The Real Reason China’s Economy Is In Crisis

INTRO (0s)

• China's economy is facing a spiraling debt crisis and deflation, threatening its 45 years of economic growth.
• The situation is a result of compounding policy decisions, disease spread, market euphoria, lies, and mistakes.

45 YEARS OF GROWTH (1m16s)

• China's economic growth began after Deng Xiaoping introduced sweeping economic reforms in 1978.
• Special economic zones were created, allowing market capitalism to thrive in cities like Shenzhen.
• China experienced impressive economic growth under leaders Jiang Zemin and Hu Jintao, becoming the world's second-largest economy in 2011.
• Xi Jinping took control in 2012 and initially pursued market reforms, reducing poverty significantly.
• However, since 2017, Xi Jinping has reversed some reforms, increasing state control over markets.

STATE OWNED ENTERPRISE (4m17s)

• State-owned enterprises (SOEs) play a significant role in China's economy.
• In 2017, China had more SOEs than any other country in the world.
• In 2019, over 60% of China's market cap was from SOEs.
• In 2020, 40% of China's GDP came from SOEs.
• SOEs contribute to some of the economic problems China faces today.

CRISIS AFTER CRISIS (5m5s)

• China has faced multiple crises, including a collapsing job market due to excessive COVID policies, a real estate market collapse, and a loss of over $6 trillion in public companies.
• These events are not random but result from critical policy decisions, market speculation, and greed.
• China's economy is heading towards a significant debt crisis and potential stagnation.
• China's GDP growth fell from 6% in 2019 to 2.2% in 2020 due to the COVID-19 pandemic.
• Despite negative growth in other countries like the US, China managed to grow by increasing investments, mainly through state-owned enterprises, offsetting the decline in personal consumption.
• This growth was achieved through significant debt accumulation, which will be crucial in understanding China's current debt crisis and hidden economic problems.
• In 2021, China saw a GDP growth of 8.4%, but the resurgence of COVID-19 led to the implementation of the zero-COVID policy, causing economic growth to drop to 3%.
• The zero-COVID policy severely impacted China's economy, leading to the shutdown of the country and reduced economic growth.
• Many foreign companies closed their China-based operations and laid off workers, with a significant number of foreign-invested enterprises exiting the country.
• China experienced one of the worst real estate collapses in history, starting in the mid-1990s with the rise of the middle class and increased demand for housing.
• A new property developer model allowed developers to sell apartments before completion, leading to rapid growth and debt accumulation for companies like Evergrande.
• In 2021, Evergrande, the second-largest property developer in China, defaulted on its debts, owing $35 billion to Chinese banks and foreign investors.
• The property market collapse has affected the wealth of Chinese citizens and represents a significant portion of the country's economy.
• Chinese and Hong Kong stocks have lost a total of $6.3 trillion since their peak in 2021, with Tokyo surpassing Shanghai as Asia's largest equity market.
• The real estate market troubles and rising political tensions between the US and China are key reasons for investors pulling out of equity markets.

HIDDEN DEBT CRISIS (10m29s)

• China's GDP growth in 2023 was 5.2%, but this figure may be misleading.
• China has a large amount of official government debt and trillions of dollars in hidden debts.
• Local governments in China use financing vehicles to sidestep budget caps and take on more debt.
• The total liabilities of these financing vehicles are estimated to be 11.3 trillion in 2022.
• China's total debt to GDP is estimated to be almost 300%.
• About a third of these financing vehicles were unprofitable in 2022.
• China's economic growth is being driven by debt-funded government investment, which is hurting productivity.
• The GDP return per Chinese Yuan of additional debt has been declining for years.
• Two-thirds of corporate debt in China is held by state-owned enterprises, many of which are unprofitable and inefficient.