What India needs to learn from the Chinese Economic Crisis? : Chinese Evergrande Crisis

Summary

The video discusses China's current economic crisis, driven by a collapsing real estate market that contributes nearly 30% of the nation's GDP. The problem began with massive urbanization and high property demand, leading to overdevelopment and debt-laden real estate companies like Evergrande. Now, unfinished projects, defaulting loans, and unpaid suppliers threaten the broader economy. The video explains China's 'three redline policy' aimed at controlling real estate debt, explores the potential impact on global markets, and draws lessons for India to avoid similar risks.

Takeaways

• 🏢 China is facing an economic crisis driven by its real estate sector, which contributes 30% of its GDP.
• 🚧 Hundreds of unfinished apartment towers are causing protests in China due to the failure of real estate developers like Evergrande.
• 💰 Chinese developers took on massive debt to meet the rising demand for urban housing, fueled by migration from rural areas to cities.
• 🏠 Real estate prices in China skyrocketed, making cities like Beijing and Shanghai some of the most expensive in the world.
• ⚠️ China introduced the 'Three Red Line' policy to limit developers' ability to take on more debt, but Evergrande crossed all three red lines.
• 💥 Evergrande’s collapse affects not just the real estate market, but also banks, suppliers, and millions of people who invested in incomplete housing projects.
• 🏦 The mortgage crisis is brewing as homeowners stop paying on loans, threatening a broader financial collapse within China’s banking sector.
• 👷 The over-construction of 'ghost cities' in China has led to vast numbers of vacant properties—enough to house 90 million people.
• 📉 Evergrande’s failure could trigger a domino effect, leading to further economic instability both within China and globally.
• 📚 Lessons for India: Avoid over-reliance on socially driven investments, manage corporate debt responsibly, and stay vigilant regarding the interconnectedness of industries and economies.

Q & A

What triggered China's current economic crisis?

China's economic crisis was triggered by a collapse in the real estate market, which accounts for nearly 30% of the country's GDP. Real estate developers, like Evergrande, are now struggling under mountains of debt as property sales have plummeted and housing projects remain unfinished.

Why is Evergrande's collapse such a major issue for China?

Evergrande’s collapse is a major issue because it is one of the largest real estate developers in China and has borrowed huge sums from domestic banks, suppliers, and international investors. If it fails, it could trigger a broader financial crisis affecting 171 domestic banks, suppliers, and millions of home buyers who have already paid for unfinished apartments.

What is the 'three redline policy' introduced by the Chinese government?

The 'three redline policy' is a set of financial metrics imposed by the Chinese government to curb excessive borrowing by real estate developers. Developers must meet three criteria: liability to asset ratio below 70%, net gearing ratio below 100%, and cash to short-term debt ratio of at least 1. Only companies that meet these criteria can extend their debts with banks.

How did China's rapid urbanization contribute to the real estate bubble?

China's rapid urbanization led to a surge in demand for housing as millions of people migrated from rural areas to cities. Developers flooded the market to meet this demand, pushing property prices up. This demand-driven price increase incentivized further borrowing and building, creating a housing bubble.

Why are property prices in Chinese cities so unaffordable compared to other global cities?

Property prices in Chinese cities are highly unaffordable due to a combination of skyrocketing demand, speculative investment in real estate, and social pressures to own homes. In cities like Beijing, the price-to-income ratio is as high as 56 years, meaning it would take 56 years of median household income to buy an apartment.

Why were Chinese citizens willing to buy homes despite high prices?

Many Chinese citizens bought homes despite high prices because of social norms and cultural pressures. Owning a home is a sign of being 'well-settled' and is necessary for marriage prospects. Additionally, real estate was viewed as a safe investment compared to volatile stock markets.

What are 'ghost cities' in China, and why do they exist?

'Ghost cities' in China are large urban areas with numerous empty apartment buildings built in anticipation of future demand. These cities exist because developers overbuilt during the housing boom, leaving millions of homes unoccupied as the demand did not meet the supply.

What impact could Evergrande's failure have on China’s banks and the broader economy?

Evergrande's failure could have severe impacts on China's banks, which are heavily exposed to Evergrande’s debts. If Evergrande cannot complete its projects, banks will struggle to recover loans. This could also lead to a mortgage default crisis, as homebuyers refuse to pay for incomplete apartments, further destabilizing the economy.

How did Evergrande’s rapid growth contribute to its downfall?

Evergrande’s rapid growth contributed to its downfall as the company borrowed heavily to fund new projects without completing existing ones. This debt-fueled expansion created a dangerous financial situation, leading to the company breaching the 'three redlines' and triggering its financial crisis.

What lessons can India learn from China’s real estate crisis?

India can learn to be cautious about mindless investments driven by social norms, such as over-investment in real estate or other asset classes without economic rationale. Additionally, India should be wary of companies taking on excessive debt, as they could destabilize the economy if they default, much like Evergrande in China.

Outlines

00:00

🏗️ China's Real Estate Crisis and Evergrande's Role

China is facing a severe economic crisis driven by the real estate market, which constitutes nearly 30% of its GDP. Massive debt accumulation among property developers, particularly Evergrande, has caused protests in 86 cities. With property sales plummeting by 72%, China's economic future looks precarious. The Communist Party, concerned about internal security, must decide whether to intervene and stabilize the situation.

05:01

📈 The Rise of China's Real Estate Boom

China's real estate boom began in the early 2000s during a period of rapid industrialization and urbanization. As millions moved to cities, demand for housing surged, and property prices skyrocketed. Developers, taking out large loans, began constructing vast numbers of apartments. This growth fueled the Chinese economy, contributing to GDP through job creation and a booming supply chain. However, housing affordability in China became one of the worst globally, with cities like Beijing having a price-to-income ratio of 56 years.

10:01

🏢 Cultural and Economic Drivers of China's Property Market

Two key factors drove China's housing market despite high prices: cultural norms that pressured men to own homes before marriage, and the perception of real estate as a safe investment over stocks. With no property taxes and rising real estate values, developers overbuilt, leading to 90 million vacant apartments across China, creating 'ghost cities.' The Chinese government introduced the 'Three Redline Policy' to curb excessive borrowing by developers, but major players like Evergrande breached all criteria.

💥 Evergrande's Massive Debt and Economic Ripple Effect

Evergrande, one of China’s largest property developers, borrowed heavily to fund new projects before completing existing ones, leading to enormous debt. As it breached the 'Three Redlines,' it could no longer extend its debt, triggering a chain reaction. Suppliers, banks, and millions of homebuyers waiting on unfinished apartments were impacted. A looming mortgage crisis threatens to destabilize China's economy, with billions in loans at risk, affecting banks and investors alike.

🌍 The Far-Reaching Consequences of Evergrande's Collapse

Evergrande's potential collapse could trigger widespread economic disruption. With outstanding bills to suppliers and debt to banks, the ripple effect of unpaid loans and halted projects could further damage China's economy. Already, 1.6 million homebuyers are facing losses on undelivered apartments. The mortgage sector, comprising 20% of all loans in China, is under threat, as a widespread refusal to repay mortgages could lead to billions in bank losses, escalating the crisis.

📉 Lessons for India and Economic Caution

India can learn several lessons from China's crisis. Social norms, like owning homes despite high costs, led to unsustainable debt. Similarly, Indian investors should avoid blindly following traditional investment norms, such as over-relying on gold or fixed deposits. Additionally, companies accumulating large debts pose significant risks to economies, as seen with the Adani Group. As China’s economic troubles unfold, India must monitor its own major business groups and the impact of China’s supply chain slowdown on industries like solar energy.

Keywords

💡Real Estate Bubble

A real estate bubble occurs when property prices are driven up to unsustainable levels due to high demand, speculation, and excessive lending. In the context of China, this bubble began in the early 2000s when rapid urbanization led to a housing demand surge. Developers took on massive debt to meet this demand, leading to inflated housing prices and overbuilding, exemplified by China's 'ghost cities.'

💡Urbanization

Urbanization refers to the process where a growing percentage of a population moves from rural areas to cities. In China, this shift accelerated after 1995, contributing to a housing demand boom. By the present, nearly 64% of the Chinese population lives in cities, increasing pressure on real estate developers to build housing, contributing to the property crisis.

💡Three Redline Policy

The Three Redline Policy is a financial regulation imposed by the Chinese government to curb excessive borrowing by real estate developers. It sets limits on liabilities, net gearing, and liquidity ratios. Companies like Evergrande breached all three criteria, limiting their access to further loans, which triggered the company's financial crisis and exacerbated China's property sector woes.

💡Ghost Cities

Ghost cities refer to urban areas in China where large numbers of buildings remain unoccupied despite significant development. Developers built housing for 90 million people in anticipation of demand, but many of these properties remain empty, contributing to the inefficiency and unsustainability of China's real estate market.

💡Evergrande Group

Evergrande Group is one of China's largest real estate developers and the company at the center of the current property crisis. The company took on excessive debt to fund rapid growth and new developments before completing existing projects. Its failure to meet the Three Redline Policy’s requirements led to a liquidity crisis, affecting suppliers, banks, and millions of homebuyers.

💡Property Market Collapse

The property market collapse refers to the downturn in China's real estate sector, where excessive borrowing, speculative investments, and overbuilding led to unsustainable market conditions. The collapse has triggered widespread economic concerns, with analysts fearing it could destabilize China's entire economy. The script explains how this downturn is affecting developers, banks, and homebuyers.

💡Debt Crisis

The debt crisis in China, particularly in the real estate sector, stems from developers borrowing excessive amounts to fund projects. Evergrande's massive debt—owed to domestic banks, international investors, and suppliers—has created a ripple effect that threatens the stability of China's financial system. This crisis reflects broader risks of over-leveraging in fast-growing sectors.

💡Price-to-Income Ratio

The price-to-income ratio measures housing affordability by comparing the average price of a home to the median household income. In China's cities, this ratio has reached unsustainable levels, with places like Beijing requiring 56 years of median income to afford a house. This metric highlights the severity of the property price inflation in China, contributing to the housing bubble.

💡Too Big to Fail

The concept of 'too big to fail' refers to companies whose failure would cause catastrophic repercussions for the broader economy. In the case of Evergrande, its collapse would affect thousands of suppliers, millions of homebuyers, and numerous banks, potentially destabilizing China's entire economic structure. This explains why the government and financial system are so deeply concerned about its failure.

💡Mortgage Crisis

The mortgage crisis in China refers to the situation where millions of homeowners are threatening to stop paying their mortgage loans due to incomplete housing projects. If large numbers of people default on their mortgages, banks will suffer huge losses, potentially writing down $220 billion in loans. This crisis is tied to Evergrande’s inability to finish projects, causing widespread panic among homebuyers.

Highlights

China is witnessing one of the most challenging economic crises in its history, with a real estate market crash and banking issues impacting the entire economy.

The real estate market, accounting for nearly 30% of China's GDP, has experienced a sharp decline, with property sales plummeting by 72% in the last year.

China’s real estate boom was driven by rapid urbanization, leading to high demand for housing and skyrocketing property prices in cities like Beijing.

A crucial factor in China’s real estate crisis is the inability to own land, as it is state-owned and leased to developers, further complicating the situation.

Chinese cultural norms, such as the social expectation to own property for status and investment purposes, contributed to the inflated housing market.

The Chinese government introduced the 'three redline policy,' which restricted borrowing by developers based on specific financial health criteria.

Evergrande, one of China's largest real estate developers, became the face of the crisis, having breached all three red lines of the policy, making it unable to extend its debt.

Evergrande’s rapid expansion and borrowing practices led to incomplete projects, with 1.6 million home buyers still waiting for apartments they had already paid for.

The crisis has broader implications, with Evergrande owing $100 billion to suppliers and $220 billion in mortgage loans, potentially causing a banking collapse.

China’s property sector has developed 'ghost cities,' where buildings meant for millions remain vacant, with the overbuilt real estate sector far exceeding demand.

The collapse of major real estate developers is threatening to impact China’s entire economic system, from suppliers to banks and homeowners.

Evergrande's debt crisis could lead to defaults by other major Chinese real estate firms, exacerbating the financial instability.

This crisis could serve as a cautionary tale for other economies, highlighting the dangers of over-leveraging and dependency on a single sector for economic growth.

India should take note of China’s crisis to avoid similar pitfalls, such as the unchecked accumulation of corporate debt and the overemphasis on real estate investments.

The unfolding crisis in China has broader geopolitical and economic implications, particularly as Chinese control over solar components and rare materials could affect global markets.

Transcripts

right now there are hundreds of

unfinished apartment towers across china

social media footage shows crowds

protesting in front of the offices of

the chinese real estate developer

evergrant

[Music]

now the big risk comes from property

where developers are crumbling under

mountains of debt analysts fear the

crisis could spread throughout china's

property sector and the entire economy

the communist party is paranoid it is

obsessed with internal security so the

question is will the chinese government

step in and act as a backstop

hi everybody china is witnessing one of

the most challenging economic crisis in

its history the real estate market which

accounts for nearly 30 percent of its

gdp has come crashing down in the past

one year property sales plummeted by 72

and thousands of people are now

protesting in 86 cities and now there is

a banking crisis whereby banks have

started freezing the accounts of the

depositors and in spite of all this

trouble experts say that this is just

the beginning of one of the worst

economic crisis that is to follow in

china the question is why is china at

the brink of an economic crisis what

exactly went wrong with the real estate

market of china and most importantly

what are the lessons that india needs to

learn from this chinese economic crisis

this video is brought to you by cuckoo

fm but more on this at the end of the

video

the story of china's real estate bubble

dates way back to the early 2000s during

this time china was an ultra fast

growing country this is when the

manufacturing revolution of china was at

its peak wherein companies from all

across the world were setting up their

manufacturing hubs in the cities of

china

before this time china was just another

agricultural nation with very little to

nothing to do with globalization so

if you look at urbanization in china

after 1995 huge chunks of population

started moving from the rural places to

the cities of china so back then only 29

of the population was living in the

cities but after 1995 you will see that

the population in the city skyrocketed

to nearly 50 percent of the entire

population and today 63.89 percent of

the chinese population as in nearly 900

million people live in the cities now

the catch over here is that in china

unlike in india you cannot own a land so

the entire land of china is owned by the

state and can only be given on a lease

to the builders and developers so when

so many people started migrating to the

cities the demand for houses skyrocketed

and when demand for a product skyrockets

what happens the price of the product

increases and more and more players jump

into the market to cater to the rising

demand

so not so surprisingly hundreds of

developers flooded into the chinese

market to meet this demand and this is

where we saw the massive rise of chinese

real estate developers

now as we all know construction is an

extremely capital intensive business so

these companies first of all took heavy

loans on the banks to pay the heavy

leasing amount to the state

then they took even heavier loans to

build these buildings and started

selling them to the people of china

now from the chinese bank standpoint

construction was an amazing business to

lend to why because there was already

over demand in the market the business

had a healthy profit margin of 15 to 20

percent in spite of being a high ticket

business and most importantly from the

state's perspective it generates a lot

of employment profits a huge supply

chain of steel glass cement brick and

hundreds of other suppliers and

eventually makes a huge contribution to

the gdp of china by giving jobs to many

many workers in fact this is the reason

why real estate contributed to almost 30

percent of the chinese gross domestic

product

this is the reason why banks kept on

lending the developers kept on building

and the people of china kept on buying

houses and due to this increasing demand

the price of houses increased so more

lending more developers and more sales

and this is why ladies and gentlemen the

property boom in the chinese economy

started as a result the real estate

prices in china started shooting to new

peaks making the chinese cities some of

the most expensive cities in the world

now just to give you an idea about how

bad the condition is there is this index

called price to income ratio to

understand the affordability of houses

in a particular locality it's nothing

but the ratio of the price of an average

apartment to the median household income

of that particular place so if this

index is 10 for new york it means that

it would take 10 years of the median

household income to buy an apartment in

new york so while a median new york

household needs 9.92 years of income to

buy an apartment in london it's 17.3

years in mumbai it's 26 years whereas in

beijing it's 56 years and even in other

chinese cities it's more than 35 years

now the question over here is if the

price of these houses was so so high why

were the chinese still buying houses

couldn't they just rent an apartment

well here's where apart from

urbanization there are two more reasons

why the chinese were buying houses in

spite of high prices

number one just like in india even in

china you will be respected as a

well-settled person only if you own a

house so if you're a man who does not

own a house in china the family will be

too hesitant to get their daughter

married to you

secondly just like gold is our go-to

investment in india for the chinese

people property was the best investment

instrument in the market and just like

our elders refrain from stock investing

even the chinese people consider stocks

to be dangerous and real estate to be

extremely safe and if you look at the

increasing prices of the houses in china

it kind of looks like it was a great

investment instrument

cherry on the cake there is zero

property tax on buying private

residential places in china

and you know what guys in the race of

the social norm gdpn property boom the

chinese developers built so many

buildings that today there are buildings

for 90 million people that are

completely vacant

to put that into perspective that is

more than the entire population of

france germany italy uk and even canada

and this led to the creation of what we

know today as the ghost cities of china

take a look these are china's ghost

cities sprawling empty spaces city meant

for thousands of people that's just

completely empty many chinese cities

constantly conducting real estate

development in pursuit of gdp growth

simply turn urbanization into building

houses and cities

but their floor areas and increase in

population are out of sync leading to

the ghost city phenomenon

and guess what most of these apartments

are already owned by the people in the

hope that the real estate prices will go

up and their investments will appreciate

this is why ladies and gentlemen the

government of china realized that they

are in a super bubble where developers

are borrowing dangerous sums of money to

keep feeding the real estate bubble of

china

so they came up with something called

the three redline policy whereby they

put forth three criterias that the large

real estate developers in china are

supposed to clear and only if they clear

these criterias they can extend their

debts with a bank these three criterias

are liability to asset ratio of less

than 70

net gearing ratio of less than 100 and

cash to short-term debt ratio of at

least one now this is a little complex

but don't worry you don't have to

understand all this all you need to know

is that if all three criterias are

passed then the company can increase its

debt up to 15 and as you keep breaching

a criteria the percentage at which your

debt can grow will be decreased to ten

percent five percent and then to zero

percent and as soon as this announcement

was done all the real estate developers

started cutting down on their expenses

and started optimizing their finances

but but but while many many medium and

small scale developers fulfilled this

criteria as it turns out the second

largest real estate developer in china

crossed all three lines and this company

is named china evergrand group evergrand

borrowed a lot of money what we call

offshore in international financial

markets and it's probably not going to

pay it back china evergreen is the most

indebted real estate development in

china evergrande is a ticking time bomb

and it's about to blow up in the face of

foreign investors in other words if this

company fails it hits

171 domestic banks in china now the

question is what exactly is wrong with

evergrand and why has a single company

triggered such a massive unrest all

across the country

well the story of a grand is pretty

straightforward and astounding at the

same time the founder of the company saw

the real estate wave started the company

to serve the over demand of homes took a

ton of loans from the banks built huge

buildings and sold them and made a lot

of money but the problem was that they

were growing and borrowing at such a

rapid pace that it started to get more

and more dangerous and if you look at

the numbers within just 10 years they

went from a revenue of 45.8 billion yuan

to 507 billion yuan

this is mind blowing right but you know

what guys behind the scenes they used

all this debt not to complete the

existing projects but kept on funding

new projects before the existing ones

got sold out so you will see that in

this graph from 2010 onwards after they

started expanding the gap between the

properties under development contracted

sales and completed projects started

increasing and as you can see by 2021 it

had already touched a dangerous level

whereby the completed projects held for

sales were barely one-sixth of the

properties under development and as a

result of this super fast growth fueled

by a mountain of debt evergrande ended

up crossing all three red lines in the

policy and now they can no longer extend

their debt with the banks

and this is why ladies and gentlemen the

chain reaction starts

now the question is it's just another

company that would go out of business

right then how is it possible that a

single company going down can affect the

growth of the second largest economy in

the world well here's where you need to

know about a category of companies that

are said to be too big to fail in this

case if you see evergrand is not the

only player to get affected they are yet

to pay bills worth hundred billion

dollars to their suppliers this includes

steel suppliers cement suppliers pain

suppliers trucking companies brick

supplies and thousands of other vendors

and now that these supplies won't be

paid it directly affects their suppliers

and they are balance sheet secondly the

banks that have given out loans to

evergrand they cannot get their money

back unless all these ever grant

projects are sold out but as we saw most

of these projects are still under

development and the news of evergrand

has already sent shockwaves across the

market so now no one is going to buy

those incomplete apartments right and

what's even worse is that since these

incomplete projects cannot be completed

without more loans even the people who

have paid for the apartments cannot get

their house or will lose their money

altogether and you know what guys these

angry home buyers are now waiting on as

many as 1.6 million apartments and many

of these people have also taken out

loans and now all home buyers are

threatening not to pay mortgage on their

loan at all and if they don't pay the

banks the banks will have to write down

220 billion dollars of mortgage loans

which will put them in a disaster

fun fact mortgage loans account for 20

of all loans in china so you can imagine

how bad the condition is

and you know what evergrand did not just

borrow from banks they also raised

billions of dollars from the common

people through bonds and now even those

people will lose money and the most

insane fact of all is that as of october

2021 itself two-thirds of the top 30

chinese property firms have breached at

least one of the metrics in the three

redline policy which means more

defaulting more companies going out of

business more defaulting customers and

more loss for suppliers and ultimately

the collapse of one of the biggest

sectors of the chinese economy

this is the reason why there is so much

chaos in china now what remains to be

seen is how will the chinese tackle this

crisis and how will it prevent itself

from a catastrophe

and this brings me to the last part of

the episode and that are lessons that

india needs to learn from this chinese

economic crisis

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moving on to the lessons the first thing

we need to learn from this chinese

crisis is that investment instruments

driven by mindless social norms will

often cost both the people and the

economy heavily in this case the chinese

definition of a well-seeded person got a

ton of debt piled up for the chinese

people in spite of the sky high prices

so you see in spite of it not making any

economic sense because of the social

construct it has now put millions of

people's lives at stake in our case in

india the same thing happened with fts

because we outright considered fds to be

safe because of the social norm without

understanding inflation similarly the

mindless purchase of gold is now

hindering our economy so take a step

back and assess whether your instruments

are backed by calculated strategy or

just mindless social norms

number two piling up of debt of any

company might showcase accelerated

growth in the beginning but with today's

volatile uncertain and chaotic market

conditions it comes at the risk of

everything falling apart at once in our

case just like evergrande the adani

group is taking up a huge amount of debt

and like i said in the previous episode

it sounds both risky and genius to me

and as much as we must vouch for indian

businessmen to prosper and become the

pillars of our economy we must also keep

an eye on the implications in case they

start defaulting and just like china had

a huge supply chain banks and people

that got affected if a huge business

group in india starts defaulting even

our economy will face troubles so be

careful with that and thirdly with china

being a monopoly with solar components

and cobalt because the chinese banks

have curtailed the lending the cost of

these trades to india might actually

keep increasing so keep an eye on your

solar and electric stocks and lastly i

am attaching a ton of study materials

for you to read in the description so

read through them and let me know in the

comments section as to how will this

chinese crisis affect india according to

your perspective

that's all from my side of today guys if

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will see you in the next one bye bye

[Music]