Why China's Economy Is Collapsing ?

China, or the Asian miracle as some call it, has earned this nickname because in just a period of 45 years, it has gone from being a poor agrarian nation to becoming the world's second largest economic powerhouse. A move that ultimately turned China into a global economic powerhouse, second in GDP only to the United States. In the past three decades, the Chinese economy has undergone an extraordinary transformation, developing from an inward-looking, agrarian-based society to a major industrial powerhouse. During this period of growth, China became one of the most attractive destinations for large companies like Apple, Nike, or even Volkswagen to mass-produce their products. However, that is changing. China is beginning to slow down its growth, which will have a significant impact on the global economy. Despite President Joe Biden's claim that China's economy is shrinking by 2.2%, the reality is that China's economy is still growing, just not as rapidly as before. China's economy grew by 5.5% in the first half of 2023, which, for any other country in the world, would be a significant achievement. However, for China, it's not. President Biden adding insult to injury, calling China a ticking time bomb, and adding, quote, that's not good because when bad folks have problems, they do bad things. In previous years, China's economy used to grow at an alarmingly fast pace, reaching levels of 10%, 11%, or even 12%. At certain times of the year, it even reached economic growth levels of 15%, as in the case of the second quarter of 2007, when China left the world astounded. This week, a look at China's extraordinary economy and the consequences of mixing capitalism with communism. Now, if China is slowing down its growth, does that mean good news for the United States? In reality, no. Although China and the United States compete to lead the global economy, the truth is that if one falters, the other will, too. Over the past few decades, the United States has established numerous trade agreements with the Asian giant, making them heavily interdependent. China has become the epicenter of manufacturing worldwide, meaning that if China grows, the rest of the world does, too. Similarly, if China's economy slows down, its effects will be felt worldwide. Recently, for example, the U.S. stock market dropped simply because China reported slower growth than usual, causing many investors to become fearful and bearish. Unfortunately, as we learned in 2020, what happens in China doesn't stay in China. Nowadays, all countries in the world are facing the same problem, debt. Despite countries like the United States and China being very prosperous, it doesn't mean they are debt-free. In fact, they are the most indebted countries in the world. America's debt has now surpassed $31 trillion. That's with a T. New data from the Treasury Department shows the government went on a borrowing spree during the COVID-19 pandemic to keep the U.S. economy moving. 1835 was the only year in American history when we had no debt. However, from then on, U.S. debt has been growing at an alarming rate. Over the last 186 years, U.S. debt has multiplied by 183,000%. This has led the government to spend less on its citizens and more on paying off its debt. China has the same problem, carrying the world's second-largest debt only behind its American competitor. China currently has a debt that is 282% of its GDP, which means it owes 282% of what it earns in an entire year. However, even though both countries share the distinction of being the most indebted in the world, they have certain differences. In the United States, the cost of living for American citizens has risen significantly, causing groceries, cars, gas, and rent to increase in price. Inflation reached 8% in 2022, quadrupling the 2% projected by the Federal Reserve. China, on the other hand, has the opposite problem, known as deflation. After the 2019 health crisis, everyone expected consumers to start spending again, factories to start producing products once more, and China to return as the global growth engine. However, that didn't happen. The world's largest trading country has been trading a little less. According to China's Customs Administration, exports fell by 4.4% in December, while imports were at their lowest level since 2016. Consumer prices in China dropped by 0.3%. Now, if prices are falling, that's good, right? Well, yes and no, because consumer prices don't decrease in the way we intuitively think they should. It would be great if companies started caring about the middle class and lowered their prices, but that's not how it works. Prices drop when there's less demand, and that's bad for economic growth because companies slow down and produce less, ultimately leading to a country earning less money. These results affect not only the Asian country economically, but also its reliability for investment. The Chinese real estate sector represents about a third of its GDP and used to be one of the fastest-growing real estate markets in the world. However, that's no longer the case. For decades, China's booming property market has meant that owning a property is a surefire way of increasing your personal wealth. The problem was the crackdown on the property sector, cracking down on how much debt it had, happened very intensively and far faster than the economy could really catch up with. One of the biggest examples is the collapse of Evergrande, which set off alarms worldwide. So last night, Evergrande filed for U.S. Chapter 15 bankruptcy. The embattled company has filed for bankruptcy protection in the U.S., while its restructuring plans are being carried out elsewhere. Hui Ka Yan, the founder of Evergrande, was once the second-richest person in Asia, but in 2021, his wealth plummeted by $17.2 billion. In fact, Evergrande lost so much money that it exceeded what Microsoft or Google earned in all of 2022. This was made possible in part by something called the pre-sale system, where in China, a property developer can start a pre-sale and collect deposits before beginning to build housing units. With that money, they can start building some of it, but before completing the project, they can start the next pre-sale and collect those deposits, and so on. So before you know it, the goal is not to complete any specific project, but to collect as many of these deposits as quickly as possible. By doing so, they were able to make a lot of money, earning $73 billion in annual revenue at its peak in 2020. The flexibility in Chinese construction laws eventually led to overbuilding and an oversupply, putting pressure on people's finances, so much pressure that the Chinese government had to step in and limit people's loans. And as new money wasn't coming in, Evergrande finally defaulted. Complexes turned into ghost towns. Residents organized mortgage boycotts. Now, unfortunately, the worst part of all this is that China's real estate market could get even worse. There's another property developer called Country Garden that has four times the number of projects as Evergrande and is on the brink of collapse. Shares of Country Garden plummeted. The company posted a first-half net loss of almost $7 billion. They now have 30 days to avoid an official default, which would take China's real estate crisis to a whole new level. As expected, property values in China are already falling, and people want to sell and withdraw their investments. But another major reason for China's economic slowdown is its declining population. For as long as most can remember, China's growing population has been an economic advantage for its workforce. However, that number is rapidly declining. The working-age population went from 997 million in 2014 to 986 million in 2021, and the United Nations predicts it will start declining even faster and throughout the century. In the United States, there are about 1.7 jobs available for every person willing to work, resulting in very low unemployment rates. However, in China, it's quite the opposite. Unemployment rates reach 21.3% among its younger population, meaning one in every five young people in China cannot find a job. This is due to various reasons, such as overpopulation, an excess supply of labor, and the fact that workers are willing to accept extremely low wages to secure employment. That's why it's said in China that if you lose your job after the age of 35, it's almost impossible to find another one, as there are much younger workers competing for the same job. Factors like these have caused China's economy to gradually slow down, which is undoubtedly good news for the Western world. However, it also comes with several disadvantages that will eventually impact the entire world.