Earlier in the week I stated that the Chinese economy was "teetering on the edge of collapse". This surprised a few people and prompted some push back from others. So I thought I should spell out why I'm so concerned about the Chinese economy.
1. Mortgage crisis.
The Chinese property market has been growing at an insane rate for almost a decade, in fact the prices have been rising at such a speed that increasing numbers of buyers are paying up front and in full for homes that have not yet been built yet.
Rather than use this money to pay for the building of these apartments projects, the developers have been quickly diverting the money to launch new projects so as to capitalise on the apparent insatiable appetite for property. Creating what is essentially a ponzi scheme that only works so long as everyone keeps buying property.
When the public begins to lose trust in the property market and stop buying, (cue the collapse of massive property developer Evergrande), then suddenly the developers don't have the money to finish the developments people have already paid for.
This has led to millions of Chinese refusing to pay their mortgages until their apartments are actually built.
It has been estimated that Chinese banks are potentially facing a loss of $350billion. This is greater than the loss faced by US banks as a result of the sub-prime mortgage crisis.
2. International Debt Crisis
In an effort to maintain its growth, China developed the Belt and Road initiative which isn't too far removed from the US's Marshall plan after World War Two (except 12 times bigger).
By lending to developing nations, China hoped to create new markets for itself. It ended up lending more than the IMF, the World Bank, and entire G20 combined.
The problem is, many of the countries China lent money to aren't exactly renowned for transparency and accountability, most are incredibly corrupt.
The projects that have been invested in have often been white elephants that have brought no real development to the local economy. Bring on a World wide recession, and nations like Sri Lanka and Pakistan have already indicated they simply cannot afford to pay back their debts. This has meant the Chinese Government is now issuing rescue loans to developing nations to prevent a complete collapse.
China has so far had to "renegotiate" $118billion in debts, with much more inevitably about to follow.
While China can get lease holds and commodities as collateral for debt failures, what it needs is capital to keep its banks afloat.
3. Demographic crisis.
For a country to maintain its population it needs a fertility rate (children per woman) of about 2.1. China's has dropped to about 1.3, and thanks to the only recently surrendered One Child Policy, it has been low for while.
Now it should be noted that Australia's fertility rate isn't much better at about 1.6, however we make up for this with immigration, and thankfully a lot of people want to move and work here to pay taxes and care for our aging population.
China doesn't have this same source of growth. It's population is aging, yet it's struggling to find jobs for the young people it has.
Youth population is believed to be higher than 20%, with the country now churning out 11 million university graduates every year without the skilled industries to employ them.
So the country is facing an aging population, with an increasingly educated and skilled youth who aspire to more than the manufacturing jobs that remain available to them. This is a pressure cooker.
5. Covid.
While lockdowns for most of us are a bad memory from last year, China continues to pursue what it calls a "dynamic zero" covid policy.
This means rolling lockdowns stricter than anything anywhere in the West has witnessed, sometimes for months on end, shutting down massive cities like Shanghai or Beijing.
This has meant months of no income for workers, many of whom have fled back to their rural homes to escape the next lockdown.
The impacts on the economy have been massive and will continue to be. However because the elimination policy has been a boasting topic for the Chinese Government for so long, it has little option but to continue with it.
The CCP have painted the proliferation of Covid in the West as evidence of a failure of democratic Government, allowing the virus to spread within China would be surrendering its claimed superiority.
Add to that concerningly low vaccination rates among older Chinese, and it seems like the Government has no choice but to continue the draconian lockdowns no matter the economic cost.
6. No innovation.
This is something I have written about extensively before (https://www.carrickryan.com/post/i-don-t-fear-a-strong-china-i-fear-a-weakened-china) so I won't go too in-depth, but the reality is that while China has evolved something resembling capitalism, it does not have a free market.
There is no scope for a new start up company to disrupt the market with a new innovative way of doing things. No innovation means no increase in productivity. The only way to grow the economy is to grow the market.
For the reasons I've outlined above, the market, both domestic and international, is not going to keep growing.
So, is a crash inevitable? Absolutely not. There would be a litany of brilliant economic minds in China that would have recognised these problems and developed ideas to either solve them, or at least mitigate their impacts.
The problem is, China's fate rests on whether one man will listen to them; a man whose cult of personality has rested on the unprecedented economic growth of the last ten years and has personally aligned his legacy with most of the policies that are now causing the end of that growth.
In a democracy, during a financial crisis there would be opposition parties that could offer alternative solutions to problems.
There would be civil servants and an independent treasury who could speak openly and define their own responses to challenges.
The free media could inform the public of the problems before they become unmanageable and help ensure trust in Government communication by vetting the official messaging.
But China has none of these things, it has a dictator for life.
It is possible Xi's policy of spending his way out of financial crisis through infrastructure projects may work again... but there are many economists who believe that this spending is part of the problem.
The thing is, while China is something of a national security adversary, there is no one in the West that actually wants China's economy to collapse, not least Australia.
A Chinese economic crisis will impact the entire global economy, and Australia will probably hurt more than most.
Within China, the mortgage crisis has already induced public protests on a scale not seen in decades. What the CCP is prepared to do to ensure their grip on power should concern us all.
Perhaps the most difficult aspect of this is the fact we simply don't have a great idea of what is really happening in China. There is no transparency, there is no free media, and President Xi's main concern is hiding any cracks at least until he is sworn in for a "historic" third term in October this year.
What becomes of those cracks once his power is confirmed is anyone's guess.