It's Over: China’s ENTIRE Economy Is About To Collapse

Tens of thousands of them have begun withholding payments for unfinished projects. A massive protest over frozen bank deposits. The international community and the financial markets will also feel the pain.

"What's up, guys? It's Graham here. So I recently came across an extremely unsettling video from Cascades Academy who posted about how China's entire economy will collapse in 34 days. And yeah, I have to say I had no idea what I was about to get myself into. Even though we've covered some of the fallout back in September with the collapse of the largest property developer ever, Evergrande, I was completely unaware of the sheer magnitude of just how much the situation has devolved and how this could quite literally lead China to the edge of the next Great Depression in a very short amount of time.

Why does this matter? Well, China is one of the largest economies in the world. They're fighting to overtake the US dollar as the world's reserve currency. They're responsible for manufacturing 20 percent of the items that we use day to day, and they are, without exaggeration, at risk of a complete financial collapse, which of course would affect the rest of the world.

So, as inspired by Cascades Academy, who I'll link to down below in the description, I did my own research to determine just how bad the situation really was. And what you're about to hear is most likely going to be worse than expected.

See, much of this begins with two words: real estate. Throughout the last few years, China experienced what many would consider to be a real estate bubble, as citizens preferred to invest their money in real estate as a safety net, causing the real estate market to increase double digits year over year. On top of that, the urbanization throughout most of rural China, combined with the societal pressure to own a home, caused a massive relocation to cities that offered greater opportunities and higher earnings potential, thereby further driving up demand.

In fact, the country was building five times as many homes as America and Europe combined, and supply was still so limited that some cities would use a lottery system to decide who gets to buy a home, with some odds as low as 1 in 60. That led to 70 percent of the country's wealth being tied to the property market, which is more than twice as high as we have here in the United States.

But there was also another problem. People believed the housing market was such a good investment that they would literally buy anything that they could get because even if they didn't live there and they kept it empty, they could always sell it in the future for a profit. At that point, property values were rising so quickly that developers would pre-sell units where the buyer would begin making payments on a property that didn't even exist yet, with the expectation that it would be cheaper to buy today than it would be in the future since property values just keep on rising higher.

It didn't matter how much it costs either; home buyers would spend as much as 23 times their annual income to buy a home, with the mortgage sometimes taking up more than half of their gross take-home pay, while they financed and borrowed money from family and friends just to say that they're able to own a home. That led to a 22% vacancy rate throughout China as home buyers bought second properties for an investment just outside the city limits without restrictions.

Right as the government stepped in to buy the surplus inventory to keep the market stable, in addition to that, the increased building demand meant that there was less oversight in terms of quality of construction, leading, of course, to substantial building problems as developers cut corners to save costs and maximize profits.

But there was an even bigger problem. And no, the problem is not that most of you have still not hit the like button yet, even though it's totally free and helps the YouTube algorithm push this video to an even bigger audience to help spread awareness. But instead, the problem is that these pre-sale units were not being finished. In fact, it's alleged that some of the largest property developers were taking pre-sale money, funneling them as down payments into new projects for the purpose of garnering even more pre-sale deposits and running a property Ponzi scheme by using new funds to slowly complete the construction of past projects.

Even more surprising is that pre-sales and deposits were developers' biggest funding sources in both 2019 and 2020, accounting for more than twice the money raised from bank loans. And while bank loans and bonds usually have an annual interest rate of at least 5%, capital raised from pre-sales is entirely interest-free.

The reality today is the city of broken dreams and unfinished housing projects owned by eight struggling property developers who don't have the money to move forward while construction has completely stopped midway through. But this is only the tip of the iceberg as more and more projects have fallen behind the construction or flat-out abandoned their construction entirely due to a lack of funding. Buyers have staged a mortgage boycott where all homeowners with outstanding mortgage loans will stop paying unless construction resumes before October 20th.

Even though this all started with the property giant Evergrande, whose 300 billion dollars in debt, within four weeks, more than 320 projects and about a hundred cities were facing similar protests, roiling markets and forcing authorities to corral banks and developers to defuse the unrest. Although the damage might be too late to fix, home sales and property investments have seen a steep decline since February of 2021, while at the same time the credit market ballooned at a staggering rate while developers borrowed more and more to keep themselves afloat.

The United States Federal Reserve even came on record to say that the fragility in China's real estate sector could spread to the U.S. if it deteriorated dramatically. So what is China doing about it, and why does the situation only seem to get worse from here?

Well, China came out with a statement that they've tightened regulation by supervising customer funds and ensuring timely delivery of new units. But when 96 percent of the Chinese population is exposed to the real estate market and 13 million units have already been halted in the last year alone, it's inevitably going to spill over across other industries and banks are one of them.

On July 11th, protests erupted outside of the People's Bank of China, where customer deposits have been frozen since April when banking regulators said that they were investigating allegations of illegal financial activity. The authorities claim that the problem was caused by a takeover of the bank by criminal gangs, which they say dated back to 2011, was met with a lot of skepticism across Chinese social media where the incident was being closely followed.

But according to the China Bank and Insurance Commission, the banks in question were luring customers in with promises of high interest before then illegally transferring those funds to privately run criminal organizations. Although this wasn't just one isolated event, over four hundred thousand customers across China have fallen victim to similar bank run activities.

And it's reported that a quarter of the industry's total assets are held by 4,000 smaller lenders which often have opaque ownership and governance structures and are more vulnerable to corruption and the sharp economic slowdown.

To make matters worse, even though those bank deposits are insured up to about seventy-five thousand dollars U.S., if the bank is involved in non-compliant transactions, people could lose everything. And for China, their biggest risk is that their population loses faith within the entire banking system.

The other problem for banks is that almost all of them loan money to property developers, and according to an inside source, some developers have been taking the money needed to finish housing projects out of the country. For example, they might take out a loan for 80 million dollars, spend 10 million dollars buying a new property to collect even more pre-sale deposits, and then transfer the money overseas, leaving the bank and the people on the hook for the amount unpaid.

But the Chinese government has agreed to repay their customers the equivalent of about fifteen thousand dollars. But that might not be enough to get their customers to fully trust the banking system again, leading to the word that everyone fears: a bank run.

As Cascades Academy pointed out, both the U.S. and China employ a system called fractional reserve banking, where a bank is only required to keep 10 percent of their customers' assets on hand at all times. The rest could be freely lent out or loaned to other institutions for a profit. Just imagine it like this: you give me a thousand dollars to hold on to for safekeeping, but I'm allowed to turn around to give 900 of that to someone else who gives 810 dollars to someone else who gives 709 dollars to someone else, and so on. Or in other words, they're betting that no more than ten percent of their customers are gonna want all of their money back at the exact same time.

But since 2019, China’s been lowering these reserve requirements to allow for more money to be spent, which would temporarily prevent the economy from slowing down. But that comes at the increased risk of a bank run should more of their customers all demand their money back at the exact same time. This is happening at the same time that their population has lost faith in the real estate market has degraded consumer faith in the Chinese economy, and for the government, the priority is to break the negative feedback loop that features the high leverage ratio and the liquidity crunch on the part of the developers.

After all, if people don't trust banks, the less money is borrowed. If people don't buy real estate, developers walk away from projects. This then repeats the cycle to an even larger degree. Will people pull money out of the system and protect whatever is left?

However, the one thing that China's been really good at is delaying the inevitable, through reimbursing some accounts, saying they'll oversee transactions, and potentially bailing out bankrupt developers by lending even more money. Yes, seriously, you can't even make this up. The solution to solve over-leveraged properties is to simply loan more money to make up for it. It's kind of like telling a lottery addict to go and buy more lottery tickets to recoup their losses.

But it's estimated that this new fund could raise all the way up to 300 billion yuan, which might just be enough to restore confidence in the markets and wait for the economy to recover. A source close to the matter said that this fund would bankroll the purchases of unfinished home projects and complete their construction and then rent them to individuals as part of the government's drive to boost rental housing.

Now, even though it might be easy to think, "Oh, this is all just the Chinese market; it doesn't affect me here in the U.S.," that's not quite the case. As you can see, the United States has substantially increased their investment in China throughout the last 10 years and this includes many large institutions to regular everyday investors.

Of course, it's important to mention that even though we do have over 118 billion dollars invested throughout China, it's still only a drop in the bucket in terms of how large the U.S. portfolio really is. But regardless, Chinese companies also hold a lot of exposure to the United States market, and when they need money, it would make sense that they would sell those assets to raise capital, which would result in a much more volatile stock market.

The real impact, though, for everyone in the U.S. is not so much a policy change or a drop in the stock market, but instead the investor perception that things could get a lot worse before they get better. Or in other words, it's just fear.

In the United States, for example, fractional reserve banking has been around since 1791 and it's backed by the code of the FDIC and regulation to ensure that banks aren't just going to be running off with their money. Now sure, you have examples of the 1920s Great Depression caused by over-leverage on bad investments while entire cities wanted their money back, but throughout most of our lifetimes, this has not been something to worry about.

Although in China, that's not been the case; they've made it abundantly clear that their approach is to protect the market at all costs. But without strict oversight, it appears as though there are too many bad actors looking to take advantage of the current system, and that could simply delay the inevitable.

It's too early to tell exactly how this is going to play out, but it's noted that China will fall short of meeting its annual economic growth target of five and a half percent. And we're starting to realize very quickly that the days of China's meteoric economic rise are long past.

In a perfect world, I would love to see this amicably resolved in tougher regulations in place to protect their citizens, but realistically expect that the Chinese economy is going to be something to closely follow. And if you want to be kept up to date, feel free to subscribe or check out Cascades Academy down below in the description because he provided some great insights into the inner workings of their economy.

So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram, and thank you so much again for watching. And until next time.