WTF Just Happened To China's Economy?

China's economy has slipped into a deep slump. China is announcing stimulus plans; they are going to really push out a bazooka to get stock prices up. This is the broadest push so far year to date. You can call it a bazooka or not, but nothing seems to be working. What's up, guys? It's Graham here, and you're not going to believe what just happened. Despite China being on the brink of an economic collapse, with a multi-trillion dollar underwater housing market, threats of being delisted from the US Stock Exchange, and weakening demand, in the last 30 days, they've experienced one of the strongest stock market rallies in almost a decade. All thanks to a new strategy— the economic reset.

That's right; apparently, money can solve all of your problems. Even though some analysts believe that this only delays the inevitable, China's latest stimulus package is about to impact every financial market around the world—from real estate to lending, to interest rates, to even the value of the US dollar. So to break this down, let's discuss exactly what happened through the new economic reset that's resulted in a 20% stock market rally, whether or not this massive stimulus is actually sustainable, and then finally what you could do about this to come out ahead.

Although before we start, as usual, if you appreciate videos like this, all I ask for in return is that you hit the like button or subscribe. It helps out the channel tremendously. It's totally free, and as a thank you for doing that, I will do my best to reply to as many comments as I can. So thanks so much, and also a big thank you to Rocket Money for sponsoring today's video, but more on that later.

All right, so I've said this before, but as a bit of background, up until recently, China's been on an unstoppable trajectory. That's because for the last 30 years, they've 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 as a result of that, money poured in. Countries from around the world invested in Chinese infrastructure, took advantage of low-cost labor, and helped them bring much-needed funding to areas that were previously closed off.

At this time, growth was so impressive that in 2001, China became a member of the World Trade Organization as a way to further strengthen ties with the United States. But it didn't go exactly as planned for the United States; it quickly became apparent that demand for low-cost Chinese goods was increasing faster than expected. More and more products were being outsourced elsewhere, and corporations moved 6 million jobs overseas to allow for higher profit. Even though this did bring down the cost of everyday items that a lot of us still use to this day, for China, the benefits were monumental. With all the increased worldwide trade and foreign investment, 400 million people were lifted from poverty.

In addition to that, their economy is now more than 11 times larger today than it was in 2001. They became the world's largest exporting nation in 2009, and they were even touted as the world's economic miracle while they grew at a faster pace than any other nation. However, not everything appeared exactly as it was 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 they could regulate as they deemed necessary, and as a result of all that, the more difficult they've been to join forces with.

In fact, members of the World Trade Organization alleged that China has been providing illegal 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’s said that they've been purposely devaluing their own currency by as much as 40% as an incentive for other countries to buy their goods at a discount, leading of course to fake economic growth that was largely unsustainable, as we've recently begun to see.

So in terms of the three major roadblocks for China and how they're now dealing with it, let's begin with the first: real estate. Up until recently, China experienced what many would call a real estate property bubble as citizens preferred to put their money in housing as a safety net, causing real estate prices to increase double digits year after year. In fact, China was building five times as many homes as America and Europe combined, and supply was still so limited that they used a lottery system to allocate them, some with odds as low as 1 in 60.

This led to 70% of the country's wealth being tied up in the real estate market, which is more than twice as high as it is here in the United States. At that point, property values were rising so quickly that developers would pre-sell units, and buyers would begin making payments on something before it even existed, with the expectation that once it's done, it's going to be worth a lot more since the market just kept moving higher. It didn't matter how much it cost either, with some buyers spending as much as 23 times their annual income to say they own a property, oftentimes with the mortgage making up more than half of their gross take-home pay.

Yeah, if you thought the housing market was competitive here in the US, you haven't seen anything compared to that. Anyway, China's real estate market was growing so quickly that prices increased 700% from 2001 to 2017. So in an effort to curb some of this appreciation, the government stepped in with imposed regulations on who is able to purchase a house and they said that homes should be for living, not for speculation. But it was too little, too late. With their economy now beginning to slow down, property developers had a harder time raising money in order to stay afloat; they couldn't afford to finish their pre-construction units.

Even though this originally started with Evergrande, within four weeks, more than 320 projects in about 100 cities were facing protests, roiling markets, and forcing authorities to corral banks and developers to diffuse the unrest. This led to Evergrande, their second largest property developer, filing for bankruptcy in mid-2023 after owing more than $300 billion to its investors. An estimated 233 other property developers filed for bankruptcy shortly afterward, and in response to this, China began lowering interest rates as a way to help spark some more economic growth.

But there was also a second boogeyman that the entire economy had to deal with, and you're going to want to hear this. Although before we go into that, I think it's really important to mention that there's always going to be some sort of economic uncertainty out there. Even though it seems scary, it's precisely why you should take matters into your own hands and focus on what you can directly control. Like, did you know that most Americans have absolutely no idea how much money they spend? Or even worse, 84% are spending beyond their means.

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All right, now in terms of the second economic boogeyman that China has to deal with, it's none other than youth unemployment. All of this began in 1998 when China created an expansion on higher education. This provided much-needed funding to build schools, hire professors, and give students an education that couldn't otherwise afford it. The goal here was to develop a knowledge-based economy, satisfy demand for higher educated workers, and then grow their economy to eventually compete with the rest of the world.

As a result of that, it’s said that Chinese universities accepted about 1.59 million students in 1999, up more than 47% from the previous year. In a way, it made higher education almost like mass education to anyone who was interested, even if they lived in rural areas with a low-income background. As we could see today, there was a bit of a problem in that higher education expanded faster than there was market demand, meaning there were a lot more college graduates than there were jobs to pay them.

As a result, youth unemployment increased. As it stands right now, the jobless rate of 16 to 24-year-olds is currently 18.8%, and that's been steadily rising since the surveys were started in 2018. In fact, unemployment has gotten so bad in this category that lottery sales increased more than 50% because young people see hitting the jackpot as their only solution to achieving financial freedom.

In addition to that, it’s said that many companies are refusing to hire recent college graduates now because they worry about the cost and legal difficulties if they have to let someone go a year down the line if the economy remains in the doldrums. In terms of how much this costs, apparently, companies have to pay quite the severance; or in this case, if someone works for two years, they have to give 30 days notice plus two months' salary. This is expensive, so no one wants to fire anyone now or hire anyone new.

On top of that, youth unemployment actually got so bad that the government stopped publishing data for several months in 2023 and only resumed doing so once it changed its methodology. Because of that, the third problem seems that much more obvious: deflation. Now, for those unaware, deflation is pretty much the opposite of inflation, where instead of prices going up, they're going down. Even though this might sound like a good thing, it's not.

See, when prices come down, it's a sign of less demand. When your money becomes more valuable the longer you hold on to it, the less likely you are to spend it, which means prices fall even further. Companies scale back; they produce less. The cycle repeats itself until eventually, the entire economy weakens and falls into the abyss. In China's case, though, consumers are very reluctant to spend money after three years of COVID lockdowns, with recent CPI only increasing 4% year-over-year.

Companies are also taking note of this and reducing their workforce, resulting in even more deflation as less money is available to spend. Essentially, even though household income growth is outpacing that of spending and disposable income per capita rose 5.4% in the first half of the year, China's citizens are afraid to spend more money because of strong economic uncertainty, especially everything that’s happened with falling real estate prices, bank runs, and high unemployment.

This, of course, means that China is falling short of their 5% GDP growth goal unless of course their latest strategy is going to work, and that would be their economic reset, otherwise known as the Bazooka stimulus. Essentially, China's solution to a slowing economy is the tried-and-true method of printing a lot of money. In terms of how they're planning to do this, let's begin with the banks. A few days ago, the People's Bank of China moved forward with two funding proposals that would inject about $112 billion into the stock market.

In terms of specifics, it said that they were lowering interest rates to make borrowing money cheaper, lowering mortgage rates for homeowners, benefiting 50 million households, and lowering the requirements for how much money banks need to keep on reserve, freeing up $140 billion. It also set aside $28 billion for local government investment projects. This also includes lowering down payments for buying second homes—often purchased in China as investments—which would be cut to 15% of the apartment's value from 25%.

Now, by the way, side tangent here, do you remember a few years ago when they said that second homes were for living, not for speculation? Well, it seems like they've completely reversed course on that now that their economy depends on it. The second rumors have been swirling that Beijing plans to release $284 billion in sovereign bonds later this year to provide funding to pay down local government debt and boost China's social safety net.

And third, government officials are pushing for a much bigger stimulus package, potentially as high as $1.4 trillion; otherwise, the economy may fall off a cliff. However, in terms of how all of this is being perceived from an investment standpoint, they're wildly optimistic, with the stock market having increased over 20% in the last month.

Although one economist was quoted as saying the move comes a bit too late, but it's better late than never. But in terms of what I think, and the expectations going forward, I have some doubts. Right now, yes, it is true that China's stock market has seen some rather impressive returns over these last 30 days, but it's important to acknowledge that a large portion of this rally is due to the optimism that China will enact even more stimulus in the future rather than from existing policies already in place.

Like, part of their recent price surge is based on promises that may or may not happen in the future. And even though they did cut interest rates and reduce mortgage down payments, one could argue whether or not this is an actual long-term solution or a quick fix just designed to get them going a little bit longer until eventually they have to step back in again.

For example, one of the ways that they were able to free up some more money was by reducing bank reserve requirements. Now banks don't have to keep as much cash on hand, allowing them to lend even more, but is this a good idea if they face a liquidity crisis and customers all come demanding their money at the same time? Perhaps this is a lot riskier than it seems initially. It's also said that in the coming months, the central bank is ready to make another reserve cut, potentially doubling the extra money available for lending.

To me, this is really no different than the economy slowing down, printing more money to get the economy going again, and then kicking the can a little bit further down the road until eventually, they're going to have to start the process over again. This is why we've seen reports that China's economy is collapsing for such a long time. Even though everything on the surface seems like a disaster, there's nothing that says they can't just print more money indefinitely, and as long as investors keep buying in for a quick profit, this could last for a very, very long time.

Overall though, I would be cautious about such a rally, and I'd question whether or not the stimulus is a sustainable path to growth long term or if it's just enough to shore up interest for a temporary improvement. There are still a lot of fundamental issues that will need to be addressed, but as long as they could just throw money at the problem, there's really no telling how long this could go on for.

So with that said, thank you so much for watching. Let me know what you think down below in the comments section. As always, hit the like button, subscribe if you haven't done that already. Thank you so much, and until next time.