China’s Economic Collapse Just Got Worse

Zero Kovitz became one of the select drivers of global recession. If a company is relying on China for any type of material, if you slow China down, the world slows down. What's up, guys? It's Graham here.

So throughout the last few weeks, you'll probably come across some content referencing the downfall of China's entire economy, how it's positioned to collapse in the next 30 days, and why their debt crisis is spiraling out of control. In fact, I made a video covering several of those points just a week ago, which detailed just how badly their markets are being affected. But since then, China managed to do the unthinkable by lowering interest rates and injecting even more money into the economy as a last-ditch effort to stay afloat a little bit longer.

See, not only are they experiencing one of the worst housing bubbles in history, but their economic slowdown has already begun to impact the rest of the world, and there are some serious implications for all of us that you should be made aware of. Because it's not a matter of if it's going to happen, but instead when, and that is something that needs to be addressed.

Although before we start, I've heard reports of dislike bots attacking videos like this to suppress the information and prevent it from gaining any traction. So if you wouldn't mind doing me a quick favor and hitting the like button or subscribing for the YouTube algorithm, it would help out tremendously. So thank you, guys, so much, and now with that said, let's begin.

Alright, now up until recently, China was on an unstoppable trajectory, set to overtake anyone or anything that stood in its way. That's because for the last 30 years, China’s been at the forefront of production, international investment, and rapid productivity, all because of an exchange that occurred back in 1979, which gave China diplomatic relations with the United States and by extension the rest of the world. All of a sudden, China shared a common objective with the global economy, and with that door having been opened, money poured in.

Countries from around the world invested in Chinese infrastructure, took advantage of low-cost labor, and helped bring much-needed funding to areas that were previously closed off. Even though this did bring down the cost for almost every item that we use day-to-day, the benefits for China were monumental. With all the increased trade and worldwide investment, 400 million people were lifted from poverty.

In addition to that, their economy is now 11 times larger today than it was in 2001, and were even touted as the world's economic miracle while they grew at a faster pace than every other nation. However, not everything was exactly as it appeared on the surface. Because the more China grew, the more powerful they became in relation to every other nation.

The more leverage they had to maintain tight control over their businesses, the more regulation they could set as they deemed necessary, and the more difficult they were to join forces with. In fact, members of the World Trade Organization alleged that China has been providing legal state subsidies to businesses that export their products, discriminating against companies that don't buy from Chinese manufacturers and controlling supply chains through taxing raw materials. Even worse, it was said that they've been devaluing their own currency by as much as 40 percent as an incentive for other countries to be able to buy their own goods at a discount, leading, of course, to economic growth that was largely unsustainable and was going to collapse.

Like you know the saying, "The higher you climb, the harder you fall." Well, nothing describes that better than the current state of China's economy, which is quickly becoming a victim of its own success, with the ripple effect that's starting to be felt throughout the entire world.

Like first, we have the impact of a zero-COVID policy. This quite literally means that there's no tolerance for the spread of COVID, to the point where China will enforce strict lockdowns, maintain tight regulation, and do anything in their power to prevent the population from becoming infected. But it has begun to already take its toll. Chinese stocks have experienced the worst quarter in years. Their economy has begun to lose ground as global recession fears increase.

Supply chains have continued to be severely impacted by a backlog of shipping, and their growth is expected to be non-existent. Not to mention, these policies are so strict that all citizens must use a health code app that dictates who can move around the capital and where. If your health care turns red, you're sent to isolation along with anyone you've come into contact with who could also be deemed as high risk. These implications have made their daily life a constant challenge, compounding even further.

Second, the real estate market. Just as China's economy had been rapidly expanding, nothing saw an increase as large as the housing market, where prices rose by nearly 700 percent from 2001 to 2017. In fact, the Chinese government recognized that this was becoming a major issue; they imposed regulations on who is able to get a loan, but it was too little too late.

Large developers took advantage of all the real estate enthusiasm by selling pre-built units that didn't even exist, with the assumption that they would be worth a lot more in the future by the time they were eventually complete. Citizens bought into completely vacant cities as a way to store wealth, and excessive demand meant that there was very little oversight to ensure that all of these properties were actually being built.

Now in a market that's constantly going up, this wouldn't be an immediate issue because developers could always raise more capital by selling even more pre-built units. But with sales having completely collapsed in their worst property downturn on record, those previous projects are now being completely abandoned, leaving buyers to fend for themselves and forcing them to make payments on a property that isn't even being built.

And finally, the third nail in the coffin: the debt bubble. The Wall Street Journal reports that from 2014 to 2018, China's debt has inflated by 20 percent annually. Housing prices are nearly twice the levels that led to the great financial crisis of 2008, and China continues to loosen lending requirements to ensure that growth is maintained at all costs, even at the expense of the global economy.

But in terms of what we're dealing with today and how this could lead to potentially another ticking time bomb, here's what's happening right now. As I mentioned earlier, in response to slowing growth, a declining property market, and falling demand, China did the unthinkable by lowering interest rates to help stimulate more growth. While at the same time, pumping 60 billion dollars into the financial system as a way to incentivize lending.

However, they reassure everyone that the government won't roll out massive stimulus measures or flood the financial system with too much new money and would instead aim for stable prices and a relatively good economic performance. However, that doesn’t exactly pair well with the reality that growth estimates have been revised down and the zero-COVID policy is taking priority, leaving China with an economy that now has even more room to fall.

Their president, who's expected to maintain a third term in power, recently came on record to say that he would rather temporarily affect a little economic development than to risk harming people's life, safety, and physical health, especially the elderly and children. While others worry that this is simply a scapegoat to avoid the much deeper issues of economic instability; namely, the fear of spending money.

See, any growing economy wants people to feel comfortable enough about their finances to buy more products, spend more money, borrow against their assets, and be able to reinvest into growing infrastructure. But with China's weakening outlook, more and more people are holding back, creating a self-fulfilling prophecy. The prices are falling because people are not spending enough money, because prices are falling, and that just repeats itself.

It's also noted that Beijing's crackdown on real estate developers' reliance on debt also affects households' perceptions of wealth, as the majority is tied up in property, and this is especially true when 96 percent of the Chinese population is exposed to a real estate market that's declined for 11 months straight. As a result, April's retail sales fell 11 percent year over year, and in an effort to increase spending and boost the economy, the Chinese government issued what's called consumption vouchers.

These are government-issued coupon bonds that give discounts for shopping at various businesses, and the goal is that by offering an incentive to spend more money, people will in fact spend more money. So in terms of making the numbers seem better than they are, it's working. Proponents have noted that consumption vouchers have boosted spending by three to ten times their face value, while others argue that it only helps the people who have the extra income to spend without addressing the root cause of the issue, and that China's economy is rapidly deteriorating.

Now in an ordinary market, such a rate cut and injection of money into the economy would be seen as a bullish signal for almost anything, but in this case, it's seen as a negative sign in a failing attempt to keep the economy running just a little bit longer. As Goldman Sachs pointed out, mortgage boycotts have made people a lot more reluctant to buy a home, leading, of course, to 28.8 percent fewer sales.

That in turn reflects a loss of confidence in the housing market, which in turn reflects the loss of confidence in the entire economy, and that is something that cannot be solved with lower interest rates. On top of that, oil prices have also started to fall, with the expectation that China's economy has officially started to decline. After all, China consumes 15 percent of the world's oil and imports more crude than any other country, so when they're slowing down, the rest of the world could follow.

So of course, what does that mean for all of you watching, and how could that affect all of us in the U.S.? Well, besides lower oil demand resulting in cheaper prices at the gas pump, there are a few key points to watch out for. The first is through the de-listing of Chinese stocks on the U.S. stock exchange. In just the last few days, five state-owned companies were removed from the U.S. stock market, citing high administrative burdens and costs as the reason for their decision.

However, the timing comes just months after the SEC flagged those companies for failing to meet United States auditing standards, leading to the assumption that maybe more businesses are about to follow. See, here in the U.S., it's required that all companies follow strict disclosure requirements if they're going to be publicly traded, and that includes a fully verified third-party audit on a regular basis to ensure accuracy and transparency.

This prevents disastrous errors like Luckin Coffee, which was accused of falsifying financials, raising money in the U.S., and then collapsing once those numbers proved to be unsustainable. And as of now, 261 Chinese stocks could be on the chopping block should they choose not to comply, which is the reality that we should be prepared for. After all, China responded by saying that they're reluctant to let overseas regulators inspect local accounting firms due to national security concerns.

With the clock beginning to tick down, either China needs to comply or over one trillion dollars could be delisted from our U.S.-based markets. The second thing to be aware of is that it could take a long time to unfold. Since China publishes their own numbers and maintains an extremely tight grip on their economy, there is no guarantee that they can't just keep kicking the can further and further into the future, and they have the ability to inject as much money as needed to resolve the situation, at least temporarily.

Finally, in a weird way, China's slowing growth and global recession could help ease demand in upward price growth, meaning with less resources being consumed, inflation could begin to subside or even decline. Now, a lot of these are very broad assumptions without a definitive timeline for when they could unfold, but it is a very worrying sign that we're not going to know the full effects of what's to come until most likely it's too late.

So with that, today, guys, thank you so much for watching. If you want to be kept up to date, make sure to subscribe. Thank you so much for watching, and until next time.