It's NOT Just Real Estate. China is DEAD Right NOW.

Kind: captions Language: en You've been told that China is the next global superpower, [music] an unstoppable economic juggernaut destined to overtake the West. Yet, right now, all across China, tens of millions of empty apartments sit behind sealed gates. Unfinished residential buildings gather dust. A property system that used to power the entire country's economy is grinding to a halt. The life savings of an entire generation has been wiped out with the Chinese [music] middle class losing up to 20 trillion dollars in household wealth. That's more than the entire GDP of China itself. This isn't a recession. It's a silent financial nuclear winter. It doesn't just affect this generation, but the generations to come. In China, real estate isn't just about having a place to call home. For many families, properties are vaults, their retirement accounts, their investments, their life savings, pensions, and future stability, all wrapped up in bricks and mortar. Which is why the Chinese people are so willing and eager to invest almost all of their money in them. Reuters reports that around 70% of all of China's household wealth sits in property, which is significantly higher than the US, where the same metric sits at just 35%. In other words, the average Chinese family has almost three quarters of its entire life savings locked into concrete. And that concrete is rapidly losing value. There's just far too much of it to go around. Conservative estimates suggest the country has at least 65 million vacant homes. Other estimates are significantly higher. Some sources state that China has up to 100 million either empty or unfurnished apartments. 100 million apartments would be enough to house the entire populations of both France and the United Kingdom combined. It is enough raw vacant space for almost up to 300 million people. One official even said that China's mammoth population of 1.4 billion wouldn't be enough to fill the countless properties that are sitting around going to no use. For generations, Chinese families, particularly those among the middle class, were trained to believe that buying property was the best possible decision they could make. While citizens in other countries like the US, for example, tend to diversify their net worth across a variety of assets, from real estate to bonds to equities and shares, the Chinese system has always been different. For a long time, it worked and it made sense. It gave people the stability and the returns on their investments that they'd hoped for. But when so much of your money is tied up in a single structure, even the slightest fluctuation value matters more than normally. It doesn't just affect those at the top of the food chain, like developers, investors, and speculators. [music] Instead, it spreads across the population, impacting the spending power of ordinary families. It suppresses their ability to buy. It limits their capacity to consume, and it freezes the entire economy from the inside out. When home prices fall, millions of families suffer the effects as they watch their largest, most important store of value break beneath the weight. This is why the collapse matters so much because China didn't just build vast cities and thousands of towering apartment buildings, it built an entire financial system around one core assumption, that property prices would never meaningfully fall. The demand would always be there, even if it had to be manufactured somehow. Households [music] could rest assured that putting their money into real estate and treating homes like savings accounts was both the easiest and smartest financial move they could make. Now those same families are being forced to watch [music] their wealth crumble around them. They're seeing their savings erode before their eyes. Their net household wealth beginning to wither and wilt. When people feel poor, they inevitably spend less. When they spend less, the economy slows down. When the economy slows down, the property market gets even weaker. It's a vicious cycle, but the worst part of all is that this wasn't a mere accident or unfortunate turn of events. What looks on the surface like a housing crisis is actually something significantly darker. It's a system propped up with [music] lies and empty promises. A model that turned homes into financial revenue and middle-class money into the fuel that kept the machine turning over. So, while [music] those tens of millions of houses remain without life or purpose, the wealth that helped to build them is rapidly fading away. But, how did an entire nation get tricked into buying millions [music] of empty boxes? It's easy. They were lied to. For decades, the general public was told a story built on the premise of scarcity. The ruling classes, the Chinese Communist Party or CCP, warned them that land was scarce, that urban space was finite, [music] that the continuous migration of rural citizens into big cities and metropolitan centers meant [music] that property values were destined to rise. And over time, people were conditioned [music] into one unavoidable conclusion: buy now or be locked out forever. Apartments [music] stopped feeling like luxury purchases or even just places to live. They became survival assets. It was the one and only way to safeguard their families' future, to prevent them from being left behind. The CCP propped up this narrative in various ways, including the aggressive promotion of a national strategy to increase urbanization. To be more precise, [music] in its 14th 5-year plan, which ran from 2021 to 2025, the state set out a specific 65% urbanization target. It wanted to have around 2/3 of the country's population living in the cities by 2025. It had already undergone unprecedented urban transformation in the previous years. The country's overall urbanization rate rose from [music] a mere 36% in 2000 to over 60% by 2019. That's the equivalent of almost 400 million more people living in urban centers, more than the entire population of the United States. This influx of rural residents into the metropolitan spaces >> [music] >> has proven to be a huge boon for the economy. So, it's no surprise then that those in charge would want to see ever-increasing urbanization. Throughout the 2010s and into the 2020s, countless state [music] sources stressed the importance of that 65% target. State media agencies, academic institutions, and corporate developers [music] all helped to build the narrative that hundreds of millions more rural workers were set to flood into the urban pipeline. There would be an endless and insatiable level of demand for metropolitan real estate. It was the perfect psychological trap. Build just the right amount of panic and doubt in people's minds so that everyone decided to buy up apartments at hyper-inflated prices. But here's the thing, the entire story was based on ideas that were out of date. For decades, China's overall population increased and the country's urbanization program worked. Millions left the countryside communities behind in favor of a better life in the big city. But in the 2020s, that all changed. A new reality set in, one in which China's population is both shrinking and aging at a rapid rate. Data shows that the population effectively stagnated in 2021 and began to decline every year after. That demographic shift is important. Property markets are dependent on new buyers. They need those young couples and fresh-faced families eager to take their first steps on the property ladder. But when your population is actively shrinking and forecast suggests that this is a long-term trend, that demand that powers the market has weakened. And it's at the same time as excess housing is being [music] built. The powers that be knew all of this, but they had to keep the people's faith in the system alive. To do that, they had to perpetuate the scarcity myth. If families believed that homes were in short supply, they would happily buy them up at a higher and higher rate. It wouldn't matter to them because they were confident they'd end up in profit. But if the demand was never actually there, why were so many of these cities and skyscrapers constructed to begin with? Enter the local governments. China's local governments weren't passive spectators or innocent bystanders in the country's property boom. They were active participants in it. In fact, on some level, they almost became addicted to it. They fanned the flames and encouraged people and investors to buy up more and more homes. Why? Because at least some of the money from local land sales flows right into these government's coffers. They needed it to keep pouring in by any means necessary. In 1994, China introduced a fiscal reform. This represented a massive overhaul in the way the country handled taxes. It introduced a new tax sharing system designed to re-centralize revenue collection which had fallen to worryingly low levels in the preceding years. In other words, it was designed to increase the share of tax revenue that went straight to the central government. The reform introduced a new national tax service, as well as a value-added tax or a VAT system. All taxes were classified into three distinct categories, central, local, and shared. This led to a quite dramatic imbalance in the country's economy where the central government grew richer while local governments grew poorer. >> [music] >> They were left with huge fiscal responsibilities like having to fund local healthcare, maintain infrastructure, pay public [music] servant salaries, and provide education, but with less money to fulfill them. So, these local governments did the only thing they could do. They looked for other sources of revenue, and they soon realized that land sales were one of the most effective options available to them. It wasn't that the governments were necessarily intending to be underhanded or malicious. They were simply doing what they had to do to survive. Eventually, [music] they became dependent on land sales to stay afloat. Statistics show that between 2000 and 2017, land revenue represented over 50% of all local government fiscal revenue. That's not [music] some sort of side revenue stream. It is a fiscal dependency. If the governments failed to sell off sufficient amounts of real estate, they simply wouldn't have enough money to keep operating. And if that happened, their infrastructure would crumble, their services would weaken, and the populations would likely leave en masse. Their fragile economies would be damaged even further. But what started as a battle for survival soon devolved into a quest to make as much money as they possibly could. It wasn't just about raising enough revenue to make ends meet anymore. These governments wanted to squeeze as many yuan as they could out of every single square foot of land. They effectively began to weaponize land sales, turning the real estate market into their personal fiscal engines. They were less focused on civic duties and more on marketing and enabling the ever-expanding property bubble. Every bit of land they could sell meant more money flowing into their accounts to help counteract their growing deficits. But, the problem with this approach is that it meant the local budgets became intrinsically linked to land values. [music] If those values ever fell, local governments would be hit the hardest. But, who was actually buying up all that land and property? And how [music] were they hiding the debt? In the years following the 1994 fiscal reform, local governments became more and more dependent on land and real estate sales for vital revenue. But, that led to the development of a whole new dilemma. In a [music] system with direct borrowing limits, how could the machine keep on moving? How could these authorities keep on borrowing money to fund the development of new properties and construction projects? To any outside observer, it seemed inevitable that the debt limits would eventually be hit. At that point, it would become impossible for local governments to borrow the money they needed to keep the wheels turning. >> [music] >> Somehow, however, they found a way to work around this issue. It came in the form of something called local government financing vehicles, or LGFVs. In a nutshell, LGFVs are state-backed companies that allow local governments to borrow enormous amounts of money without officially putting the debt on their own books. They've [music] even been called the black holes of the Chinese financial system by financial experts. And just as the local governments came to rely on land sales, they [music] also became increasingly dependent on these financing vehicles, to quite a staggering degree. At one point, reports revealed that the total amount of shadow debt accumulated via LFGVs was a staggering 9 trillion. In real terms, that meant that around half of China's total GDP was hidden away in these off-balance [music] sheet entities. And much of that money went straight into real estate development projects along with other infrastructure. It was all aimed at making these regions more attractive to prospective investors, business owners, and future residents. With an almost infinite pool of leverage to pull from through their shadow debt machines, local government started building anything they could think of, even if it didn't necessarily make sense. High-speed rail lines to nowhere in particular, grand squares and plazas despite a lack of anything of importance around them. And of course, large amounts of residential real estate as well. Many people have a misconception about China's so-called ghost cities. Analysts see pictures of these vast empty [music] spaces, and they assume they're the result of bad planning or bureaucratic incompetence. They say that the local authorities must have been overly optimistic about their development or rushed into new projects without thinking them through. In short, they think that all those empty buildings are unfortunate accidents or [music] unintended side effects of excess ambition. They're wrong. These ghost cities aren't there by accident. They are not planning errors. They are [music] debt extraction zones. They were built not because there was a demand for them, but because the actual act of building them helped convert land into cash. And this in turn allowed the authorities to get deeper into debt, [music] which then paved the way for even more development. It was not a healthy system in any sense, but it was a functioning one. These empty homes were never intended to house human beings. Their true purpose was to extract wealth from the middle classes and convert it into funding to [music] keep state operations going. The concrete towers were merely the collateral. And thanks to them, the local governments were saved. But this created a bubble so massive it defied global economic laws. At its peak, the The of China's real estate universe became almost impossible to comprehend. It shattered records and smashed [music] standards, defying logic and reason to become far greater than anything the world had ever seen before. Estimates varied from source to source, but it was broadly accepted [music] that the country's real estate market eventually reached a total value of over $60 trillion. That's more than the United States residential market, and it's [music] four times China's GDP. In fact, it's the equivalent of the combined [music] GDPs of several of the world's wealthiest nations, including China, the US, Japan, Germany, and India. It is an astronomical amount of money, all tied up in bricks and mortar and cement. [music] At that point, it had effectively become the biggest financial anomaly in modern history, and it didn't follow the usual patterns and rules one would expect. It worked more like a classic pyramid scheme than a conventional real estate industry. The bottom layer of that pyramid, the part propping up everything else, was the pre-sale model. As the name suggests, this involves buyers paying for properties before they actually existed. In most other countries around the world, it doesn't work that way. In the US, buyers might put down a deposit on a home that's under construction, which could be as low as 10 or even 5% of the final purchase price. It's a way to lock in the sale and prove your commitment to the property, but you wouldn't be expected to pay the property's full price at once, especially before it's even finished. The Chinese model, however, demands that buyers pay 100% of the sales price up front before ground has even been broken. To do this, citizens would often have to take out huge mortgages. They would gamble everything on buildings that were little more than blueprints. They would hand over their entire life savings to developers, hoping [music] and praying that they held up their end of the deal. What was supposed to happen next is that those pre-sale funds would be locked away in escrow accounts until the homes were built. They had to meet the original specifications and the buyers' expectations, thereby avoiding any disputes. What often happened instead was that developers used the money to buy even more land from local governments, usually at wildly inflated prices, feeding the cycle all over again. To those developers and investors, this was the logical thing to do. There was no point in delaying purchases and paying more in the long run. The more land they bought today, the more money they'd be able to make tomorrow. It was perhaps the biggest pyramid scheme ever seen. It was entirely reliant on new buyers coming in at the bottom layer to keep the funds flowing in. That was the only way the older projects would ever get finished, and new ones would continue being funded. As soon as the influx of retail buyers slowed down, even slightly, the entire pyramid could come crumbling down. And that is exactly what happened, because a $65 trillion Someone had to pull the plug. In 2020, the CCP pushed the kill switch on the property pyramid scheme. Regulators introduced the so-called three red lines policy. It was essentially a set of debt restrictions designed to stop property developers from [music] endlessly piling on more and more leverage. Developers were made to meet three specific criteria regarding their debt ratios. If they violated all three rules, they would be barred from taking on any further debt. Even violating one or two of the lines resulted in punishment, [music] albeit slightly less severe. As a direct result of this kill switch tactic, even the biggest development firms were forced to deleverage, [music] which led to a massive liquidity crisis. This also resulted in many outside observers and [music] analysts misunderstanding the whole point of the policy. Indeed, many news agencies, particularly in the West, framed the three red lines as some sort of mistake. They argued that Beijing's regulators had misjudged the market's fragility, or even made some sort of bureaucratic error, resulting in major developers defaulting. Yet, as disastrous as it seems, this wasn't a mistake. It wasn't an oversight or a misjudgment, but a calculated reset from those in the highest positions of power. Beijing looked at the state of the developer sector and it saw the insane levels of debt that were spiraling out of control. >> [music] >> It saw the growing addiction among local governments to their shadow debt machine and the ever-expanding [music] array of pointless projects and empty buildings and it decided to blow it all up. Not literally, but figuratively. They controlled bursting of the bubble, a forced demolition of a system that had been allowed to rot for far too long. Because if [music] that system was allowed to continue and the developers continued to borrow more and more money, the effects would begin to hit the broader state-owned banking system, the very system that fue