China’s Looming Crises | CNBC Marathon

Chinese population hasdeclined for the first time in decades. It is a big deal becauseit marks the end of this era of rapid growth andof cheap labor. China's ghost cities, orresidential buildings without tenants orconstruction that never finished, have becomevisual metaphors for the ongoing crisis. Demand disappeared.

There was lack of trustamong buyers, and that's ultimately what led to adecline in demand and therefore the downwardadjustment of prices as well. Since the end of 2022,China's urban youth unemployment rate hasrisen to 21%. This is the age categoryfrom people 16 to 24, about 96 million people,the statistics bureau said. 6 million of thoseare still looking for.

Jobs. The second largest economyin the world is in trouble. China is facinga growing list of problems real estate,semiconductor bans and labor market gyrations. The world's second mostpopulous country also has a major youthunemployment problem. Really quite disconcertingwas the youth unemployment figure. It hit a freshrecord of 20.8% for May.

That's up from 20.4% theprior month. This is the age categoryfrom people 16 to 24, about 96 million people,the statistics bureau said. 6 million of thoseare still looking for jobs. Since the end of 2022,China's urban youth unemployment rate hasrisen to 21%. The issue was getting somuch attention that China decided to stoppublishing the data.

Altogether. China's youthemployment rate now ranks with several G7 countriesthat have notorious problems with gettingyounger workers into the labor market, like Spainand Italy. India, the world's mostpopulated country, has also been dealing with ayouth employment problem. But China has prideditself on putting its hundreds of millions ofyounger, well-educated citizens to work, and themost recent data set a.

Record for the highestyouth unemployment rate ever in China. Experts point to severalreasons for the slow pace of hiring for recentgraduates, and China's youth. At a labor markettransformation could have impacted the recent youthunemployment rate in China, and also the waythe Chinese government has been regulating some ofthe sectors that I.

Studied, including thehigh tech sector, could have really seriousimpacts on the employment situation today. My understanding is therejust aren't the same level of jobs that require acollege degree. So there's this imbalancein terms of supply and demand, and then thatthat's made even worse because of the Covid andthe entire economic slowdown.

So what's happening inChina? Why are younger workersnot working? Because of the overalleconomic slowdown, businesses don't want tohire as many people, especially not youngpeople, because you have to train them and youdon't know if they'll stay around. You don't evenknow if your business is going to be around. China's economy, alongwith other parts of the.

World, is struggling tofind growth. A lot of Chinese wealthis tied to real estate, and as the housing sectorgrew and grew in the late 20th and early 21stcenturies, homeowners saw a big increase in theirnet worth. That all reversed duringChina's zero Covid policy, investment in real estatebegan to plummet from 8.3% year over year growth in2018 to a sharp decline of 8.4% in 2022.

Policies from Beijingforced property developers like Evergrande todefault on their debts and eventually file forbankruptcy. Shares of Guangdong basedEvergrande began trading again on August 28thafter a 17 month halt. The stock plummeted 78%in the day. Consumer confidence hasbeen declining since the beginning of the yearbecause people realize that the post-Covidrecovery isn't as strong.

As many of them had hopedfor. One area of particularweakness is the service sector. Investmentactually completed by the tertiary industry, whatChina's National Bureau of Statistics calls theservice industry, has tapered off in the lastsix months compared to a year ago. Even importsand exports to and from the country are down inmost sectors, including a 23% drop in exports tothe United States and a.

21% drop in exports tothe European Union in July compared to last year,all while imports of crude oil dropped 21% in Julyfrom a year ago. Just a year to date, thecountry's imports have fallen 7.6% from lastyear. Some of the problems inChina may be deflationary, but, you know, if Chinais experiencing deflation, that doesn't change thefact that consumers aren't really spending,consumers aren't spending.

In China. And they're notspending abroad either. As a result of pressureson the economy and limited spending, the Chinesegovernment decided to cut interest rates in a verydifferent move than the rest of the developedworld. For Chinese government, itreally wants to contain any of the marketvolatility, especially during the economicdownturn. And from the beginning ofthis year, there were a.

Lot of speculations inthe market over any big change in themacroeconomic data. So it's in a way becomingthe self-fulfilling prophecy because thegovernment is so worried that there might be toomuch attention for certain type of data, then theydo not wish to disclose too much of it. And as a result, thereare more speculation and more fear in the market.

A lot of the young peopleright now, their parents lived through China's bigeconomic boom in the last couple of decades. So alot of the parents have made a lot of money. And, you know, the kids,even if they're not fully employed or employed atall, it doesn't mean that they're financiallyaffected. They might still beliving very comfortable lives just because of howaffluent their families.

Have become. One study, conducted by aYale University researcher determined just how muchhousehold wealth increased between 2010 and 2012, inChina. The data showed betweenthose two years, housing assets grew 51% in value. And then what happens inChina was in the last 10, 15 years, the housingmarket skyrocketed. And then the value ofthe, say, second, first.

Tier cities property,especially first tier city. My experienceresearch mostly in Shanghai. It wentsixfold. Tenfold. That's howpeople are sitting on this wealth. And these arethose young people's parents generation. And in the U.S. we talk about, oh, thebaby boomers. They got everything.

China's overall urbanunemployment rate has remained relativelysteady all year, hovering around 5.2%. The 25 to 59 year oldpopulation has seen steady employment as well, withthat number hovering around 4% since March. That's leading some tocall younger demographic groups, quote,professional children, even.

If they're not fullyemployed or employed at all. It doesn't mean thatthey're financially affected. They mightstill be living very comfortable lives justbecause of how affluent their families havebecome. And so that also contributes to hey, maybeI can just take some time off and lie flat. I don't think young peopleare buying it because they were not lazy.

Like I said, they studyreally hard, they compete really hard, and thenthey are competing for jobs like hundreds ofpeople applying for one position. I recently heard anotherway to characterize the situation in doing situps. It's sort of expressingthis idea that whatever sector you try to makeyour way in, whether it's coffee or real estate ortourism, it's extremely.

Competitive becauseeveryone's trying to get their slice of the samepie. So if you're doing situps, you're taking breaks between lying flat andalso participating in this intense rat race. One way this sitting upphenomenon has played out is via the country'snational civil service exam in March 2023, morethan 7.7 million people took the civil serviceexam in China, the first.

Step toward getting agovernment job. Thing is, there were only200,000 open civil service positions. Certainly the internetplatform companies like Alibaba, Tencent, theyalso saw massive growth in the last two decades thathad driven significant demand for young peopleas well, and with different regulations inthe last couple of years, we've seen that theseindustries have been.

Clamped down on by by thegovernment or at least restricted in a way that,you know, they're not hiring necessarily at thepace they used to, if not laying off jobs. China's policy towardssome of its largest technology companies tooka significant shift during Covid 19, when Xi Jinpingbegan his third terms in office in 2020,regulators suspended what would have been at thetime the world's largest.

IPO on record fromAlibaba's Ant Group on Shanghai and Hong Kongexchanges, due to, “significant issues suchas the changes in the financial technologyregulatory environment.” So before 2015 is thecontinuing growth of wage across different sectors,including labor intensive manufacturing like laborintensive or services. But the situation beganto change in the mid 2010s. So basically thejob moved from the.

Manufacturing sector tothe low skilled service sector. But the problemis that the low skill service sector don'treally solve the problem because they generatedvery bad jobs. Chinese President XiJinping has urged the youth to eat bitterness,a more traditional Chinese phrase which means topersevere through hardship without complaint or evento suffer. China's policy focus hasbeen more and more on the.

Long term, and that's whywe have seen a lot of stress on economicsecurity. And that means way moreinvestment into the kind of technology that willbe meaningful in the long term, but not so much forthe short term. Artificial intelligencewill be one of such example. Just by puttingmore money into AI, it has a potential to replaceeven more workers, especially young workers,in the near future.

So it's not necessarilygood for job creation, but it's very important forChina's long term growth. On the other hand, though,it actually does look like the economic malaise thatChina is experiencing may be contributing to itsapparently increasing willingness to come tothe table and engage in diplomatic exchanges withthe United States. You look at their importnumbers, you look at their export numbers all again,read negative.

And we invest in otherparts of Asia, Australia, South Korea, Japan. But at this point, Ithink it's prudent for folks like us and yourviewers to start to rethink how they're goingto deploy capital in China. Many young people used tograduate and maybe go into real estate education,after school tutoring, internet technologycompanies, coding jobs,.

Even governmentpositions. And those are really not necessarilywhere the future of China is going to be heavilyfocused on. The Chinese youth, forthey tend to pursue graduate degrees as astrategy to deal with labor market difficulty. So the problem is thatthey are becoming more and more educated. But the problem is thatyou just delaying.

Postponing the problems,but you are not solving the problem. You aregetting more and more degree that don't reallygive you any return. China has always beenknown for its massive population size. It's home to 1.41 billionpeople. That means nearly one outof every five human beings on Earth lives in China. But now that number isshrinking.

For the first time since1961. China's population hasdeclined for the first time in more than 60years. According to numbersreleased Tuesday by China's National Bureauof Statistics, the population in 2022 wasjust over 1.4 billion, a drop of 850,000 from ayear prior. So the recent news thatChinese population has declined for the firsttime in decades, in many.

Ways is a big dealbecause it marks the end of this era of rapidgrowth and of cheap labor. If the labor costs inChina are no longer cheaper than othercountries, China will lose its comparative advantagein manufacturing goods for the rest of the world. Consequently, the pricesof your iPhones, the prices of your cars, andmany of these things are going to rise. And so theglobal consumer is going.

To feel what's happening. So what's happening inthe bedrooms in China is actually affecting what'shappening in the rest of the world. China has beenimplemented this one child policy for 35 years, from1980 to 2015. The reason for this isback in 1980, the Chinese government observed orpredicted that in the future, China'spopulation growth rate.

Will be so high, and thenthere will be the famine problem. Then theagricultural production will not meet thepeople's wants and needs. Many couples thereforechose to only have a son when restricted to just aone child household. So consequently, after 30something years, what you do have is a hugesituation of missing women and surplus bachelors. Something like 30 millionsurplus men who cannot.

Find brides. Thatobviously has a lot of consequences for how doyou make future babies for China, right? No women. That's a big problem. Itcosts the population to become too male, too old,and too few. Reasons why the youngergeneration decided not to respond to the policychanges. Number one is the sheercost of living. Just an ordinary city, ifyou buy a property, you're.

Looking at 30 years ofcommitment to pay off your mortgage. So this is ahuge burden. In rural China, thingsare slightly different because housing is cheap. However, education is aproblem, and if you want to send your kids tosecondary schools or universities, you mustleave your village. You can imagine thenboarding costs all the fees. This all build up.

Although the governmentrelaxed this one child policy to even threechild policy. But still we did notobserve much effect out of it. One reason is Covidrecently, especially for the year 2022, because2022 was China still implemented, this verystringent zero Covid policy. So most of thepeople live in a very, extremely inconvenientlife, and many people got laid off because of thislong time no show at work.

That's why the birth ratein the year 2022 is very low. So from the domesticperspective, the real estate market, which wasbooming for the last 30 years, your firstgeneration of homeowners coming in is now stalled,partly as a result of Covid, but also partly asa result of a housing crisis, and also partlybecause of the population growth slowing down. That's a long termeconomic outlook that it's.

Not helpful. Aging is catching up inChina. It actually affects thequality of population and they are not asproductive as young generation. The aging population canmake the government spend a lot of money on thewelfare expenditure. They pay more money forthe Social Security, Medicaid, Medicare andetc.

And also populationshrinks. That means tax payersshrinks. So lower amount of taxpayers indicate a lower tax revenue and thenhigher government expenditure. So thegovernment budget deficit will be the result. Especially the last 25years, China has embedded itself into global supplychains. And so we felt that veryacutely out of the Covid.

Pandemic, particularly asvaccines were rolled out and consumer spendingboomed, there were bottlenecks at ports,there were semiconductor chip shortages as inputsto automobiles. And so the integratedsuccess of globalization has now become a threatto the resilience of global supply chains. Now, China. Had for a long time been amanufacturing-based.

Economy. So the source ofcheap labor was very helpful to grow. Andthat's why very many of the world's factoriesrelocated there. That's why it became theworld's manufacturing floor. That's why youriPhones and your your cars and your solar panels areall made in China. And that's why we've allpaid relatively cheaper costs for it. Unlimited supply of cheaplabor from rural China is.

The engine of China'sexports. Now, if you switch thatoff, China's cheap labor-based manufacturerswill soon kind of decline. And this will cause somekind of famine in goods. Certain things you canget very cheaply, not anymore. Cheap goods madein China. That party's over. India is poised todominate the global economy for the rest ofthis century.

Why? Because itspopulation will overtake China this year, in 2023,and in the next few years, its working agepopulation will become the largest in the world. Now, India still hasdemographics so that it will continue to grow andadd population in the subsequent decades. Indians are young. The average age is under30.

It's really a vibrant,young, educated workforce. I won't be surprised inthe next decade. India will be theworkshop of the world. Population is only goingto be one dimension of this. We have to thinkabout infrastructure, about gender roles,gender equality, about the nature of the economy. And in that sense, ofcourse, there are still fundamental differencesbetween China and India.

And I think in many ways,India still has a lot of ground to gain. Just because you haveplenty of young workers doesn't mean you have theroads, or the factories, or the financing or thelogistics to take advantage of all thosethings and really make it come together. So yeah,that's not that expectation at all. This population decline inthis process of aging is.

Almost irreversible. We can try to slow itdown a little bit through increasing fertilityrates, but that's not really the solution toanything, because of course, babies don'twork, babies don't pay tax. And so we need to dois tackle some of the challenges of today. And that will requirethings like reforming the pension system, makingsure that their health and.

Social welfare systemsare more adequate, but then also ensuring thatChina can do more with a smaller populationinvolve increasing productivity, maybereforming the education system, and so on. Suppose if the laborsupply reaches a critically low point, theChinese government might consider importingcheaper labors from other countries to lower thecost of production and to.

Maintain its comparativeadvantage of its domestic products. And this willbring about even more benefits to othercountries with cheaper labor. Foreign companies, foreigngovernments are aware that things are going in onedirection in China at the moment. A lot of companies aregoing to rethink their whole business model,whether they would place.

Any manufacturing orresourcing outside of China, whether they wouldbe looking at other sources of consumptiongrowth. The damage has been done. Nothing you can do aboutit. You just have to tominimize the damage in the future. China's real estateindustry is collapsing in slow motion. These ghostcities or residential.

Buildings without tenantsor construction that never finished, have becomevisual metaphors for the ongoing crisis. That kind of reallyundermined the confidence among home buyers,because they were now worried that developersmight not deliver the apartment that they hadput a down payment on for. And so you then gotessentially a confidence crisis among consumerswho weren't able to trust.

Developers to deliver thedepartment they had paid for, at least in part. And so demanddisappeared. There was lack of trustamong buyers. And that's ultimatelywhat led to a decline in demand and therefore thedownward adjustment of prices as well. One of the issues for theproperty sector has been its rapid expansion.

And in China's financialworld, there haven't been as many regulatoryconstraints as you might have seen in other partsof the world that are more developed. The total value ofcommercial real estate sales from things likeoffices and shopping centers skyrocketed inFebruary 2021, with the month over month increaseof 133%. That same value on thosesales has now fallen.

Negative to -1.5% fromJuly to August of this year. Part of the problem thissummer, in late July and early August, was thatthe pace of the sales decline was accelerating. While you had CountryGarden run into these default worries. From Evergrande's defaultand eventual bankruptcy filing to CountryGarden's debt.

Restructuring, rippleeffects are making waves throughout the entireeconomy and the Chinese stock market. The HangSeng Mainland Properties Index illustrates thistough time rather clearly, a steep decline since thesector's peak in January 2020. This all comes asChina's overall economy struggles with itspost-Covid recovery. Wall Street analysts arenow cutting their forecasts for China.

Barclays, for example,cut its estimate for China's 2023 GDP from anastronomical 9% to 4.5%. Official Chinesestatistics state the real estate sector onlyaccounts for 6% to 7% of the country's overallGDP, but estimates from economists like KenRogoff suggest all real estate inputs and supplychains make up a whopping 30% of China's overallGDP. So what's going on withChina's housing sector,.

And does it mean troublefor the U.S. and the global economy? Back in 2014, thecountry's sizzling housing market began to cool,with fewer sales, falling prices and slowingdevelopment. Compared with thesituation back in 2014. The situation is quitedifferent because back in 2014, we don't have thiskind of issues of developers. At the timewe just had a slowdown,.

Not a huge wave ofdefault of private developers, and we don'thave a huge group of austerity householdswhich already have a high leverage, lower-incomeexpectation. This time around,developers began to look to offshore internationaldebt markets and local governments to financenew projects, anticipating continued growth. They really saw hugegrowth in the last two.

Decades, and part of thatwas because they could buy land from localgovernments and then sell those properties thatthey built on the land to people in China. And there was a lot offinancing involved with that. As these companies beganto grow and grow with no constriction in sight,that's when several auditors parted ways withthe big real estate.

Companies in China,sparking fears of underlying concerns. It's a result of verydeliberate policy by the government to prick theproperty bubble that was forming over the lastdecade or so, so the government stepped in andessentially curbed financing to developers,tightened the screw and household borrowing, forexample, in order to rein in property prices.

But in some sense, theygot a bit more than they bargained for, becausenow we are here about a year and a half later andthe property market is actually quite depressed. Evergrande is one of thenotable property developers that defaultedon its offshore debt payments in late 2021,meaning it failed to repay bills and even miss thegrace period window to repay. Country Garden wasanother of the.

Privately-owned Chineseproperty developers to catch investors'attention after signaling pressure on their abilityto pay down debt. On October 18th, thecompany missed a $15 million payment. Thecompany now rests with $11 billion in offshorebonds, and even mentioned it expects to be unableto meet all of its off shore debt obligations. So one strategy thegovernment adopted in.

Order to rein in thefrothy housing market was really to curb thefinancing access of developers. Developerswould borrow money in the market, would then buildapartments and sell these to consumers. And so by essentiallycutting off developers from funding or at leastrestricting their access to funding, developerssuddenly realized they don't have enough moneyto actually complete the.

Projects they're workingon. In total, 26 propertydevelopers encountered distress events in 2022,according to S&P Global Ratings. S&P GlobalRatings counts distressed events as those where thedeveloper reportedly restructured or outrightfailed to pay any of its offshore or domesticobligations. However, these defaultssubsided in 2023 as several of thesecompanies were able to.

Push back theirmaturities to late 2024. China's shrinking realestate sector over the coming years really havea huge impact on heavy industry, on thecommodity markets globally, because there'sgoing to be less steel demand, there's going tobe less cement being used, less glass, for example,that impacts within China, heavy industrial areasthat really produce these raw materials. And sothat's not something that.

Will grow very fast. And therefore, China insome sense has its own rust belt in thenortheast, a term we're familiar with from theU.S.S, for example, where as the economy shiftedaway to different sectors, you left behind with kindof empty factories and kind of decliningemployment, and China has the equivalent. All of this is spillingover into the global.

Economy. TheInternational Monetary Fund just cut its globalgrowth forecast for 2024, and called out China'sreal estate crisis as a big reason why, inaddition to citing rising inflation and interestrates, the IMF described China's real estatecrisis as a major problem facing policymakers goinginto 2024. The IMF said diminishedconsumer confidence and investment in China poseda “significant risk for.

The global economy. Since real estate was oneof the biggest parts of China's economy, realestate developers were growing significantly. I mean, it made a lot ofinvestment sense at one point to buy these bonds,but that growth and that reliance on debtobviously proves unsustainable. I mean,it's something that people have warned about onChina's economy for.

Decades. And at somepoint, the government has started to think abouthow they could reduce the level of debt in theirsystem. This led to the centralgovernment's decision to institute a three redlines rule for property developers. This ruleputs a cap on the ratios of debt to cash, debt toassets, and debt to equity that these companies canhold. From anecdotes that I'veheard, this policy was.

Implemented prettystringently in that everyone was so scared ofgiving any financing to the real estatedevelopers that they were almost, it sounded like,cut off. This three red linespolicy was so steep it doubled China's defaultrate to 4.4% in 2021. Then the following year,it doubled again to 8.2%, according to S&P GlobalRatings. I think China's governmentwould try to let those.

Private developers tonegotiate with creditors and to get those thingsdone, to try to stabilize it, instead of trying toleverage on central government to bail themout. Fast forward to just acouple months ago, the central bank andgovernment officials moved to boost home sales bylowering the minimum down payment for first-timehome buyers to 20%, and 30% for second-timepurchasers.

Officials also beganencouraging lenders to lower rates on existingmortgages, all in an effort to boost propertysales. All these are really aimedat juicing home sales, raising demand forapartments. And on both of thesestrategies, the government has only been partiallysuccessful so far. We're still early days,but we're not really yet seeing a V-shapedrecovery in housing.

Demand. It's really beena bit of a slog in recent months to get consumerconfidence back into the market and stabilize homedemand. But there's a keydifference between private sector developers andstate-owned developers. The private sectordevelopers really funded themselves a little bitmore out of the international market. That is, they went toglobal investors and.

Issued bonds to fundtheir expansion, whereas the state-led developersreally funded themselves more domestically. This exact phenomenonplayed out in 2021 and 2022, as the privatelyowned enterprises or developers default amountsurged 35.4 billion, while their state ownedcounterparts fell to 190 million. In a very rapiddifference. It's not to say thatstate-led developers are.

Entirely off the hook. They too have faced, ofcourse, increasing pressures due todeclining demand. And they, too, are facingit, facing a more difficult time to raisefunding, although not quite on the par of whatprivate sector developers experience over the past18 months or so. The amount in offshoredefaults for China's property sector soared toa record rate in the last.

Ten years, from 4 billionin defaults in 2015 to $54 billion in 2022. And the rate at whichcompanies defaulted tripled, according to theS&P Global Ratings. You see that bifurcationin how the property developers are doing. Like, for example, again,Evergrande, they were more exposed to the lower tiercities and not as much to the higher tier cities.

It's pretty similar to,let's say, the United States. New York'sproperty market will almost always hold itsvalue. It might go down, butafter the pandemic, it comes back and moreexpensive than ever. It's just because morepeople are always going to the large cities for thejob opportunities, and also the education andhealth care services that they can get in the largecities.

Cities and localities inChina differ in their policy responses to thestruggling property sector. For example,China's central authorities announcedthat city-level governments could decideon their own the eligibility criteria forfirst-time home buyers. These kind of policiesdiffer based on where you are in China. As of now, only Shanghaiis still maintaining its.

Momentum, while for othertier three city, or tier two or even tier one cityalready slowed the momentum. So that meansthat the effectiveness of this policy is quitedifferent. And maybe it's just it'sjust not going to be that kind of boom that we,booming economy, booming growth that we've seen inthe last couple decades. Also, people haveexpected you know, China's growth overall is goingto slow.

But does that mean it'sgoing to collapse and fall into a deep recession? I think there's a lot ofspace in between that scenario and what'shappening right now. I think no one right nowwould expect, like the property market willimmediately stabilize. I think the market has abetter understanding of that the property marketmay not stabilize that soon. I think the keyquestion back to when it.

Will start to stabilizeor when it will bottom out. I think that'ssomething that people are debating. As I mentioned,Like I may be a little bit bearish. Like I don'tthink the situation will stabilize in 2024 due tosupply issues. It's important torecognize that there is a longer-term challengehere, and that is we essentially have toolarge a construction sector in China.

We have two large a realestate sector because underlying demand forapartments is declining. We have slowing slowingurbanization, declining demographics, that itspopulation is aging. We've already rebuiltmost of the Chinese housing stock to modernstandards of the last two decades. And so Chinagoing forward doesn't need the amount ofconstruction activity, the size of these developers,the overall real estate.

Activity, because there'sjust structurally declining demand. And it's just that there'ssome times we just don't have enough information,which is the scary part in of itself. And that'sbeen China's problem, this lack of transparency. But with the data wehave, some people are pointing to China's pasttrack record on economic policy. It's just more Ithink what we don't know.

But there are growinguncertainties.

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