China’s economy is plunging into an unprecedented and dire phase, sounding deafening alarms that the Chinese government hopes to muffle, but they are growing too loud to ignore. This looming collapse is an ominous warning to America and the entire world as we are witnessing this unsettling unraveling in real-time. So, what do we need to know about this? China isn’t exactly transparent, most recently halting economic data releases to keep the world in the dark, which is just not a good sign. What they are hiding is that their state-controlled economy is unravelling due to debt, misguided investments, and eroding credibility. The question is, how bad could it get and what impact could it have on you? And most importantly, what can you do to prepare? Let’s talk about it.
3 REASONS CHINA COULD SHOCK THE WORLD
1) UNINFORMED POPULATION
The course and direction of a country are often determined by its citizens, and China’s citizenry is becoming increasingly upset and agitated, or are they? Some things we know, and some things we don’t. We know the suppression of information and censorship might keep them from blaming their problems on the Chinese government, and the government is keeping information from them. The Chinese Communist Party had a botched COVID response–Draconian lockdown of apartment complexes and factories; workers forced to work instead of going home, then suddenly all measures were lifted as if they never occurred.
China has ceased reporting economic data that could reveal its true economic health. For instance, they stopped publishing youth unemployment figures, citing a need to review their methodology. The most recent available data showed a record-high youth unemployment rate of 21.3% in June for those aged 16 to 24. It’s possible that it’s even higher now, possibly exceeding 25%, but we lack current information. In addition, China has limited access for foreign users to corporate registries and academic journals. They have also clamped down on due diligence firms, which are vital sources of information for overseas businesses interested in China. It’s evident that the Chinese government is actively suppressing information and engaged in extensive damage control.
The Chinese people don’t really understand how teetering their economy truly is because the government doesn’t want that to be known. Even today, if the ruling Chinese Communist Party doesn’t like data or it reflects negatively on them, they simply don’t report it. The world has to wonder what’s really going on in the people’s minds, what they actually know and don’t know, and whether their frustration level will ever be more potent than the government’s ability to hold them down.
2) OVERBUILDING & COLLAPSE
China has followed an investment-led economic growth model, heavily focusing on infrastructure and construction. However, this approach has led to significant overbuilding, with excess housing units that could house twice the entire Chinese population. Did you catch that? There’s two residences available for each of the 1.412 billion people. In China, home ownership for investment is favored over stocks. As a result, China has responded to this by building, and building, and building giving people to buy properties that are sitting vacant. Unlike the U.S., China’s stock market is less closely tied to the economy at individual and corporate levels. Chinese firms tend to rely more on bank loans and retained earnings rather than equity financing, in contrast to U.S. companies. Only around 7% of Chinese households own stocks, compared to 53% in the U.S. This leads to a liquidity issue, as it’s easier to sell stocks than vacant properties in a market with a surplus of available properties.
This has led to the citizenry purchasing homes enthusiastically as an investment vehicle leading them to invest in multiple apartments, accumulating second, third, and even fourth properties. As the economy suffers, however, they find themselves unable to make payments on some of these properties and unable to unload them to take a loss on them. Again, that’s two residences available for each person. This massive overbuild presents a problem that surpasses anything seen in the American subprime crisis.
This has been unraveling at a staggering pace, even as the government takes drastic measures to desperately try to stop the freefall. The collapse of Evergrande, a massive Chinese real estate company with over 1,300 projects in more than 280 cities, has sent shockwaves through China’s real estate market, one of the world’s largest, employing over 2.8 million people. As of 2021, Evergrande was grappling with $300 billion in liabilities, failing to meet its obligations to suppliers and offshore lenders, ultimately defaulting on its creditors. This default triggered a market panic, a cascade of defaults, and nationwide protests that were forcefully suppressed. The ongoing real estate crisis, now spanning two years, has raised concerns about financial system contagion risks and is likely contributing to job cuts, housing market declines, and an economic slowdown in China, the full magnitude of which remains uncertain and of global significance.
If the subprime real estate bubble collapse of 2008 in the U.S. that rippled worldwide and plunged many economies into a deep recession was bad, China’s overleveraged position in real estate is likely far, far worse. Foreign direct investment in China’s real estate market is quite extensive. Still, those investors are getting rather skittish as the Chinese Communist Party continues to demonstrate that it is having difficulty righting the ship that is its economy.
The government continues to struggle to radically adjust and prop the economy up, even as they crack down on billionaire tycoons and use them as scapegoats. Their desperation has lead China to seek and secure substantial resource deals with Russia during the conflict in Ukraine and Russia’s urgent quest for allies and markets. These agreements have the potential to entirely redirect global energy and grain sales, potentially leading to a profound transformation of longstanding trade agreements. These known and unknown deals are altering geopolitics and will have unknown future consequences worldwide.
