Although not attracting much attention from the Western media, a financial crisis is developing in China, which could eventually lead to the collapse of the Chinese economy, and either the end of the rule by the Communist Party of China ( PCC), or a sudden military adventure. by the CCP in an attempt to distract the Chinese people from the financial crisis inside China.
The Chinese Communist Party came to power promising the Chinese people a higher standard of living. In order to provide this higher standard of living and stay in political power, the CCP opened its economy to the West in 1978.
China’s GDP in 1978 was $149.5 billion. After China opened its markets to a free economy in 1978, the growth rate of the Chinese economy was nothing short of phenomenal. In 2021, China’s GDP was $17.7 trillion. The main reason for the explosive growth of the Chinese economy was that its economy in 1978 was bankrupt and had no place to go but up.
Although China’s economic growth has been impressive, it has relied specifically on “stable growth”. Steady growth relies on continuous and increasing amounts of economic inputs to maintain its rate of growth. Once inflows to the economy stabilize or stagnate, the rate of growth suffers and a decline in the economy is inevitable.
On the other hand, Western economies are subject to the “non-steady state growth” model of the Solow-Swan economic model. Unstable growth occurs when a technological change in production increases the productivity of the economy, causing the supply curve of a particular good or service to shift to the right on a system of Cartesian coordinates, which increases the demand for that good or service at a lower price. Such an increase in the supply of a good and/or service increases the GDP of that country without the use of additional economic inputs. The steady-state growth rate continues until the new technology becomes the new standard, after which the steady-state growth pattern reverts to a steady-state growth pattern.
China is unable to experience this type of economic growth due to the lack of an impartial judiciary in China to fairly and impartially adjudicate contract law disputes. For this reason, the current Chinese economy increasingly depends on economic inputs to increase significant economic growth.
Money as a political good
In the West, and in most of the world, money is an economic good. Money in the West is governed by the philosophy of a return on investment that creates more wealth. Money acts as an intermediary between buyer and seller.
In China, according to geopolitician Peter Zeihan, money is seen by the CCP as political property.
According to Mr. Zeihan, “Investment decisions that are not driven by the concept of return tend to add up. Conservatively, corporate debt in China is about 150% of GDP. This does not take into account federal government debt, or provincial government debt, or local government debt. Nor does it involve the bond market, or non-standard borrowing such as LendingTree-like person-to-person programs, or parallel financing designed to evade even China’s hyper-lax financial regulators. That doesn’t even include US dollar-denominated debt that has sprung up in the rare moments when Beijing has taken some small steps to resolve the debt problem and so companies have sought funding outside of China. With this kind of attitude towards capital, it shouldn’t come as much of a surprise that Chinese stock markets are in essence gambling dens completely disconnected from issues of supply, labor, markets, logistics and cash. (and legality). Simply put, in China debt levels are simply not seen as a problem.
In China, money is a political commodity and only has value if it can be used to achieve a political goal. This political good is the maximum number of jobs.
The notions of rate of return or profit margins do not exist in China, and that is where the danger lies; the law of supply and demand will eventually prevail and the Chinese economy will face a correction. The longer it takes to deal with this economic correction, the greater the damage that the inevitable correction will cause to the Chinese economy.
The Chinese real estate market is in crisis
The default of huge real estate giant China Evergrande Group in December 2021 foreshadowed the wreckage of the slowing train of China’s real estate market. As they faltered in default, China’s state-owned enterprises picked Evergrande’s assets and took them over with cash and, in some cases, took on the debt of those assets with the blessing of the state government. Chinese. Due to Chinese law, international debt is so-called “unsecured” and issued by a Hong Kong subsidiary, which means that creditors do not automatically have the right to seize anything on the mainland, where Evergrande has nearly all of its 1,300 projects. There is little chance that foreign investors will be able to recover their investment thanks to this law.
In July, an article by the British news agency Reuters detailed the continuing crisis in the real estate market in China. According to the article, home buyers in 22 cities inside China are refusing to make mortgage payments on unfinished condos and apartments. According to Dan Wang, Chief Economist of Hang Seng Bank China… “If tens of thousands of home buyers really stop paying their mortgages, real estate companies will soon collapse because they have no cash, there has huge risks for banks, especially local banks, whose assets are mainly in the housing market, and there is no way the central bank can save them all.
These protesters risk being punished under a government system called “social credit” that rewards what is considered good behavior by Chinese citizens and punishes bad behavior. The refusal of frustrated Chinese families to pay a mortgage for an apartment or house that may never be built indicates the level of anger among thousands of Chinese buyers and carries over into the developing banking crisis in China.
A developing banking crisis in China
On July 10, 2022, in the Chinese province of Henan, in the provincial city of Zhengzhou, a crowd of around 1,000 people clashed with police outside a branch of the Central Bank of China to protest against the freezing of their deposits by the bank. .
The bank’s deposit freeze began in April 2022. Depositors were unable to withdraw their money from the bank from then on, despite promises that their money was safe.
The shock of July 10e, resulted in many protesters being attacked and beaten by unidentified men, who were later identified as government police and then held in detention centers. The protesters were freed later that afternoon. The next day, authorities announced that funds would be released with a maximum amount of 50,000 yuan ($7,434 in USD). Authorities have announced that frozen deposits above this amount will eventually be released, but no information on how and when was given.
The bank, one of around 1,600 village banks, is under pressure due to the slowdown in China’s property market. Many banks and financial institutions are heavily invested in China’s property market, and with the property market slowly collapsing, the damage is slowly seeping into China’s financial sector.
To boost its economy, China has announced a $1.1 trillion (USD) infrastructure package. This is an example of the Chinese economy adding inputs to its economy to drive growth, but the input is simply more debt. The stimulus package will depend on bonds, in which provincial banks are supposed to invest. Given the illiquidity of smaller banks, this could prove to be a daunting challenge.
With the real estate market in crisis in China, and with collateral damage leaks in the Chinese banking sector, with funds frozen where depositors cannot access their capital, a serious real estate and banking crisis is developing in China.
With the housing market crash in China, and the beginnings of a crash in the Chinese banking system, it seems that the inevitable economic correction has arrived.