How China Could Trigger a Global Economic Collapse
There are so many things to think about right now. And those are nothing compared to what’s lurking in the distance threatening to disrupt our peaceful lives, a Global Economic Collapse triggered by China.
The world’s second-largest economy, the largest real estate market, and the manufacturing hub of the planet is at risk of total collapse. And a collapse here would send shockwaves around the world, including your wallet, because the thing is, whether it’s stocked real estate or crypto, china has a hand in it all. In addition, the more I learn about china’s economy, the more worried I get about my own investments.
China’s economy has been a miracle of the 21st century in absolute rags-to-riches adventure. But now, that miracle is beginning to crack and crumble. It’s shaping up to be one of the worst years for china’s economy in decades. And you might be thinking one bad year can’t matter that much. But let me give you a different perspective. You could say one bad hand in poker doesn’t matter that much.
But what if you’re all in? You have everything riding on that bet hitting. If you miss disaster, china’s economy is built on the expectation of rapid growth. Its own central bank says if growth falls below 4%, it’ll be in serious trouble. And leading the charge into disaster is the Chinese housing market.
Chinese real estate is the world’s largest asset class, and things are turning for the worse. People are taking to the streets and refusing to pay. This is partially due to the thing that they’ve come to expect growth on; it’s gone.
Imagine you’re a 50-year-old Chinese person living today in china. Over the course of your life, you’ve seen the country that you live in change completely. When you were born, this was one of the poorest places in the world. But in your lifetime, you’ve watched shanghai go from a shanty town to the most-populous and prominent city in the world.
Since the 1970s, China has had a policy of aggressive modernization. You and your friends began manufacturing consumer goods for western markets, and the government heavily focused on your education, and things were going pretty well. But you had no idea how good they were about to get. China joined the world trade organization in 2001. And your country’s economy took off like a rocket growing 15 times its original size in 20 years. China did this with its own version of a free market where the government never completely let go of the steering wheel. See, china’s most crucial businesses are state-owned, and most large companies have major government backing. Though it might look like a free market economy from the outside, nearly everything remains controlled by the state. It’s all planned, and that’s been fined by you; things have been wonderful riches success.
But, having a plan doesn’t mean it’ll work forever. It’s beginning to crumble. Meanwhile, here we are, mowing our lawns and living life totally unaware of what’s brewing on the other side of the world.
A Great Real Estate Boom in History
In the past few decades, china has seen the largest real estate boom in history. People think of its economy as factories and exports, but real estate is on another level. As factories opened, people moved to cities, and prices skyrocketed, creating an absolute buying frenzy. Today real estate accounts for nearly one-third of china’s entire economy. To put this in perspective, 20 percent is high for most countries. One-third is absolutely bananas. So, why this craze for buying homes?
Well, again, put yourself in the shoes of that 50-year-old shanghai resident. You landed a decent job in the early 2000s, and as soon as you could, you rushed to buy a condo, and your logic here is simple. Your whole life your entire life, you’ve been hearing about china’s overpopulation issue. From the 1950s to today, china’s population has nearly tripled. And combine that with an economy on steroids and limited ways to invest your cash, turning home ownership into the ultimate status symbol. In the past 50 years, the homeownership rate in china has jumped from 30% to 90%.
So again, you’re thinking rationally here like you better get into this market before a billion other people do. This meant prices soared, and developers developed until Chinese real estate became the largest asset class in the world, worth 62 trillion dollars. That’s more than the entire U.S stock market and double the U.S real estate market.
A crash in china would certainly cause a threat here, and of course, like everywhere, all that real estate construction was done on borrowed money mortgages, a mountain of debt beginning to pile up. But here’s the thing as a resident of china, you begin to hear less and less about this population problem. The government enacted a one-child policy to stop so many babies from being born like 40 years ago. And today, you look around and notice there just aren’t younger people replacing the older workers. China may soon see a shrinking population. The working-age population has already fallen. China now expects its workforce to shrink by 35 million people in the next 10 years. That’s equal to the entire labor force of Great Britain.
China’s biggest resource, its giant workforce, is running dry. So you’re sitting there thinking about this. There are way fewer people, way less growth, way less output, and way less money coming in. Maybe that shanghai condo I bought wasn’t the guaranteed investment I thought it was. The mood is turning sour, Chinese home prices have now fallen for 10 months straight, and we haven’t even talked about the ticking time bomb here.
Evergrande and Everything After
Now the mood in china didn’t just change among home buyers. It also changed the government. China’s leader, Xi Jinping, seems to have caught the populist bug lately when he decided that china’s growing class of the ultra-rich was just too rich, or maybe he saw them as a threat.
Whatever the reason, Xi promised a crackdown on financial speculation they limited. The total debt these massive real estate developers could carry forced the riskier companies into a tight squeeze. The first victim was china’s second-largest real estate company ever granted, and I did a bit of digging to try and understand the sheer size of this company and had my mind blown. They’ve built the homes of 12 million people. They hold 300 billion in debt, more than any company in the world in some countries. And here’s the thing last year, their interest rates jumped as high as 20%. It’s like these developers were putting their construction costs on a MasterCard. It’s not sustainable, and the real estate contagion began to spread.
When Evergrande defaulted on its debt back at the end of 2021, it was clearly not what Beijing wanted, but in trying to stop a debt crisis, they actually triggered one, and that crisis created something truly unique in china a mortgage rebellion.
The Great Mortgage Boycott
Over the past few months, a growing number of people across china have outright stopped paying their mortgages. And it’s not for the reasons you’d think, not because they lost their jobs or hate the government. They’ve gone on strike against the developers who are building their homes or, more accurately, not building their homes. Imagine you just bought yourself your first condo in a booming Chinese city. You start by paying the mortgage on it right away despite it not being built yet. You’re okay with this because construction in china is typically pretty fast or so you thought because then the pandemic emerged. Your move-in date keeps on getting delayed over and over again. The developer says there’s nothing they can do about its supply chain issues.
But you hear all these stories about developers in a debt crisis. They can’t borrow. They can’t pay. So you’re thinking, what’s really going on with my new condo? I’ve been paying rent and a mortgage this whole time, and now I’m hearing about developers going bust and projects getting canceled. Will I ever see my home? Will I ever get anything for this money I’ve been paying for years, or have I just been robbed?
Then you hear on social media that thousands of people just like you are refusing to pay their mortgages, and that sounds about right to you. Why should I pay for something that I might never get? The Chinese mortgage strike has spread to 86 cities covering 700 billion dollars in real estate. Protests against banks have broken out; demonstrators are asking for a bailout, and things are getting out of hand. You’re looking around, and everything in your economy is just getting worse.
The Impact of China’s Slowdown
Now some say the mortgage rebellion is a big threat to china’s finances others say it isn’t, at least for now. It’s a relatively small chunk of the total mortgage lending market. The bigger problem is contagion real estate issues are spreading from developer to developer and country to country. But one thing’s for sure Xi Jinping’s campaign against the super-rich has worked.
China’s richest woman has lost half her wealth this year alone. But it’s not just china’s rich; this could have an impact on people around the world because the world is dependent on china’s economy. If your investment portfolio has Chinese holdings, there’s a good chance you’ve lost money on it. The tiger index has been down 37% in the last year. China’s real estate slowdown is creating all kinds of secondary consequences, like appliance makers who may go out of business, which could cause the prices of big-ticket items to soar in America. Because, after all, these things are mostly made in china, and then there’s the impact on your local real estate market. You might think that this has nothing to do with this, but you’d be wrong.
Chinese investors have become major buyers of homes around the world, especially on U.S west coast, Canada, Australia, New Zealand, and Singapore. Many argue that rich Chinese buyers have pushed up house prices, and a slowdown in china’s economy could force these investors to sell, pushing prices lower. And what about all the American people and businesses that invest in and depend on china? We’re a global economy; if one piece falls, we all get injured.
But maybe it’s not all bad U.S home prices are insane right now. Maybe a dip wouldn’t be the worst thing ever. Also, a slowdown in china means lower demand for commodities which would cause lower prices for oil, gas, nickel, lumber, and other essential supplies. So maybe there’s kind of a silver lining here. But we know that the days of china doubling in size every few years are over. But that’s not to say china’s going out without a fight. No way; in fact, Beijing is now doing everything it can to revive real estate.
It’s subsidizing home purchases by young people, pressuring banks to lower mortgage rates, and it’s working on a massive multi-billion-dollar rescue package for stalled housing projects, or even thinking about seizing developers’ land to cover costs. Basically, the government is fiddling with these mechanisms, trying to keep everything afloat.
But what’s not clear is just how effective this response will be. Have we seen the worst of it, or is there more to come? I can only say one thing about all of its problems; china isn’t about to crash and revert to 50 years ago. It’s built up too much wealth, knowledge, and power for that to happen. But it will have growing pains and a correction before reaching a new level of prosperity.
In a nutshell, the global economy is in a recession, and it’s going to get worse. China is the main reason for this, as their economy has been slowing down. This has caused many secondary consequences, like investors selling their homes and appliance makers going out of business. However, there may be some silver linings, like lower commodity prices.
No one knows how bad it will get, and how strong it would affect the world economy. It could trigger a liquidity crisis in the whole global monetary system.
So, all we can really do from the other side of the world is make sure our personal debts are in check and be prepared, in case of, tough times and great opportunities ahead!
China Economic Collapse
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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.