What India needs to learn from the Chinese Economic Crisis? : Chinese Evergrande Crisis
Summary
TLDRThe 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
🏗️ 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.
📈 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.
🏢 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.
Mindmap
Keywords
💡Real Estate Bubble
💡Urbanization
💡Three Redline Policy
💡Ghost Cities
💡Evergrande Group
💡Property Market Collapse
💡Debt Crisis
💡Price-to-Income Ratio
💡Too Big to Fail
💡Mortgage Crisis
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
you learned something available please
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channel thank you so much for watching i
will see you in the next one bye bye
[Music]
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