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China becomes Worlds Richest Country | Evergrande Crisis | Dhruv Rathee - YouTube
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Hello, friends!
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China has become the richest country in the world.
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You heard that right.
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According to a report, China has overtaken America to become the World's Richest Country.
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You'd think this is something to celebrate
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for the Chinese government and the Chinese people.
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But at the same time,
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many economic experts are pointing out that
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China may soon fall into a major economic crisis.
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How did this happen?
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And what is this looming economic crisis?
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Come, let's find out in today's video.
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"China has surpassed the United States
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to become the richest nation in the entire world.
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As the global wealth has tripled over the past two decades."
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"The collapse of the Chinese property giant, Evergrande, unfolds.
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The shares of the highly indebted company have fallen 80% this year.
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Analysts fear that the crisis could spread throughout China's property sector."
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"Housing affordability in China right now,
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is among the worst in the whole world."
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"The problems in China could lead to a 'sudden correction of real estate prices.'"
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First, what does it mean to be the richest country?
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Friends, you can understand it as 'wealth' basically.
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How do you measure how rich a person is?
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By evaluating the landholdings of the person,
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the total value of his properties,
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the businesses he owns,
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the machinery in the businesses,
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the total value of all these is used to calculate the total wealth of the person.
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This is different from the GDP.
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You can understand GDP to be the equivalent of
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the annual income of a person.
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The GDP of a country is the total value of goods sold in a country in a year.
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The value of goods as well as services.
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The total market value of all goods and services in a country.
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And the GDP can be divided into 3 main sectors.
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When we talk about the GDP,
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we need to account for the population of the country.
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Suppose a family earns ₹1,000 per month,
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and there are 2 children in the family.
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And there's a family earning ₹2,000 per month,
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but there are 10 children in the family.
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If the same amount of money is distributed among so many people,
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then they would get less per person.
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So even though the GDP of a country may be high,
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if the country has a high population as well,
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then it isn't admirable.
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That's why we calculate the GDP Per Capita,
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that's mainly the GDP per person.
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China has become the richest country in the world in terms of wealth.
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If you add up the wealth of every person in China's population,
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then it is the richest country in the world.
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But if we talk about GDP per capita,
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China doesn't stand anywhere near the top.
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If you look at the 2020 GDP Per Capita rank,
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China was at the 63rd rank.
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And the USA was in the 5th position.
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Even if we talk about the overall GDP,
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the USA is much ahead as the #1 country in the world in terms of overall GDP.
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At approximately $21 trillion.
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China comes in second place, at around $15 trillion.
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And at present, India is a $3 trillion economy.
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Despite lagging in both cases,
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China has overtaken the USA.
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In terms of overall national wealth.
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According to the McKinsey Report.
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This report was compiled after analysing the National Balance Sheet of 10 countries.
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Some other findings of this report
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revealed that the global wealth has tripled in the last two decades.
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From $156 trillion to now at $514 trillion.
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Exponential growth was seen in China's wealth.
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In 2000, about 20 years ago, China's wealth was $7 trillion.
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And today it has become $120 trillion.
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An increase of 17 times.
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During the same period, the total wealth of the USA increased 2x.
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Today it is at $90 trillion.
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This is the comparison of the overall wealth.
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Currently, China is at $120 trillion
and the USA at $90 trillion.
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You might start to wonder
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in the year 2000, the USA was richer than China.
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And every year, the annual GDP of the USA has been more than China's.
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So how did China become richer than the USA?
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Even though the USA's GDP has been higher.
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The answer to it is very interesting.
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Friends, the GDP growth can be because of many things.
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Things that are useless actually.
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Imagine a country where people consume a lot of junk food; cold drinks and burgers.
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And the GDP of the country increases because of these.
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And after a person consumes so much junk food and becomes unhealthy,
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he may need to go to the hospital.
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He'll get a taxi to go to the hospital.
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He'll get treatment in the hospital
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and after his treatment, he'll get another taxi to get home.
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In the entire scenario, at every point, the GDP of the country increases.
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Eating junk food increases the GDP of the country.
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Riding in the taxi is increasing the GDP of the country.
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Even the hospital treatment is increasing the GDP of the country.
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Because money is exchanged at every point.
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Money is being transferred.
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But in this scenario, is there any overall increase in the wealth of the person?
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No.
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There will be no overall benefit.
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Junk food is consumed.
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The taxi ride is over.
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And after the treatment, there's no more value.
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Now compare this to a country where the GDP is increasing mostly because of
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constructing new buildings,
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building new highways,
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because of new construction,
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new factories being set up.
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In the second country, the wealth would also increase
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because all of these is increasing the wealth.
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And broadly speaking,
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this is the difference between the USA and China.
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If I have to base this on data and statistics,
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then look at the comparison between the USA and China.
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The contribution of the service sector and industries of both countries to its GDP.
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The service sector in China is at 54.5%
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and the contribution of the industries is at 37.8%.
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On the other hand, the service sector of the USA contributes 77.3%.
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And only 18.2% of the contribution is from the industries.
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I explained this same difference with the example.
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Eating junk food, using taxi services, healthcare services, are all services.
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They come under the service sector.
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And new construction comes under industries.
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So the question arises that despite so much 'development'
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why is China under so much scrutiny?
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Why are experts saying that China may soon face an economic crisis?
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To understand this, let's look at the total wealth of China.
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Let's see its breakdown.
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Globally, 35% of the wealth is in the form of land.
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33% in houses and other buildings.
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So about a total of 68% of wealth is from real estate.
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But for China, this number is at 78%.
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If you compare this pie-chart with an individual's wealth
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then there is nothing unusual here,
this does happen.
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Most of the wealth of a person is in the form of the property he holds.
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His lands, his real estate.
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So 60%-70% of a country's wealth in the form of real estate is not unusual.
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But what happens when I tell you that you overestimated the value of your property?
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You feel that the value of your property should be ₹100 million,
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but in reality, it is only ₹10 million.
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Since you aren't actually selling your house,
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you won't come to know about this.
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When you'll go to sell it, you'll find out the actual value of your property.
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The same thing is starting to happen in China.
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A real-estate bubble is being formed in China.
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A bubble in the finance sector,
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was explained in my older video,
'Dark Side of Stock Market'
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about how bubbles are formed in the stock market.
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It basically means that the actual price of something is low,
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but the speculative price of it is very high.
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It begs the question, why did this happen in China?
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The State Capitalism of the Chinese government plays a big role in it.
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The Chinese central government had set targets for the local governments
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for the minimum GDP growth rate in their regions.
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So the local governments were under a lot of pressure.
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Because it is a dictatorship in China.
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The central government strictly sets the standards of the performance
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failing which, the officials lose their posts.
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So the local government were under a lot of pressure to bring in a certain GDP growth rate,
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and the saw that the easiest way to do this is
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by more and more buildings and constructions.
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And thus inflating the real estate prices.
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It was done to such an extent,
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the construction was so rapid,
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that real estate made 29% of the contribution to the annual GDP of China.
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For comparison,
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in India, real estate's contribution is only 7% to India's annual GDP.
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The ground reality is that in China, the average citizen could not earn enough
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that could enable them to afford to live in these expensive apartments.
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Due to this, we see Ghost Towns in China.
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Many such apartments and buildings with no one to live in them.
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Because no one can afford to live in them.
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More than 60 million apartments in China are sitting empty.
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Houses with no one living in them.
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If you assume that 3 people live in an apartment, on average,
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then houses have been built for more than 200 million people in China.
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More than 50 such towns
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these small cities built in China,
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have been labelled as Ghost Towns.
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Friends, if you are planning to save up for a new house or a new car,
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an amazing option to do so is through the KUVERA app.
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KUVERA is an amazing mutual funds app.
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You can set your goal on it.
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After setting the goal, the algorithm of the app will automatically tell you
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which mutual fund will be the best for you to save up.
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Additionally, you can also invest in digital gold on this app,
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and with the Tax Harvesting feature, you can even save up on taxes.
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The link to the app is in the description below.
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Do check it out.
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Let's return to our topic now.
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An obvious question now is,
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If the apartments are so expensive to live in,
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why don't the real estate companies lower the prices of the apartments?
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So that people can afford to live in them.
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The simple reason for this is that
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all the real estate companies had taken huge loans from banks
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so that they could build these apartments.
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So that these properties could be built.
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And if they can't sell them at these prices,
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they wouldn't be able to repay the loans.
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The companies would go into debt.
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And will become bankrupt.
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This has started happening.
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The overall debt of the real estate companies in China has reached $5 trillion.
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The largest real estate company is Evergrande.
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That's why you would've heard recently
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that China is facing Evergrande Crisis.
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Of the 60 million or so empty apartments in China,
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this company owns 1.6 million of them.
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This company had taken loans of $300 billion from the banks.
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And now it is facing uncertainties for repaying the loans.
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This company is so large, that if it becomes bankrupt,
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the entire market can crash in China.
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In September this year, the share price of the company fell 80%.
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And its bonds have been downgraded by the credit rating agencies.
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The situation is so bad that
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the companies are asking for loans from their employees.
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Many experts compare this situation to the 2008 USA Housing Bubble.
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Which was the reason for the 2008 Global Economic Crisis.
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Evergrande is being seen as Lehmann Brothers.
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The company that was considered
'too big to fail company' in 2008.
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That the company was so big that it couldn't possibly fail.
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But it did fail.
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Evergrande is involved in other sectors as well.
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It is a giant.
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Electric cars, food, beverage productions
and they even own a football team.
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And more than 125,000 employees in the company in total.
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Since the company is so huge, it has a huge impact on the stock market as well.
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When the shares of the company crashed,
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the same day, the top richest people in the world,
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including Jeff Bezos, Elon Musk, Mark Zuckerberg,
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their total wealth fell by $26 billion that day.
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The day when the price of the shares of this company crashed.
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What is the solution to this situation?
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Some people claim that Evergrande can sell off its assets.
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To generate some revenue.
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That it can sell off its ghost apartments at steep discounts
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so that it earns them at least some money.
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But the last option for a revival of such companies is often
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the Government.
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To take help from the Government.
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Here you can see the hypocrisy of these large companies,
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that when these companies run successfully,
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they ask the government not to interfere in their business,
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and that they want unregulated capitalism.
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They don't want any form of governmental interference.
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And that they believe in pure capitalism with an absolutely free market.
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But when these companies face such situations
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that the companies are underwater
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and they need bailouts,
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then they humbly submit to the government
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asking for socialism.
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To give them the public funds for a bailout.
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Asking the government to give them the taxpayer's money to save them.
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You'd feel that this is outrageous
and wonder if the government can do this.
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That the sinking company should be left alone.
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But here, the companies use the logic that
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since their company is so large with so many employees,
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if their company goes underwater,
the stock market will also crash,
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so many people will become unemployed,
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and it would affect the economy of the country.
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That's why it becomes necessary to save their company.
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That's why the government should help them.
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The same thing happened in the USA.
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And many people criticised this.
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After the 2008 crisis, the government had bailed-out the sinking companies.
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There were even protests on the roads in the USA because of this.
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It is very interesting to see what the Chinese government did in the response.
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Because the Chinese government is often proactive about these things.
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So the Xi Jinping government carried out major regulatory crackdowns recently.
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To reduce bad loans, they introduced Regulation 3 Red Lines.
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3 new conditions have been put forth based on which the companies can now take loans.
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For example, one of the conditions is that
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the net debt of the company should not be more than the overall equity of the company.
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In October, it was found that of the 30 biggest property companies in China,
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20 of the companies had crossed the Red Lines.
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Apart from this, many big real estate companies are being forced by the government
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to repay a portion of their debt instantly.
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And a new team has been formed in China to detect corruption
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all the State-run Banks, National Financial Regulators and the companies,
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are being scrutinised to detect corruption.
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To see the level of corruption in each of them.
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This is an interesting point,
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because many people imagine that
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there is no corruption in a country with a dictatorship.
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Because they assume that the dictator would severely punish corruption.
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But this isn't the case actually.
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In fact, it is the countries with outstanding democracy,
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that faces lower levels of corruption
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than compared to dictatorships.
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Because in dictatorships, people are hesitant to question anything.
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There are no independent agencies to check
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whether there is any corruption or not.
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Whistleblowers are oppressed.
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There are no reliable independent media
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to scrutinise the corrupt officials.
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That's the reason why we see corruption in countries like China.
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Today, the property rates in Beijing and Shenzhen are so high
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that they are 55 times the annual income of the average Chinese citizen.
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Suppose your salary is ₹100,000 per month,
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and you earn ₹1.2 million annually.
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The average price of the apartment then would be
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₹66 million.
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It will take 55 years' worth of your salary to afford an apartment in your city.
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Can you imagine this?
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This is happening in China.
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You may think it is possible to buy houses by taking loans,
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but in China, there's a rule that
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one can get a loan of only 60% of the total amount.
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Thus, the downpayment will have to be at least 40% of the total amount.
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Which wouldn't be possible.
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The next option then is to rent the apartment.
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Even then, the rent is so high there
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that fresh graduates are spending about 40% of their salaries on rent.
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So if you earn ₹100,000 per month,
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you're paying ₹40,000 only on rent.
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And the consequence of this crisis is that
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people are avoiding having children.
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That's why the birth rate in China is falling rapidly.
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China removed its one-child policy first.
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And introduced the two-child policy.
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And now the two-child policy has also been repealed.
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And a three-child policy has been introduced.
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The government wants people to have more children.
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So that the population doesn't dwindle.
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The reason for this is that the houses have become so expensive,
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people are wondering why they should have children when they can't afford to raise them well.
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The rich people are buying more and more property to invest in.
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That's driving up the prices.
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And the inequality is increasing significantly.
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It is something that is seen in not only China but also the USA and India.
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For the middle class and poor people,
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buying homes have become unaffordable.
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And the rich people are buying 2 or 3 or 4 or 4 houses as investments.
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To counter this inequality,
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the Chinese government has started a Common Prosperity Drive.
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In 2017, Xi Jinping had famously said,
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that homes were for people to live in.
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Not for speculation.
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Under this, the government has proposed a new property tax in the next 5 years,
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that if people are buying homes to live in,
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it wouldn't be taxed.
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But if someone buys subsequent houses as investments,
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then high property taxes would be levied on them.
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So that real estate prices could get down to a moderate level.
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And buying homes could become affordable for people.
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According to China's 2008 data,
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about 70% of people buying homes were first-time buyers.
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As in they were buying the homes to live in them.
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But according to the 2018 data,
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only 11% were first-time buyers.
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Almost 90% of people buy houses just as investments.
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Many experts criticise the Chinese government's strategy claiming that
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because of them, more companies would not be able to prosper.
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The economic growth of the country will slow down.
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Time will tell how China deals with this crisis.
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Whether or not it can deal with it.
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What's your opinion on this?
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Comment below to let me know.
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I hope you found this video informative.
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Let's meet in the next video.
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Thank you very much.
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