win for all the participants involved.

1:00:24 Investors have seen the price of their home

1:00:26 skyrocket off the back of endless debt-fuelled

1:00:28 speculation.

1:00:28 Banks have been able to write huge loans

1:00:30 to an industry that most believe the government

1:00:32 wouldn't let fail.

1:00:33 Provincial governments made lots of money by

1:00:35 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

1:00:41 prices and the national government was happy

1:00:43 because this merry-go-round of greed was great

1:00:45 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,

1:00:55 debt and government taxation in China before so

1:00:57 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 want to withdraws since they

1:01:06 too are so heavily invested into the real estate

1:01:09 market.

1:01:09 Chinese citizens are now facing what was once

1:01:12 unthinkable which is that their homes which

1:01:14 represent their investments, savings,

1:01:16 retirement planning and their housing all in one are now

1:01:19 borderline unsellable and that's if they're lucky

1:01:22 enough to actually have a house.

1:01:24 Developers are unable to finish projects that people have already

1:01:26 paid for more often than not with a combination

1:01:28 of their own savings and a mortgage.

1:01:30 Those people who are unlikely to get their houses are now refusing

1:01:33 to pay their mortgages which means banks are running

1:01:36 out of cash even faster than they were before.

1:01:38 In anticipation of cash shortages people are

1:01:40 going to withdraw their savings from at-risk

1:01:42 institutions which is only further accelerating the problem.

1:01:45 This is a classic run on the banks

1:01:47 and most economists see this as basically financial Armageddon.

1:01:50 So there we are.

1:01:52 A housing market collapsed at least twice as potent as the GFC,

1:01:56 municipal bankruptcies, foreign investment

1:01:57 breakdowns, failing infrastructure, trade wars,

1:01:59 droughts, flooding, heatwaves, extended lockdowns,

1:02:01 food shortages, civil unrest, industrial slowdowns and bank runs.

1:02:04 That's the brief list of things

1:02:06 going wrong in China right now.

1:02:07 This is to say nothing of an ageing population, a long-term

1:02:10 loss of industrial competitive advantage and the

1:02:13 gradual decline towards a less business-friendly

1:02:15 more authoritarian government.

1:02:16 We can ignore those factors for now because again we are just

1:02:20 trying to work out if China is going to

1:02:22 collapse in the next 27 days or whatever.

1:02:24 But with all this going on at the same time

1:02:27 maybe it's more efficient to ask why China won't collapse.

1:02:30 Now to explain this we first have to define what a collapse is.

1:02:34 If we are defining a collapse as the

1:02:36 total breakdown of civil order,

1:02:37 people marching in the streets, governments being deposed,

1:02:40 something like the Arab Spring, in many ways there are some similarities.

1:02:44 Those uprisings were kicked off by stagnating economic growth

1:02:46 in Tunisia and they were directed at authoritarian

1:02:48 governments that were impeding on people's liberties.

1:02:51 So it could very well collapse in the

1:02:53 same way that America could have collapsed during the

1:02:55 GFC or in the same way that anything could

1:02:58 theoretically happen at any time.

1:02:59 If government leadership gets backed into a corner and tries

1:03:02 to do something like invade Taiwan then yes it's

1:03:04 going to collapse and it will very quickly turn

1:03:07 into a failed state.

1:03:08 It's just extremely unlikely.

1:03:10 We as economists also don't know what we don't

1:03:14 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

1:03:22 to China,

1:03:22 it's just that China is in a slightly more precarious situation at the moment.

1:03:26 If I had to present a scenario probability report this

1:03:29 would be a 1% chance where a regular economy

1:03:32 might be a half percent chance and something like Russia would be 25%.

1:03:37 Another potential collapse situation wouldn't so much

1:03:39 be a collapse in the traditional senses,

1:03:41 a regression towards becoming a closed off centrally planned economy again.

1:03:45 We can in many ways already see this playing

1:03:47 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

1:03:54 and it's aligning itself with countries who are themselves

1:03:57 getting cut off from the rest of the world.

1:04:00 Now I would argue that if this does happen it will

1:04:02 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 realises that it's North Korea 2.0.

1:04:11 It would also be much harder to pull

1:04:13 off.

1:04:13 One of the reasons having a wealthy population is

1:04:16 so fantastic is that they have the capacity to

1:04:18 be politically active.

1:04:19 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.

1:04:33 Alright, now I've covered myself from the this-did-n-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

1:04:40 some more realistic reasons why it probably won't.

1:04:43 The first is that China can afford some economic

1:04:46 setbacks.

1:04:46 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

1:04:53 second largest economy in the world in the span of

1:04:56 someone's working career.

1:04:57 Lots of other countries have economic setbacks and it's not too often that

1:05:01 we see these devolve into outright revolution or anything of that nature.

1:05:04 What's more is that a

1:05:06 bit of an economic slowdown might be exactly what the country needs.

1:05:10 Modern economies run on the

1:05:11 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.

1:05:19 When on average people are taking on debt, the economy

1:05:22 does really well and then when on average people

1:05:24 are paying off or defaulting on their debt,

1:05:26 the economy slows down a bit.

1:05:27 Now while those slowdowns might be painful, if well managed, they play a

1:05:32 really important role in the long-term health of an economy.

1:05:35 Down turns weed out, underperforming

1:05:36 businesses,

1:05:37 products and employees as everybody is forced to cut down to the essentials,

1:05:41 which means

1:05:42 that only the most competitive, value-adding and efficient entities survive.

1:05:45 I understand on a human

1:05:47 level that sounds terrible but long-term it means

1:05:50 that the economy can bounce back stronger,

1:05:52 which is a big part of the reason why on average this cycle

1:05:56 of booms and busts tends to trend upwards over time.

1:05:59 A pullback in the Chinese economy, again,

1:06:01 if managed properly, could be a huge opportunity

1:06:04 for the economy to shift away from its

1:06:06 over dependence on real estate and infrastructure

1:06:07 and focus more on value-adding industries like high-tech manufacturing,

1:06:11 research and development, tourism and finance.

1:06:13 The Chinese economy is also a lot more robust than most economists are giving

1:06:18 it credit for.

1:06:18 This might be confusing, especially since I said a lot of the biggest industries

1:06:22 are built on very shaky foundations but

1:06:24 these two factors are not mutually exclusive.

1:06:27 It's real estate and infrastructure industries are crumbling,

1:06:30 literally and figuratively, but the Chinese government is more than capable

1:06:34 of controlling the damage from these issues

1:06:36 in the short term.

1:06:38 China has the most foreign currency reserves of any nation in the world

1:06:42 by a huge margin.

1:06:43 This means that in a worst case scenario it could completely hold off bank

1:06:47 runs just by printing more money and dispersing

1:06:49 it through a series of state-owned 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

1:06:58 that China is not having the same problem with inflation

1:07:00 that a lot of other countries in the West are.

1:07:03 The Chinese central bank has actually bucked

1:07:04 the global trend and is lowering interest rate to

1:07:06 the moment in the hopes of offsetting some of

1:07:08 the pain caused by the collapse of the housing market.

1:07:11 It can further prevent this having any

1:07:13 knock on effects by using its foreign currency

1:07:15 reserves to protect the value of its currency,

1:07:17 so that it doesn't end up like Turkey or Venezuela.

1:07:20 It turns out having a $3.4 trillion

1:07:22 pile of money 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

1:07:29 to spend a little bit of extra money on making sure that

1:07:31 its citizens are fed it's going to be more

1:07:33 than happy to do so knowing the alternative.

1:07:36 There are also the non-economic factors.

1:07:37 Of course this is outside of my specific area of

1:07:40 expertise but the Chinese population does not

1:07:43 have the same opportunity for regime changing

1:07:45 levels of civil unrest.

1:07:46 The government is authoritarian and they monitor everybody

1:07:50 very closely.

1:07:50 People will no doubt voice their frustrations

1:07:52 especially if they are in a situation

1:07:54 where they are not going to get a house that

1:07:56 they have paid for but these protests are not

1:07:58 directed at the government or the country.

1:08:00 If anything they are a very public way for these

1:08:03 people to ask their government to bail them out

1:08:05 of a situation that they have found themselves in.

1:08:07 Chances are the government probably will bail them out too.

1:08:09 People are happy to give up a

1:08:11 lot of liberties if it means that they are getting

1:08:14 rich but in many cases entire families have pulled

1:08:16 their life savings of multiple generations to

1:08:18 afford modest homes that won't be delivered.

1:08:21 The government is likely to do what it does

1:08:23 best and invest into building projects to soften the

1:08:25 blow of this economic downturn.

1:08:26 Only now instead of building roads to nowhere it has the opportunity

1:08:30 to build something that really is in demand that

1:08:32 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

1:08:38 needs it and it will avoid a situation where

1:08:40 tens 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 well even if all of these

1:08:49 issues won't cause a total collapse of the Chinese economy

1:08:51 surely they at least spell the end of the

1:08:54 Chinese miracle.

1:08:55 Most reasonable economists are predicting that these issues are going to cause

1:08:59 the end of strong sustained growth in China.

1:09:01 Most of them point to the experiences of Japan which

1:09:04 was another country that grew rapidly thanks

1:09:06 to mass manufacturing and strong exports.

1:09:08 Their competitive advantage eventually faded away as

1:09:10 their population became wealthier and they started

1:09:13 to lose a lot of their manufacturing to places like China.

1:09:16 They also had an over-inflated housing

1:09:18 market that dragged the economy down and

1:09:20 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 government intervention

1:09:28 and Japan's was more socioeconomic but the result is going to be the same.

1:09:32 Too many old unproductive people to look after and

1:09:35 not enough young productive people to take their place.

1:09:37 The parallels between Japan and China are truly

1:09:40 remarkable and I can see why economists

1:09:42 are saying that this is the direction the country

1:09:45 is headed towards 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

1:09:52 trajectories.

1:09:53 They faced very similar challenges.

1:09:55 They even worked in very similar industries but

1:09:58 China is not Japan.

1:09:59 For starters China is still much poorer than Japan was in the early 1990s

1:10:04 when its stagnation began.

1:10:06 Yes there is some fabulous wealth in concentrated city centres

1:10:09 but this is not the experience of most Chinese citizens.

1:10:13 In 1995 Japan had a GDP per capita of

1:10:16 $45,000.

1:10:16 Today almost 30 years later China has a GDP per capita of $10,500.

1:10:24 Yes Japan's economy has stagnated with no real sustained GDP

1:10:28 growth been experienced over the past 30 years and yes

1:10:31 it's dealt with stagnation pretty well.

1:10:33 It's still a very stable safe and productive economy

1:10:36 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.

1:11:04 That is a luxury that Chinese citizens do not

1:11:07 have which means that if the sentiment of the

1:11:09 people shifts in a direction of wanting change they

1:11:11 do not have an easy and frankly non-violent

1:11:13 way to pursue that change.

1:11:15 There is a very good chance that if China was a regular democracy

1:11:18 that the communist party would be continually re-elected.

1:11:20 Say what you will about a lot of

1:11:22 their actions on the world stage and authoritarian antics

1:11:25 but for the majority of their people the

1:11:27 last 30 years under their rule have been very rewarding.

1:11:30 People are willing to put up with

1:11:32 a lot if they can see their

1:11:34 living conditions improving but historically economic conditions

1:11:36 have been one of the primary deciding factors

1:11:39 of if governments get re-elected or not

1:11:41 and if the people can't vote their government

1:11:43 out tensions are bound to start building up.

1:11:45 The amount of power and lack of oversight

1:11:47 that the government has also means that corruption

1:11:49 is just a way of life in China.

1:11:51 Now in a weird way some of this corruption has actually helped

1:11:54 the economy grow because businesses can cut through a lot

1:11:56 of red tape with a small bribe or two.

1:11:59 Polymata did a great video on this topic so go

1:12:01 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

1:12:08 will eat it alive.

1:12:09 Paying a bribe or two to a government official to look the other way on

1:12:12 zoning laws or factory pollution standards will have

1:12:15 negative consequences but not the type that

1:12:18 gets paid for with money.

1:12:19 If foreign investment stops, industry slows down and new projects get

1:12:23 halted then corrupt officials won't have the

1:12:25 same opportunities to make money through simply

1:12:27 opening doors so they will be forced to

1:12:29 take money by stealing it from the people.

1:12:31 Now you know the line nobody can predict the future least

1:12:34 of all economists but if I was a betting man

1:12:37 which I'm not my predictions would be that China

1:12:39 doesn't end up looking like Japan but ends up

1:12:41 looking more like other countries that have become

1:12:43 very wealthy very quickly but that wealth

1:12:45 didn't translate into a sustainable economic model not

1:12:48 a collapse but more of a slow stable

1:12:51 decline.

1:12:52 If you want the real reason that you've

1:12:54 been seeing headlines about China being on the

1:12:56 brink of collapse then prepare to be disappointed.

1:12:58 The reality is that someone out there made a video

1:13:01 with a thumbnail that said something to the

1:13:04 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

1:13:11 used the same clickbait titles to bring in as

1:13:14 many viewers as possible on their own videos.

1:13:16 Some of these videos were themselves nonsense and

1:13:19 some were genuinely great commentary on the

1:13:21 issues.

1:13:21 No hate I understand the game better than most

1:13:23 people if you put a lot of effort into

1:13:26 making a video 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

1:13:34 no doubt but an outright collapse in the second

1:13:36 largest economy in the world with high levels of

1:13:39 control over a quasi reserve currency and very

1:13:42 little patience for public descent is very unlikely.

1:13:44 It's important not to let the understandable

1:13:47 animosity we might feel towards the CCP affect

1:13:49 the way that we interpret news about them.

1:13:52 If any of you have read these headlines or watched

1:13:54 these videos and sensed a feeling of joy or superiority

1:13:57 over the fact that the bad guys are finally

1:13:59 getting what's coming to them then no shame.

1:14:00 I'll be honest I enjoy a bit of Sheldon

1:14:03 Freud as well but please consider two things.

1:14:05 Were you more likely

1:14:07 to accept the fact that these headlines were true because

1:14:09 you wanted them to be true and if so I

1:14:12 encourage you to go back and read them as

1:14:13 if they were talking about your own country.

1:14:15 I think that a lot of you would be

1:14:17 less likely to take the predictions at face value.

1:14:19 Also this is perhaps

1:14:21 the most important part of the video which

1:14:23 is that you don't want China to collapse.

1:14:25 Never mind the mostly innocent citizens of the country that

1:14:28 are just trying to make a better life for themselves

1:14:30 even if we think about this from a purely selfish

1:14:33 point of view the second largest economy in the

1:14:35 world collapsing would do a lot of collateral damage.

1:14:38 China is a large buy of material exports from

1:14:41 countries like Australia, Japan, the EU and the US.

1:14:44 Losing that export market would cause steep

1:14:46 downturns in any of these economies.

1:14:48 China also produces a lot of the products that we use in

1:14:52 our daily lives at a price point that we have become accustomed to.

1:14:55 If you want to turn the

1:14:56 inflation that we have been experiencing at the moment

1:14:58 from a problem to a crisis then cut off

1:15:00 Chinese exports without time to arrange an alternative supplier.

1:15:03 Finally a collapse is not

1:15:05 going to solve any of China's problems even if

1:15:08 the government ceased to exist in a somehow

1:15:10 totally peaceful way there would be a massive power

1:15:12 vacuum that is likely only to be filled

1:15:14 by another authoritarian regime.

1:15:16 Anybody who has watched my channel for long enough will know that

1:15:19 I am not a fan of the Chinese government but

1:15:22 a collapse is not the mechanism to bring about

1:15:24 productive change.

1:15:25 Instead what we should all be hoping for is a slow gradual shift towards the

1:15:29 system 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 and shifting

1:15:38 role in the global economy, one thing is clear,

1:15:41 China's economic rise isn't as unstoppable

1:15:42 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.