Everything You Need to Know About Chinas Ruthless Economy

For decades, many believed it was only matter of time before China became the world's dominant superpower. Its rapid economic rise, massive infrastructure projects, and expanding global influence made it seem unstoppable. But that hasn't happened, at least not yet. Instead, China's economy is slowing, debt is piling up, and cracks are forming in its once unshakable financial system. As the USA is mixing up the global order, many are looking to China to finally pull ahead like it has been expected to for while now. Maybe this still could be the Chinese century. It's just starting quarter of the way through. But it's important to address that China has its own problems that are just as, if not more serious than the USA's. If anything, it's just better at hiding them. Which is why we put this collection together to address those issues one by one. Looking at how its reported numbers might not tell the whole truth, why debt has become its biggest threat, and whether China is truly on the verge of collapse or just facing temporary setbacks. This is China's economic reality. Growth, debt, and an uncertain future. Economists should have known better. In 1980, under the direction of this man, Deng Xiaoing, the new paramount leader of the People's Republic of China, small town across the border from Hong Kong, was given special economic privileges to trade and do business with the outside capitalist world. The city at the time was only home to around 330,000 people, tiny by Chinese standards, because the country had just become the first nation in history to be home to over billion people. In the 40 years since, Shenzhen, that once small town, has turned into one of the largest and most economically influential cities in the world. In 2018, it exceeded the GDP of its direct neighbor, Hong Kong, global center of commerce that has stood for hundreds of years, and is now the eighth largest city in the world by total population. huge change from an averagesized town just four short decades ago. Shenzhen's story is not unique in China. The country is home to hundreds of cities that are each economic powerhouses in their own right. And the reforms that started with few select regions have been almost universally adopted nationwide. In that time, the economic development of China has done some major good for the country and the world. It has pulled hundreds of millions of people out of poverty and made lot of everyday consumer goods that we take for granted far cheaper than they would be if they were produced locally. But of course, it hasn't been without its problems domestically and internationally. Perhaps the biggest of those problems within the country has simply been the expectation that this economic growth would continue forever. The country has been home to the most intense economic growth in history. And lot of social, political, and economic systems have become reliant on that growth continuing forever. Unfortunately for the country, that has led to lot of systems that in retrospect favor short-term boosts to the economy at the expense of long-term economic stability. And now, 40 years later, the long-term may have arrived in some of the most unexpected ways imaginable. So why are growth rates that would be remarkable in any regular economy such problem in China? Similarly, why are things getting cheaper causing so many economists to become concerned about the country's economic health? How is country with relatively low national borrowing facing debt crisis? And finally, and perhaps most importantly, is this any different from the dozens of other times that economists and commentators have predicted the inevitable demise of the world's second largest economy? Now, before we get too far into assessing China's current economic problems, we need to give the big disclaimer that the country obviously causes some international tensions. From proposed hostilities with one of the most technologically significant countries in the world to human rights issues and simply been dramatic shakeup to the global status quo for the last century, which has had the USA exist as the de facto economic power. For these reasons and others, it's perhaps understandable that people are eager to hear news about some kind of impending collapse in country that is now the second most dominant economy in the world. But just because people might want something to be true doesn't mean that it is. And it was just over year ago that we had to make an entire video discussing why China wasn't going to collapse yet. But since then, few things have changed. The country has more or less completely reopened after the longest and most severe lockdowns in the world as response to the global pandemic. The country's questionable case numbers were at least in theory maintained by extreme measures that controlled when people could leave their homes, go to work, go shopping, travel, start business, or really do much of anything that generates economic activity. After these restrictions were lifted about year ago, the hope was that economic activity would bounce back as people went out to do everything they weren't able to do while was stuck inside for the better part of 3 years. This did happen, but it was not as intense as economists and the government predicted. The country went from posting close to doubledigit annual growth rates from before the pandemic to around 5% today. Simply put, that means that year-over-year the Chinese economy is producing 5% more net goods and services in given year than it was 12 months ago. lot of media outlets and even some economists have pointed to this as sign that the end is nigh for China, but they mostly failed to explain why. Now, 5% is low by Chinese standards, and it's following trend of downwards growth statistics that have existed for just over decade in the country. But that growth rate would be remarkable in most countries, let alone the second largest economy in the world. Advanced Western economies strive for growth rate of around 2 to 3% annually, effectively half of what China is achieving. And even then, plenty don't achieve that. So why are economic growth figures that would be miracle in the West considered crisis in China? Well, it all has to do with expectations. If someone was earning $50,000 year, but they had planned their long-term budget around getting 10% annual pay increases every year, they might have taken on bigger mortgage than they really should have, maybe had an extra kid, assuming that their income would grow enough to cover those expenses, and generally adjusted their spending, saving, and investing strategy based on an assumption of strong career growth. The comparison of personal income to country's GDP is not perfect, but it should start to highlight the problem. GDP is timed measurement. It effectively resets every year just like how much money person has earned in year also by definition resets every year. But they do both contribute directly to national or individual wealth and debt levels respectively over time. higher GDP or higher income will all other things been equal mean that country or an individual can pay off debt and build up assets faster. And that's why things like debt to GDP is spoken about in economics as much as debt to income is in regular finance. This becomes especially important when it's considered that growth rates compound. The difference between 5% and 10% annual growth rate over decade is almost double the end output. An economy with $1 trillion GDP will have $1.65 trillion GDP with 5% growth rate, but $2.71 trillion GDP with 10% growth rate. China has built its economy around the assumption that growth would remain lot stronger than 5% for lot longer than it really has. lot of major investments made by the government at all levels from individual to local as well as companies within the country and perhaps most crucially individual households were all predicated on the idea that the economy would continue to grow like it had been for the decades between 1980 and 2010. Commentators have poked lot of fun at things like ghost cities where entire cities were developed on the outskirts of existing major centers that could house millions of people but never had anybody move into them so they sat mostly empty for years. Other commentators were quick to defend this practice, pointing to instances where these ghost cities ended up being fully populated. The reality, as with most things, lay somewhere in the middle. These development projects took investments from governments to provide infrastructure, companies to construct the buildings and provide amenities, and individuals to invest into apartments in city that nobody lived in yet. With the country growing as fast as it was, the expectation was that eventually these areas would be filled by people moving into these new centers. And the rate in which that was happening meant that it only made sense to plan ahead. With that style of economic planning, any kind of drop in growth, even if it would still be strong by Western standards, could mean the difference between an entire city being filled up or remaining completely empty until everybody involved in the project runs out of money. This is just the first place where economists really should have known better. The simple fact that international migration rates from the country to major cities has been slowing for decades now. And for the first time in recorded history, outside of war, the population of China was decreasing means that endlessly building with the expectation that the country will grow into things just wasn't going to last forever. Real estate has become the most obvious and problematic sector where this kind of expectation of strong future growth has encouraged optimistic recklessness at every level of the economy. But it's not the only place. Everything from infrastructure development to trade deals all the way up to massive international projects like the Belt and Road Initiative were made with the expectation that the Chinese economy would swiftly grow into markets that it wasn't yet big enough to fully utilize. Now overly optimistic future planning is one thing, but it doesn't constitute crisis by itself. It might though when we consider the one thing that is still growing rapidly in China, debt. China has always had reputation for being prudent saver on national and individual level. The country does have the world's largest foreign currency reserves, but it also has rapidly growing pile of debt. China's national debt to GDP ratio is about 77%, which is up significantly in recent decades, but is still perfectly healthy. The USA, by comparison, has debt to GDP ratio of around 122%, which is high, but still not really anything to be too concerned about. The thing with China, though, is that that's not the full story. And the country either intentionally or incidentally has fallen into situation where none of their debt metrics look too concerning individually. But collectively they tell very grim story. National debt only measures debt taken on by the national government. On top of that, there is also provincial debt which is more concerning because provinces within China do not have the authority to print money so they can become insolvent. Exact value on provincial debt is hard to track down because all of the various regions report their borrowing in different ways. Some don't report it to anybody but the central government. And of course, potentially embarrassing economic statistics in China are frequently misreported. Anyway, quick but very funny side note is that several stories of provincial governments painting their grass green screen, setting up completely fake pieces of infrastructure like drains that lead nowhere and sticking rocks on top of rebar to make it look like flowers in field have been reported ahead of visits from central government officials. Of course, these are individual reports, but if they're willing to go to that much effort and do that much damage just to keep face when highle government officials come to town, it's not outside the realm of possibility that they would also massage financial figures. Anyway, the best estimates by Goldman Sachs put total provincial debt in China at the equivalent of over $23 trillion, effectively 150% of the country's total economic output, on top of the 77% from the national government. That provincial borrowing was mainly done to fund big infrastructure projects with the anticipation that the country's industry would grow into fill them. As we discussed earlier, major cities all over the country who were becoming very wealthy by centers of industry and other regions did not want to be left behind. The main source of revenue for these municipal governments is selling stateowned land to developers on 70 or 99year leases. But they can only sell that land if people are willing to buy property. And people are only willing to buy property if the local government was investing in big projects. Combined provincial and national government debt. if the estimates are correct, would be over 200% of the country's GDP, which is where alarm bells do start ringing in even the most resilient economies. Now, to be fair, the individual states within the United States that we were using as point of comparison do also have their own debts. And collectively, they add up to $3.3 trillion in total borrowing. So, still significant amount, but tiny tiny fraction of provincial government borrowing in China, which is still overall smaller economy in nominal terms. But the debt problem doesn't stop there. Unfortunately, far from it. lot of borrowing to fund government initiatives in China is not done by the government directly, but instead through series of thousands of state-owned companies. Large stateowned companies have been the primary driving forces behind major projects with less than amazing outcomes both within the country and internationally. The belt and road initiative in particular, which was China's grand plan to fund infrastructure development in emerging economies to build out trade partnerships and spread their influence, was mostly funded and built out by stateowned companies like the China Construction Bank, China National Petroleum Corporation, and the China State Construction Engineering Corporation. The Belt and Road Initiative has not been resounding success. It's led to lot of lending that is looking unlikely to ever be repaid, and it's turning China into global debt collector, which is running contrary to the plan's original goal of getting developing countries around the world on side with China. Today, it has more or less been abandoned, as no major projects have been pushed anymore. At home, the story is not much better for lot of Chinese stateowned corporations. lot of these companies are just regular property developers that would assist regional governments in building out cities. And of course, that industry has been plagued with problems ever since the spectacular collapse of Everrand, which itself was not stateowned company, but did bring lot of other developers that were down with it. On top of all of this, companies like the China Railway Corporation have also overinvested into infrastructure based on the expectation of future growth and have taken on debt burdens that would only be manageable if the country's economic activity continued to grow very rapidly. China's stateowned companies have total debts of over 15.6 6 trillion, bringing the running total to $52.3 trillion, or roughly 300% of the country's GDP. This is all before considering perhaps the most important indebted group, regular everyday households, which have also borrowed heavily, mostly to invest into real estate, which in major cities was amongst the most unaffordable in the world. Again, people bought into the dream of cities like Shenzhen going from glorified fishing village to one of the global centers of commerce within their lifetime. Assuming that economic growth kept going, this success story could be replicated in hundreds of other cities around the country. And in many instances, it was. Family members pulling together their life savings to buy run-down one-bedroom apartment in complex with terrible building standards sounds foolish in hindsight. But if these cities continue to grow like they had been, it would be good investment. Including household debt that has mostly been directed towards unproductive assets that are losing lot of market value, the country now has debt burden potentially as high as 360% of its GDP. And if that wasn't concerning enough already, it's becoming worse due to deflation. Now, in the past 3 years on this channel, we have spoken lot about inflation for obvious reasons. So, don't want to repeat too much here, but simply put, inflation is the general increase in the price level of goods and services in the economy. So, deflation is the opposite. But then the question becomes, why are goods and services becoming cheaper in China, causing so many economists to get so worried? Theoretically, cheaper stuff should be positive economic outcome. But it does cause some problems. For starters, it can be sign of bigger underlying issues. This isn't problem so much by itself, just like faster heart rate isn't problem by itself in the human body. But if it's unexplained and it goes on for long enough, it can be sign of something else going very badly. Most deflation occurs when consumers aren't spending as much because then businesses are forced to lower their prices to try and encourage consumers to make more purchases and to compete with other businesses for the few consumers still spending. The reason that consumers would be spending less is either if they are earning less because employment is lower or because they're worried about the future and are trying to save money. Either bad in an economy. Deflation itself, if it goes on for long enough, can also dramatically slow down growth. small amount of inflation can actually be good thing for an economy so long as wages keep up with that inflation. small bump in nominal wages every year can actually encourage people to go out and spend or invest their money even if their real buying power hasn't actually increased. Deflation does the opposite. If money is buying more every year, businesses are going to find it harder to give people wage increases. And long-term, they might even need to reduce people's wages or lay them off. Even though people's incomes are technically becoming higher, it's harder for people to see it in the same way they would with bigger number hitting their bank account every month. Other people with more money to spend and invest will also be less likely to do it. Because if money is buying more every year, it just makes sense to sit on it completely risk-f free. Especially in an environment like China at the moment where investments that were once considered safe as houses are literally being demolished because it's no longer worth it to keep them standing. In China, this is especially bad because lot of their economic growth still depends on lowcost manufacturing. If deflation persists and wages aren't lowered in line with it, then it will make their problems even more severe as they continue to lose their dominance in this industry to other regional rivals. Now, all of these issues have common trend. They would be fine if the country still had double-digit growth. And of course, nobody can predict the future, least of all economists, but there was no reason to expect that now would be the time where their economy slowed down. By global standards, China is still at best middle-income country, and large part of their population still lives in relative poverty. So, there was still plenty of headroom for economic prosperity. Of course, looking back, there are many reasons for this slowing growth, but we've already made several videos covering those issues, and they really do deserve fulllength explanation. China's rise has been incredible. But if it's destined to become the world's dominant superpower, why is its economy slowing down? Some economists argue that the real problem isn't just stagnation. It's that we don't actually know how strong China's economy really is. China is one of the most important economies in the world. Not only because of its sheer size, but also because of the influence it has over its region, the way it conducts business with other economies around the world, its immense currency reserves, problematic foreign policies, and of course, its population that represents fifth of all people living in the world. Even if China wasn't the second largest economy in the world, it would still get lot of attention for how much of tangible impact it has on our everyday lives. Look around you right now and I'm sure there are dozens of items that were made in Chinese factories that are materially improving your standard of living. Probably including the device that you're watching this video on right now. The economic dependency that we may or may not like to admit that we have on China is starting to wayne. But it's still there and that's why the validity and reliability of their economic data is something that has very real impact on the way that we manage our own economies. Anytime I've made video that looks at the economy of China on this channel, normally give brief disclaimer that economic figures from Chinese agencies are potentially altered by different levels of government to present more positive image of Chinese economic prosperity. This could include anything from inflating output figures to misrepresenting employment data. There are very logical reasons that different levels of government within China would try to do this. Whether it be more funding for local projects, gaining favor with party leaders for delivering good results, and on an international level, presenting strong face to potential allies and adversaries alike, misrepresenting economic figures can do lot more harm than bruising few egos and allocating credit where it's not really due. It can seriously impact the quality of life of, in China's case, billions of people. Beyond that, think it's also important to recognize that misrepresenting economic statistics is not problem unique to China by any means. But it is the second largest economy in the world and it does have the reputation more than any other country for this practice. So it makes great case study to learn what to look for to see if any other economy is doing the same thing. So what evidence is there to suggest that China is misrepresenting their economic figures? What problems do these figures cause in the real economy? And finally, what metrics can we look at to determine the true prosperity of an economy if the official figures are unreliable? When assessing information every type of scientist, including social scientists like economists, must consider the accuracy, precision, and relevance of the data and information that they are working with. The classic way this is explained is by imagining dart board. If points of data are accurate and precise, they will be grouped around the bull's eye very tightly. If the data is precise but not accurate, they will still be tightly grouped, but they will be in one corner of the board. And if the data is accurate but not precise, they will be grouped around the bullseye with lot of spacing in between each shot. The relevance of data can be little bit harder to determine, but to stretch this example, if you were actually playing game of golf, the grouping of your darts on dart board is kind of meaningless. actually don't like this example because it's very easy to confuse accuracy with precision. So let's use an example that actual economists might work with in the real world. Consider the GDP of country like Australia. The World Bank estimates that in 2021 Australia's output was 1 trill542 bill660 million. That figure is precise down to the closest million. But its accuracy might not be that great because the IMF says that Australia's total output was 1 trill724 bill787 million and the United Nations says it was 1 trill423 bill473 million. These estimates can't all be accurate. There is variance of more than $300 billion here which is roughly the economy of Portugal. The reason for this is that all of these organizations use very different techniques to collect and process the data needed to estimate GDP figures, which goes to show that there is lot of wiggle room to interpret information like this, even when dealing with very transparent and reliable country like Australia. What's more is that these figures actually make another mistake that economists should look out for. They have oversold their precision. There is no way that an organization would be able to measure the total output of any national economy down to the closest $1 million. Yet, they've expressed their figures down to this point, which could give the reader the wrong impression of how precise these figures really are. Economists actually make mistakes like this all the time, and people making big decisions based off this data definitely know that it's not precise down to the nearest million dollars. But if you ever making calculations like this yourself, make sure to round it to the factor of 10 that you can be confident of, and you can say that you're making better economic figures than the UN. Now the relevancy of Australia's GDP figures depends on what you are trying to achieve. If you want snapshot of the general size of the Australian economy, yeah, GDP figures are great for that. But if you want to understand living standards in Australia or the size of the German economy, well then these figures are not really relevant at all. At least not without additional information. Now, apart from tricking you into learning something about statistics, it's really important to understand the accuracy, precision, and relevance of any figures you see. Because even if they're not outright cooking their books, there is chance that they can be carefully selected to give you the wrong impression. If the people collecting and processing this data have no specific bias, then small errors like this can balance themselves out, especially if data points are collected broadly and in large numbers. But in China, there is very real incentive for all levels of government to pick figures that present more positive image. If those points of bias data get passed up the ranks to be aggregated into national figures, the errors can compound on one another to produce net results that are off in very big way. Beyond that, collecting GDP data is hard. think it's worth recognizing that the World Bank tracks the ability of all countries to produce accurate economic figures using the statistical capacity score. In the past, China's score has been below the median. It scored in the 38th percentile of low and middle inome countries in 2004 and the 52nd percentile in 2015. However, in the 2016 rankings, China was placed in the 83rd percentile, meaning only 17% of low and middle inome countries were able to produce more accurate aggregate figures than it was. That's still not great because low and middle inome countries tend to produce much worse economic figures than advanced countries. But it does make sense that poor countries have harder time producing highquality economic data. The actual formula for economic output is quite easy. Consumption plus investment plus government spending plus an exports. No problems there. But if gave you all of the resources at the disposal of an average national statistics bureau, where would you start on working out the actual numbers to plug into this equation? It's theoretically possible to sit an economist at the end of every production line and service being provided in the country. But that's obviously wildly impractical because well at that point significant portion of your economic output would be measuring your economic output. In advanced economies with very formalized financial systems, the government agencies in charge of producing economic figures can use data collected by other agencies to track things that they might be interested in. The US Bureau of Economic Analysis is responsible for producing the GDP estimates for all of the American states as well as the US as whole and they mostly use data collected from the IRS and customs. You should be able to look up the methodology that your own government uses to produce economic estimates as most of them want to make the process as transparent as possible. The problem this creates for country like China is that large portion of its economy is still very informal. We have already explored in recent video that only around 2% of China's population actually pays regular taxes. So getting clear economic picture using tax records just isn't feasible. This means that they have no other option than to rely on more firstirhand data collection. We also have to address the elephant in the room. Corruption in China. It's been known to happen. So when massive economy like China is dealing with very complex set of figures that are being collected and interpreted by many layers of government employees, all with vested interest in presenting positive message to their superiors. It's no wonder that the figures become unreliable. We also have to consider the compounding effect of figures that are reported every year. Casten Holes is researcher at Stanford University that published paper on the quality of China's GDP statistics called the quality of China's GDP statistics. It's an old paper now, but it argued that after fabricating one report, leaders struggled to go back to accurate numbers because they would have to report lower than actual growth to rebalance the level of output. If you are local government leader that has accidentally or willfully overestimated their output figures by 1% in year, you're going to need to add an extra 1% to next year's figures, or else it's going to make it look like you've gone backwards. Do this for long enough and the gap between the correct figures and last year's figures will be so large that reporting correct figures would cause such drastic drop that it would spark an investigation. At that point, even if the officials didn't want to blatantly report false figures, it would be in their best interest to keep doing it because the punishment would likely be severe. Now, this is the important part. The Chinese government recognized this problem as early as the 1990s. Famously, leaked comment by top Chinese government official openly admitted that GDP figures were purely man-made. Because of this systemic problem, international organizations and even the Chinese government itself no longer uses data collected by provincial governments to create national output figures without first making corrections to account for the trend of overinflated figures. The problem then is that the National Bureau of Statistics of China is freely admitting to making discretionary adjustments to its data and providing no further transparency on what those adjustments are. The research division of the American Federal Reserve has argued that this lack of transparency is actually worse than the blatantly false figures because it's harder to know what those adjustments were. So, it's fairly obvious to most economists that yes, through combination of data collection difficulties, incompetence, corruption, and willful manipulation that yes, Chinese economic figures are unreliable and they are overestimated rather than underestimated. So, the next question is how do we make better estimates? The output of an economy is highly correlated with lot of other data points that can be observed without the help or more importantly the interference of government organizations. Lee Kai Chang, the Communist Party official who admitted that their GDP figures were man-made, very candidly discussed that the only three things he looked at to evaluate the economy was electricity consumption, rail cargo volume, and bank lending. If an economy is using more electricity, moving more cargo via rail, and lending more money to various projects, it's almost certainly creating more output. The benefit of using these data points is that they are centralized, so they're easy to gather, and they're also very hard to manipulate. Electricity consumption is measured directly from the grid. Railards need to keep track of containers coming and going, and banks obviously want to make sure that they're keeping reliable records of who owes them money. Now, this is great stuff. If you are high-ranking official from the CCP, foreign economist isn't going to have much luck asking Chinese stateowned bank for comprehensive breakdown of their new domestic lending activities. This means that these figures are still prone to being manipulated before anybody outside the party gets to see them. But there are other sources of data that are admittedly worse, but are much easier to collect. One popular method is to measure the light emitted from country at night using satellite imagery. The theory is that country will emit more light when it has more economic activity happening. Road lights, factory lights, car lights, even stadium lights are all direct results of some type of economic output. So the more light, the higher the GDP. This is really fun theory because we can roughly test it by looking at different imagery. This is South Korea with GDP of $1.8 trillion. And then this is North Korea with GDP of roughly $29 billion. Now, while this is fun theory, I'm sure lot of you are already thinking of problems with this system. For example, there are many other factors that determine light output, aside from pure economic activity. country with larger population will naturally use more lights. country with more heavy industry will use more light when compared to country that mostly produces value in the service sector. Even cultural differences around how bright residents want their cities to be can change light output. For example, compare Shanghai to Paris. One is much more lit up than the other, but Paris is actually the larger economic center. Of course, you can add balances for these factors, but then you run into the same problem of changing outputs based on some level of discretion. Louis Martinez, an economist at the University of Chicago, published paper on this theory that suggested that the growth in China's light output over previous decades was not sufficient to be in line with their claimed growth in overall economic output. He also found that autocratic governments in general tend to overstate their actual economic figures by an average of 35% when measured using light output as an indicator of growth. The same paper went on to argue that China's growth may have been overestimated by more than double in the years between 1993 and 2012. Martinez did account for the differences in the countries he studied in way that has held up to widespread peer review. But don't get too excited because that just means that he drew rational conclusions from reliable data. Autocracies, especially those with communist focus, tend to put heavy emphasis on heavy industry even when they are very poor. This means that their baseline light output would already be very high. And the change in total light output wouldn't be as heavily affected by households growing wealthier as it would in typical economy that takes the standard route of going from agrarian farmers to factory laborers to service sector workers. Lenin himself famously said in one of his speeches that communism is Soviet power plus the electrification of the whole country. So, communist nations obviously have propensity to supply electricity as priority. You could think of this like trying to work out how rich your neighbors are by how many times they have food delivered to them every month. The general theory is is that as people earn more money, they can afford more restaurant food to be delivered to them. But if you just happen to live next door to neighbors that are total foodies, then they might order restaurant meals every night already. If they get big promotion at work, they aren't going to order any more food because there's only so much you can eat in day. But if you're basing your estimate of how much their income has grown off how much extra food they are ordering, you're unlikely to pick up on the fact that they did get that promotion. Martinez did recognize this problem and he wasn't seriously advocating for the idea that international organizations should use telescopes instead of government supplied figures. But he did offer it up as surprisingly viable verification check. Now, just quickly, want to mention that Money and Macro, smaller economics channel, beat me to the punch once again on this particular paper when he made quite detailed video on the methodology of this research. We covered different details, but he definitely deserves another shout out. Now, the important part here is that all of these alternative ways to measure GDP growth can be used to verify or raise doubts over different figures, but they struggle to come up with accurate estimates themselves. For the most part, that's actually good enough. to actual decision makers and even the economies themselves. GDP figures don't matter nearly as much as you might think they do. GDP growth is so highly coveted because it can directly lead to improvements in living standards for average people in the economy. So GDP growth pays over lot of other problems. People are willing to put up with lot if they think they're getting richer. Of course, we know that GDP figures are just the ones that get the headlines. And it's definitely possible for living standards and economic influence to decrease, even when output is increasing. If you need to see this counterintuitive trend in action, well, look no further than China. If China's economy isn't as strong as it looks on paper, that raises an even bigger question. How much of its rise has been built on borrowed money? Debt has been key driver of China's expansion, but now it's reaching dangerous levels. This is China, the most populous and second largest economy in the world. This is nation that has been home to the most intense period of economic growth and development in history. As the country has opened up to foreign trade and embrace the free market, it has transitioned from famine plagued backwater into the superpower that we see today. This sustained development has done some amazing things both within the country and around the world, not least of which was pulling hundreds of millions of people out of absolute poverty. But of course, it hasn't been without its problems. Behind the futuristic facade of glassclad skyscrapers and mega projects, the Chinese government is unfortunately regressing back towards an increasingly authoritarian rule. The type of rule that has already caused all of the problems we've already seen in our three-part series on the country. Now, up until this point, lot of these issues have been conveniently overlooked, let's say, both by the citizens of the nation and the countries and companies that were doing well for themselves by taking advantage of this new cheap pool of labor. But this is starting to change. Increasingly hostile relations between China and its largest trading partners has meant that lot of these institutions and governments that were once happy to ride the gravy train are starting to change their tune. Perhaps more concerningly, the population of the nation itself is starting to feel the pressure of an overleveraged economy. Up until now, the country has enjoyed growth that is strong and consistent. population that is experiencing consistent growth will be seeing their quality of life improve year overyear and will naturally be less inclined to rock the boat that is fing them to prosperity. But no good thing lasts forever. and everything from unusual business practices to the most overinflated real estate market in the world is starting to weigh down this growth at all cost mentality. So, is China's period of rapid growth over? If so, what is causing this slowdown? And is this actually bad thing? Before we get into things, it's time for the big disclaimer. Chinese data sources, particularly those that relate to the economy, are not super reliable, to put it lightly. We always try to use independently verified sources where possible, but even still, some of these are ultimately dependent on what the Chinese government reports. These reports are often altered to present more positive image of the nation. This is by no means problem exclusive to China, and always encourage my viewers to question the validity, accuracy, and reliability of all pieces of data, no matter the publisher. But it is particularly prevalent here, which is why we need to make this disclaimer. All right, with that out of the way, let's look at perhaps the most pressing issue in the nation at the moment. The real estate market in China is multi-t trillion dollar time bomb that is somehow even more ingrained into economic systems than real estate markets in places like the United States, Canada, Australia, and Europe. Now, regular viewers of the channel will know that real estate in China's major cities is unbelievably expensive, especially when compared to average household incomes, which are improving, but are still well behind advanced nations like the US, Europe, and even their neighbors in South Korea and Japan. Now, there are three major reasons for this insane pricing. The first is obviously the expectation of future growth. This is major factor in determining the market demand for anything, but especially things that are considered assets. If you knew stock was going to be worth $100 tomorrow and it was trading at $50 today, you would definitely buy that stock even if the underlying company was complete garbage. Now, normally this rule applies to lesser degree in real estate because real estate holdings are less liquid, much more expensive, and less fungeable than stock in company. As in, if you buy house, you probably need to take out big loan that you may or may not be approved for. Then, when you go to sell it, it's not quite as simple as opening up your phone and hitting sell on your brokerage platform of choice. You need to employ realtor, hold open homes, and pay pretty significant commission for the privilege of the whole ordeal. What's worse is that if you just happen to buy house that gets infested with termites, well, then the general market appreciation is all for nothing, and you are probably still going to lose money on this investment. Now, all of these issues aren't to be barrier to these expectations for future gains in China. Why? Well, because real estate is really viewed as speculative asset first and place to keep people second. Building standards are absolutely terrible in China, but that doesn't really matter to most people. Why? Because despite how terrible the underlying building is, it's almost guaranteed to be worth more tomorrow than it is today. China's enthusiasm for real estate is so strong that some provincial governments have tried to cool demand by limiting the amount of real estate single household can own. The cunning investors way around this issue get divorced on paper so that one household becomes two and the apparently separated investors can double their holdings without penalties. China's economic growth has been remarkable and the best way for people to piggyback off that growth is to invest into real estate. If China's economy continues to double in size every 8 years, then paying 5 million R&B for rundown apartment is going to look like savvy investment. This is very similar in many ways to tech companies in the US that might have terrible underlying fundamentals, but have seen long period of sustained price growth based on projections of future growth, which is further fueling price growth. In the same way that investors in the West have accepted that some stocks are worth 100 times what the company makes in year, residents in China have accepted that homes cost as much as 46 times what the average worker makes in year. Will these markets last? Well, nobody's got rich by betting against them yet. So, guess time will tell. This comparison also leads us along nicely to the next reason that housing in China is so expensive. And that's because people don't really have anywhere else to invest. We covered this issue in detail in our video on the Chinese stock market versus the American stock market. So, don't want to repeat too much here, but the basic rundown is that average Chinese people just don't invest into Chinese companies because they have historically not been great investments, especially when compared to the overall growth of the economy. There have also been major issues with things like peer-to-peer lending schemes in China, which were very popular until the government cracked down on the practice altogether because it was becoming rife with fraud and also, let's be honest, taking some power away from the stateowned banks. Basically, if you want to put your money to work in China, it needs to be in real estate. For what it's worth, the government has actually tried to control this rampant speculation, but so far it hasn't been particularly effective. Now, these other two reasons potentially pale in comparison to the third driver of the insane house prices we see in China, which is the societal pressure to own home. You might think this is nothing unique. In the US, everyone from prominent financial advisers to your know-it-all in-laws will talk endlessly about the need to buy house, but China takes this social pressure and turns it up to 11. Given the one child policy causing an imbalance of men and women in the nation, lot of Chinese gentlemen have found it almost impossible to get married without owning home. Beyond that, there are very real structural advantages to owning home. The Chinese population is heavily restricted by what is known as the hookco system, which basically tracks household registration. This system tracks where people's primary residence is, and from that decides where they will have access to public services like healthare and education for their children. The internal migrant population within China is huge. lot of rural residents leave their small villages to move to city centers where they can attract significantly higher wages. The problem is that these migrant workers will still technically be residents of their small village which will mean that they won't have access to even the most basic public services in their cities that they are living and working in because of this hookco system. This is also one of the main reasons that we see Chinese children left at home with grandparents while their parents are off working in the city. It's not that the parents don't want to take them along. It's that they won't be able to go to school there because they are not counted as residents. This would be like not being able to send your kid to public school in San Francisco because you were unlucky enough to be born in North Dakota. Now, the solution to this problem on an individual level is to buy house. Sure, it may be extremely expensive, but if you share room with 10 colleagues and save everything you earn while getting loan from friends, family, and bank, maybe you'll be able to afford small one-bedroom apartment on the outskirts of one of these cities. It may not be ideal, but once you have the deed to that household you are in, and you're no longer second rate citizen in the city that you call home, this is not fringe issue either. In cities like Beijing, as much as onethird of the population is made up of these designated rural workers. Now, this issue is not great at the best of times. But what happens when all of these hopeful workers are suddenly forced into lockdown without anything in the way of government assistance? Yeah, it gets messy real fast and just how messy we will soon see. But before that, this all begs the question, why don't they just abolish the system? The Chinese government is obviously trying to cool down this real estate bubble. They have introduced laws such as high deposit requirements for second and third properties. They have recently proposed nationwide property tax and in many instances they have put hard cap on how many pieces of real estate people can own as we saw earlier. The problem is none of these efforts have really worked. In fact, in the case of provinces that have limited home ownership, it's almost had the opposite effect. If people can only own three houses, let's say, they're going to make sure those houses are very valuable because they basically represent their only opportunity to consistently invest money. This dries up development supply of the types of homes that would be affordable because nobody's interested in using up one of their three property lotments on one-bedroom or small studio apartment. But there is still an obvious solution. Just get rid of this hookco system. The problem is that this isn't one universal system. It's actually dozens of individual systems specific to different provinces and cities around the country. Getting rid of this system would require the cooperation of all of these individual provinces who actually may not be too keen on the idea at all. You see, you never actually own land in China. You're rented off the government for set period of time. Normally, these land rentals are given to developers who will in turn build big apartment buildings on them and sell out the individual units for nice healthy profit. Historically, it has actually been provincial governments collecting the revenue from the sale of these land parcels. Wealthier areas have more expensive and desirable real estate and therefore attract higher prices for their land rights. Beyond this, building is huge industry that supports millions of workers in China. And the area with the most development attracts the most jobs, which in turn attracts further development. We saw very similar situation in Spain prior to 2008. Go watch our video on that to learn more about this quite remarkably similar situation. But despite this, the national government has recently announced that all this land rights revenue will now be collected centrally. This is huge deal because government revenue from these land rights sales makes up very significant portion of total government revenue. Last year alone, these land lease agreements generated 8.41 trillion R&B in revenue or the equivalent of about$ 1.3 trillion US. This has been seen by many as first step towards introducing uniform land tax which would simultaneously further increase government revenue while at the same time reducing the demand for real estate assets which would now represent an ongoing expense. However, this may be more difficult than one would think at least in the immediate future because it very well could be the catalyst for perfect storm. The fallout of the Corona virus has not been easy on China. And while their officially reported infection figures are quite low, especially for country of some 1.4 billion people, it does not mean that it has sailed through the ordeal unscathed. On the surface, it doesn't seem that way. Exports are at their highest level in history after suffering an understandable dip during early 2020. But the thing is these impressive export figures are mainly due to the price growth of commodities rather than genuine growth in productive potential. Port and factory closures across the nation have slowed down the workshop of the world and heightened trade tensions have certainly not helped the situation. Unemployment is high especially amongst young workers even by the very creative reporting standards of the government. And what work does exist is becoming harder and less rewarding. When everything is on the up and up, people are happy to work few extra hours because it means they make more money and improve their quality of life. But for the first time in long time, young workers are starting to see that this additional effort is going more to support an aging and overleveraged society than them. new phenomenon known as lying flat is sweeping the nation. It's form of peaceful protest where mostly young people will refuse to work in highintensity roles or perhaps refuse to work at all, preferring to just lie flat. This might just be another piece of straw on the camel's back, but it's one that the government is seemingly quite concerned about. China is still heavily reliant on hardworking cheap labor to prop up its economy. Without it, the domestic market it's worked so hard to cultivate or collapse very quickly, and perhaps it already is. The decades of debt that has piled up to support an endless building spree is starting to come due. Household debt has risen from 18% of GDP in 2008 to 61% of GDP in 2020. in the same time that GDP has almost tripled. Now, debtfueled growth isn't always bad thing. And for what it's worth, this debt to GDP figure is still well below places like Switzerland and my own country of Australia. But when that debt is primarily used to buy shoddily constructed apartments sitting on land rented from the government at massively inflated prices, well, the kingdom has literally been built upon pillars of sand. Debt collectors have seen massive increase in the past few months and all of the factors that we have seen might be starting to sway this tower of cards. Historically, this is where the government would step in. But this real estate bubble might genuinely be too big to manage. Time will tell, of course, and I'm well aware that everyone in their dog has predicted the inevitable demise of the Chinese economic miracle. Admittedly, in part because they kind of want it to be true. an authoritarian government that still purports to be communist being the dominant economic superpower in the world. can't say I'm excited about it. But regardless of when the economy slows down, it's more question of what happens next. In modern advanced democracies, when there is an economic meltdown, people lose their jobs, their houses, their cars, and it genuinely is terrible. But we tend to turn it around and just vote for the other mob of politicians that swears they would have totally handled it better if they were in charge. If even slight hiccup in the promise of endless growth occurs in China, people will very quickly become aware of all of the other issues that they were willing to ignore while the going was good. When there is only one mob of politicians within the country that you wouldn't dare insult, but you still need someone to blame, those fingers are probably going to be pointed outwards. With debt levels this high, it's easy to assume that China's entire economy is on the brink of collapse. But is that really the case? Some experts argue that China has too many financial safeguards, too much global influence, and too much control over its economy to suffer total meltdown. China has not been having good year. Between extended lockdowns, real estate market collapses, banking crises, trade wars, food insecurity, and an unusually high level of civil unrest, it's starting to look like the once invincible CCP is forming cracks. Look, know it's fun to speculate the demise of regime that has done some terrible things, but now is probably the time to remember that just because we want something to be true doesn't mean that it is. It's easy to see why news stories, articles, and so many YouTube videos speculating about how many days left until China collapses is getting so much attention. But if you hadn't guessed already, it's probably not going to happen. At least not in number of days. We also shouldn't be hoping for it to happen. As cathartic as the idea of our biggest global rival imploding might be, we also have to realize that this would be good news to nobody. And I'm not just talking about the 1.5 billion mostly innocent people living their lives and raising their families in China. I'm also talking about all of us that depend on delicate global finance and trade system, which would not react well to the second largest player falling into disarray. To make sense of these frankly very click- bay titles, we must as always understand few important things. So, why is everyone suddenly predicting that China is on the brink of collapse? What are the chances that these predictions will actually come true? And finally, why is this most likely totally overblown? Now, before get into China's apparent collapse, want to do two things. The first is to give the standard big disclaimer that internal Chinese economic figures are extremely unreliable and in multiple instances have been found to be altered by authorities to present the nation's economic situation in more positive light. The other thing want to mention is that while was researching and writing this video, noticed that another smaller economics YouTuber by the name of Money and Macro made very similar video. For the most part, we have explored completely separate issues within the bigger theme of this collapse narrative, but want to mention his work anyway because he is great at calling out journalists and YouTubers on their nonsense, including myself in the past. Although, think got the last laugh on that inflation situation. All right, now that that's out of the way, China's economy has not been having very good time recently for laundry list of reasons that think are worth addressing individually. Most recently, it has had record heat waves and droughts. Heat waves in any country are bad news, but China is uniquely unprepared to deal with them. Most of their industrial capacity comes from city centers, which have effectively had to shut down due to extreme heat causing conditions that make it difficult to go outside, let alone perform physical work in the nation's factories. Droughts are also bad news for the economy. Now, the situation on the ground is probably not as bad as people are saying. Nobody is going to run out of drinking water. People don't drink municipal water in China anyway, but water supply issues are going to have real impacts in other areas. Industry in China is heavily concentrated along its rivers, primarily the Yangze, which is waterway that has 175 cities built along its banks. If the Yangze River was sovereign nation, it would be the third largest economy in the world after the United States and of course, China itself. The river is running dry along certain crucial sectors which is directly interfering with hydroelectric power stations, regular power stations that need the water for cooling, internal shipping up and down the waterway, waste management as sewage and industrial runoff becomes more concentrated, and of course farming. China is very arable country with lot of productive farmland, but it also has lot of mouths to feed. As country, it still relies on food imports to feed its large population. International food markets have seen the price of staples like grains, rice, and proteins skyrocket in the wake of agricultural slowdowns, general inflation, as well as the war taking place between Russia and Ukraine, two of the top 10 largest wheat producing nations in the world. In cruel twist of irony, China was already struggling with food production this year because of flooding. Now, again, want to emphasize that the population isn't likely to starve in China because of these food shortages, at least not for the next 27 days or whatever. But feeding families is going to become lot more expensive, especially for cultural staples like pork, which is actually where good portion of grain production in China ends up. It's important to remember that while Chinese citizens are much richer than they were even decade ago, it's still very poor country by Western standards, with the average urban worker earning just $14,000 per year and rural farmers earning far less than that. If you are the majority of my audience from an advanced economy and have been struggling with food prices yourself, just imagine how difficult it is for population with significantly less disposable income. There is an old saying that society is just three missed meals away from total collapse. And perhaps we are starting to see toned down version of this already. Again, nobody is starving, but when people have to start making decisions and sacrifices to feed their families, unprecedented civil unrest is easy to sympathize with. Now, if food and water shortages weren't enough, there is also the ongoing issue with housing and jobs. first made video on China's debt crisis little over year ago. Since then, things have only become worse. There were, of course, the issues with Chinese property developers that threatened to leave millions of people without their properties that they had already paid for. And while the government has thus far managed to contain that issue, it's not changing the fact that China's biggest industry is built on pillars of sand. It's very easy to grow an economy through combination of lowcost manufacturing, government stimulus through infrastructure, and building houses to supply an ever more speculative market. The problem is that while this strategy might be extremely effective in the short term, it's unsustainable in the long term. Trying to grow an economy by exploiting these three factors is like trying to become an athlete by giving yourself an IV drip of 5hour energy. You might very well break the 100 meter dash world record, but your heart is probably going to explode before you finish marathon. Very simply, lowcost manufacturing in China has made the country lots of money. The Chinese population is still not rich by Western standards, but their incomes are many multiples of what they were even decade ago. This means that their cost competitiveness is not as strong as it once was, and manufacturers are now looking to other options like Vietnam, India, Indonesia, and even America. Obviously, American factory workers demand much higher wages than Chinese factory workers, but shipping has been extremely expensive recently. In July of 2021, it costs around $2,500 to send 40ft shipping container from Shanghai to Los Angeles. In July of this year, that price was $20,000. The average factory worker is going to produce more than two shipping containers worth of product every year, which means that even if American companies have to pay their workers $35,000 year more, they would still come out ahead. They would be saving money while also having the benefit of shorter and less complicated supply lines and been able to say that their product is made in America. In the past, the middle income trap, as this phenomenon is known, has been dismissed in China's case because low labor costs were just small part of what made Chinese manufacturing so competitive. The country had also benefited from lacked laws around environmental impacts, cheap shipping through massive economies of scale, relatively skilled workforce, low standards for working conditions, and technical lomeration. Technical lomeration is the benefit that businesses get from being close to other businesses in the same industry. If suppliers, workers, consultants, customers, and even competitors are very close together, then it encourages the sharing of components, skills, ideas, feedback, and competition, respectively. Cities like Shanghai, Shenzhen, Shongqing, and Guanghou all benefit greatly from being bustling hubs of business activity. Or at least they did. But the trade wars, external lockdowns, and heat waves we explored earlier are all putting massive damper on this business activity, which has the potential to snowball rapidly because the benefits of elomeration require critical mass of activity. As soon as some business dries up, the rest quickly follow. But maybe I've made the same mistake that lot of economists do when they are assessing China's economy, which is to assume that they are still an economy directly dependent on meantalous trade performance. While exports are obviously still very large part of China's economy, it also has domestic market which like most economies accounts for majority of its output. The problem it's facing here though is that large portion of that output has come in the form of housing and infrastructure. Infrastructure spending is great way to stimulate an economy. To build roads, railways, bridges, and all of the stuff that China's been building on mass in the past three decades, you need to employ lot of people and spend lot of money. This gives money directly to workers and businesses in the same way as direct stimulus like tax breaks or stimulus checks. But it also has the added benefit of creating something that will continue to add value to the economy for years and decades to come. Sounds great, but if you have already watched my video on China's $850 billion trains to nowhere, you'll know that you can't do this endlessly. Effective stimulus has to be performed to counter the cyclical boom and bust nature of economies. Governments should apply stimulus when an economy is facing downturn and they should ease up or even reverse stimulus efforts when an economy is going very well. China has basically been putting the infrastructure stimulus accelerator to the floor for the past two decades and has been pushing harder still since the GFC. This has meant that they have been able to build lot of impressive things and make lot of impressive headlines, but they've been doing it all while spending lot of money during time when they really didn't need to be. They have also now run out of things to build. Almost every possible piece of infrastructure that made sense to build in China has already been built. That means that now the government has been forced to rip up and redo perfectly good projects or build stuff in areas that don't really need it. You have all probably heard about China's ghost cities, developments with thousands of apartments, but nobody living in them. Well, all of those ghost cities have ghost road networks, ghost utilities, and ghost public services, too. Worse than simply providing no benefit, this infrastructure is an ongoing liability because it needs to be maintained and in many cases it was funded through municipal borrowing. big motivating factor of China's Belt and Road initiative is that it could continue its infrastructure spending in areas that would actually genuinely benefit from it. China invested heavily into developing nations in Southeast Asia and Africa by giving big loans from stateowned banks to smaller governments to fund the construction of ports, railroads, and other trading focused capital. Of the 54 countries in Africa, 49 have infrastructure loans from China. The loans were generally given on the condition that construction would be done largely or exclusively by Chinese companies using Chinese workers so that the Chinese economy would still benefit from the stimulating effects of government expenditure. Of course, if China builds port in Africa, it does not benefit from the added efficiency that that port provides to the economy, apart from opening up new trading partner, which isn't insignificant, but it is still not as good as building muchneeded port in their own country if their country had need for any ports. By investing in infrastructure in foreign countries, though, the Chinese government substitutes domestic market efficiency for stream of income in the form of loan repayments. This means that it gets to put money into the pockets of its workers while getting itself new trading partner and spreading its economic influence all without actually needing to spend any money in the long term because it will all be repaid to them. Except that it hasn't been. China has had to forgive huge amount of these loans because the governments that they loan the money to were unwilling or in most cases unable to pay them back. This can be for number of reasons. At the end of the day, most African economies are very small and unstable. But in lot of cases, these defaults are coming as the result of the infrastructure spending not providing the benefits it was promised to. Either because it was poorly planned, poorly constructed or never finished. In fairness, China has been generous with these loan forgiveness initiatives. But that has normally come on the proviso that the indebted nations fall in line with support for China on its more controversial international ambitions. Now, unpaid loans lead us nicely onto housing. China is heavily overexposed to real estate. In the US, housing contributes about 15 to 18% to the country's total output. That's everything from new home construction to renovations, landscaping, and even real estate agent commissions on sales. At even 15% rate, America is arguably already overexposed to this highly speculative industry. But in China, that number is 30%. 30% of China's output and an equally large portion of its growth over the past decades have been fueled by housing. That's because like infrastructure, housing is really easy way to boost employment and household spending. Construction always requires large amount of labor and people treat spending on new homes very differently than they would spending on regular consumer items. Households in China have been willing to take on astronomical amounts of debt to buy apartments in poorly constructed buildings on top of land that belongs to the government. So far, this system has been win-winwin for all of the participants involved. Investors have seen the price of their homes skyrocket off the back of endless debt fueled speculation. Banks have been able to write huge loans to an industry that most believe the government wouldn't let fail. Provincial governments made lots of money by selling land use rights to developers. The developers made lots of money by building cheap houses that they could sell for astronomical prices. And the national government was happy because this merry-goround of greed was great for employment and growth figures. But like all feedback loops, this was bound to end in disaster. And it has been. We have already made multiple other videos covering housing, debt, and government taxation in China before, so don't want to repeat too much here, but do want to highlight that the collapse of this market is creating panic that banks will not be able to honor withdrawals since they too are so heavily invested into the real estate market. Chinese citizens are now facing what was once unthinkable, which is that their homes, which represent their investments, savings, retirement plannings, and their housing allinone are now borderline unsellable. and that's if they're lucky enough to actually have house. Developers are unable to finish projects that people have already paid for more often than not with combination of their own savings and mortgage. Those people who are unlikely to get their houses are now refusing to pay their mortgages, which means banks are running out of cash even faster than they were before. In anticipation of cash shortages, people are going to withdraw their savings from at risk institutions, which is only further accelerating the problem. This is classic run on the banks and most economists see this as basically financial Armageddon. So there we are. housing market collapse at least twice as potent as the GFC municipal bankruptcies, foreign investment breakdowns, failing infrastructure, trade wars, droughts, flooding, heat waves, extended lockdowns, food shortages, civil unrest, industrial slowdowns, and bank runs. That's the brief list of things going wrong in China right now. This is to say nothing of an aging population, long-term loss of industrial competitive advantage, and the gradual decline towards less businessfriendly, more authoritarian government. We can ignore those factors for now because again, we are just trying to work out if China is going to collapse in the next 27 days or whatever. But with all of this going on at the same time, maybe it's more efficient to ask why China won't collapse. Now, to explain this, we first have to define what collapse is. If we are defining collapse as the total breakdown of civil order, people marching in the streets, governments being deposed, something like the Arab Spring, in many ways, there are some similarities. Those uprisings were kicked off by stagnating economic growth in Tunisia, and they were directed at authoritarian governments that were impeding on people's liberties. So, it could very well collapse in the same way that America could have collapsed during the GFC, or in the same way that anything could theoretically happen at any time. If government leadership gets backed into corner and tries to do something like invade Taiwan, then yes, it's going to collapse and it will very quickly turn into failed state. It's just extremely unlikely. We as economists also don't know what we don't know. There could be anything from further natural disasters to government infighting to an alien invasion that could cause the state to collapse. But that's not situation unique to China. It's just that China is in slightly more precarious situation at the moment. If had to present scenario probability report, this would be 1% chance where regular economy might be half% chance and something like Russia would be 25%. Another potential collapse situation wouldn't so much be collapse in the traditional sense as regression towards becoming closed off centrally planned economy. Again, we can in many ways already see this playing out. The country is becoming much more strict about who leaves and who enters. It has undeniably taken on more nationalistic persona and it's aligning itself with countries who are themselves getting cut off from the rest of the world. Now, would argue that if this does happen, it will continue to be very slow, very gradual decline rather than collapse in the sense that China wakes up one day and realizes that it's North Korea 2.0. It would also be much harder to pull off. One of the reasons having wealthy population is so fantastic is that they have the capacity to be politically active. China's population, while still not wealthy by Western standards, is not living meal to meal like it was back when the country was closed off from the outside world. It's much harder to subjugate population that has tasted wealth and freedom. Not impossible, but much harder. All right, now I've covered myself from the this didn't age well comments. In the event that this whole situation actually does go south, it's probably better to look at some more realistic reasons why it probably won't. The first is that China can afford some economic setbacks. It has been home to the most intense period of economic growth in history. It has gone from mostly agrarian backwater to the second largest economy in the world in the span of someone's working career. Lots of other countries have economic setbacks and it's not too often that we see these devolve into outright revolution or anything of that nature. What's more is that bit of an economic slowdown might be exactly what the country needs. Modern economies run on the business cycle. This is rough pattern of booms and busts with frequency of around decade. This pattern is mostly caused by debt. When on average people are taking on debt, the economy does really well. And then when on average people are paying off or defaulting on their debt, the economy slows down bit. Now, while those slowdowns might be painful, if well managed, they play really important role in the long-term health of an economy. Downturns weeded out underperforming businesses, products, and employees as everybody is forced to cut down to the essentials, which means that only the most competitive, value adding, and efficient entities survive. understand on human level that sounds terrible, but long-term it means that the economy can bounce back stronger, which is big part of the reason why on average this cycle of booms and busts tends to trend upwards over time. pullback in the Chinese economy, again, if managed properly, could be huge opportunity for the economy to shift away from its overdependence on real estate and infrastructure and focus more on value adding industries like high-tech manufacturing, research and development, tourism, and finance. The Chinese economy is also lot more robust than most economists are giving it credit for. This might be confusing, especially since said lot of the biggest industries are built on very shaky foundations, but these two factors are not mutually exclusive. Its real estate and infrastructure industries are crumbling literally and figuratively. But the Chinese government is more than capable of controlling the damage from these issues in the short term. China has the most foreign currency reserves of any nation in the world by huge margin. This means that in worst case scenario, it could completely hold off bank runs just by printing more money and dispersing it through series of stateowned banks. Normally, this would cause inflation, but China can afford that right now. One positive side effect of all of this consumer hesitancy is that China is not having the same problem with inflation that lot of other countries in the west are. The Chinese central bank has actually bucked the global trend and is lowering interest rates at the moment in the hopes of offsetting some of the pain caused by the collapse of the housing market. It can further prevent this having any knock on effects by using its foreign currency reserves to protect the value of its currency so that it doesn't end up like Turkey or Venezuela. It turns out having $3.4 4 trillion pile of money is also very effective in shoring up food security as well. China already imports more food than it exports and if it needs to spend little bit of extra money on making sure that its citizens are fed, it's going to be more than happy to do so knowing the alternative. There are also the non-economic factors. Of course, this is outside of my specific area of expertise, but the Chinese population does not have the same opportunity for regime changing levels of civil unrest. The government is authoritarian and they monitor everybody very closely. People will no doubt voice their frustrations especially if they are in situation where they are not going to get house that they have paid for. But these protests are not directed at the government or the country. If anything, they are very public way for these people to ask their government to bail them out of situation that they have found themselves in. Chances are the government probably will bail them out too. People are happy to give up lot of liberties if it means they are getting rich. But in many cases, entire families have pulled their life savings of multiple generations to afford modest homes that won't be delivered. The government is likely to do what it does best and invest into building projects to soften the blow of this economic downturn. Only now, instead of building roads to nowhere, it has the opportunity to build something that really is in demand, and that is the housing that people have already paid for. It's another win-win. It will provide economic stimulus at time when the country actually needs it. And it will avoid situation where tens of millions of people have nothing to lose. The kinds of situations that tend to get bit revolutionary. Okay. Well, even if all of these issues won't cause total collapse of the Chinese economy, surely they at least spell the end of the Chinese miracle. Most reasonable economists are predicting that these issues are going to cause the end of strong sustained growth in China. Most of them point to the experiences of Japan, which was another country that grew rapidly thanks to mass manufacturing and strong exports. Their competitive advantage eventually faded away as their population became wealthier, and they started to lose lot of their manufacturing to places like China. They also had an overinflated housing market that dragged the economy down and caused prolonged period of economic stagnation. Japan also suffers from an aging population. Sure, China's was caused by direct government intervention and Japan's was more socio-economic, but the result is going to be the same. Too many old, unproductive people to look after and not enough young, productive people to take their place. The parallels between Japan and China are truly remarkable. And can see why economists are saying that this is the direction the country is headed towards, but they are probably not correct, at least in the way that you would think they are. China and Japan had very similar growth trajectories. They faced very similar challenges. They even worked in very similar industries. But China is not Japan. For starters, China is still much poorer than Japan was in the early 1990s when its stagnation began. Yes, there is some fabulous wealth in concentrated city centers, but this is not the experience of most Chinese citizens. In 1995, Japan had GDP per capita of $45,000. Today, almost 30 years later, China has GDP per capita of $105,000. Yes, Japan's economy has stagnated with no real sustained GDP growth been experienced over the past 30 years. And yes, it's dealt with stagnation pretty well. It's still very stable, safe, and productive economy that provides good standard of living to its citizens. If China's economy was to stagnate now, it wouldn't be any of those things because most people would still be very poor by global standards. China is also much more corrupt and less representative country than Japan was. Since the end of the Second World War, Japan has been functioning democracy. And while they have been overwhelmingly represented by single party through the years, the people have the choice and the power to vote that party out if they see fit. That is luxury that Chinese citizens do not have, which means that if the sentiment of the people shifts in direction of wanting change, they do not have an easy and frankly nonviolent way to pursue that change. There is very good chance that if China was regular democracy that the Communist Party would be continually reelected. Say what you will about lot of their actions on the world stage and authoritarian antics, but for the majority of their people, the last 30 years under their rule have been very rewarding. People are willing to put up with lot if they can see their living conditions improving. But historically, economic conditions have been one of the primary deciding factors of if governments get reelected or not. And if the people can't vote their government out, tensions are bound to start building up. The amount of power and lack of oversight the government has also means that corruption is just way of life in China. Now, in weird way, some of this corruption has actually helped the economy grow because businesses can cut through lot of red tape with small bribe or two. Poly matter did great video on this topic, so go and watch that if you want more details there. Corruption may very well have helped the economy grow, but if the economy is not growing, corruption will eat it alive. Paying bribe or two to government official to look the other way on zoning laws or factory pollution standards will have negative consequences, but not the type that gets paid for with money. If foreign investment stops, industry slows down, and new projects get halted, then corrupt officials won't have the same opportunities to make money through simply opening doors. So, they'll be forced to take money by stealing it from the people. Now, you know the line, nobody can predict the future, least of all economists. But if was betting man, which I'm not, my predictions would be that China doesn't end up looking like Japan, but ends up looking more like other countries that have become very wealthy very quickly, but that wealth didn't translate into sustainable economic model. Not collapse, but more of slow, stable decline. If you want the real reason that you've been seeing headlines about China being on the brink of collapse, then prepare to be disappointed. The reality is that someone out there made video with thumbnail that said something to the effect of 34 days until China collapses. It's complete nonsense, but it got millions of views. Other creators saw the success of this video and use the same clickbait titles to bring in as many viewers as possible on their own videos. Some of these videos were themselves nonsense, and some were genuinely great commentary on the issues. No hate. understand the game better than most people. If you put lot of effort into making video, you want to make sure that people watch it. Let's let this be the takeaway. China is in difficult economic situation at the moment, no doubt. But an outright collapse in the second largest economy in the world with high levels of control over quasi reserve currency and very little patience for public descent is very unlikely. It's important not to let the understandable animosity we might feel towards the CCP affect the way that we interpret news about them. If any of you have read these headlines or watched these videos and sensed feeling of joy or superiority over the fact that the bad guys are finally getting what's coming to them, then no shame. I'll be honest, enjoy bit of Sheldon Freud as well. But please consider two things. Were you more likely to accept the fact that these headlines were true because you wanted them to be true? And if so, encourage you to go back and read them as if they were talking about your own country. think that lot of you would be less likely to take the predictions at face value. Also, this is perhaps the most important part of the video, which is that you don't want China to collapse. Never mind the mostly innocent citizens of the country that are just trying to make better life for themselves. Even if we think about this from purely selfish point of view, the second largest economy in the world, collapsing would do lot of collateral damage. China is large buy of material exports from countries like Australia, Japan, the EU, and the US. Losing that export market would cause steep downturns in any of these economies. China also produces lot of the products that we use in our daily lives at price point that we have become accustomed to. If you want to turn the inflation that we have been experiencing at the moment from problem to crisis, then cut off Chinese exports without time to arrange an alternative supplier. Finally, collapse is not going to solve any of China's problems. Even if the government ceased to exist in somehow totally peaceful way, there would be massive power vacuum that was likely only to be filled by another authoritarian regime. Anybody who has watched my channel for long enough will know that am not fan of the Chinese government. But collapse is not the mechanism to bring about productive change. Instead, what we should all be hoping for is slow gradual shift towards system that is more open to the international community and less suspicious of its own citizens. So, after looking at China's economic slowdown, unreliable data, growing debt crisis, and shifting role in the global economy, one thing is clear. China's economic rise isn't as unstoppable as many once believed. But whether it stabilizes, stagnates, or eventually surpasses the US, its future will shape the global economy for decades to come.