Fall of the Chinese Economy and the reasons behind it

In 2019 China was on it’s way to become the SUPER POWER.

Now its economy is collapsing, putting millions out of jobFamous for debt-trapping poor countries, it’s now trapped in debt itself.

2022 has not been very kind to the world's economy.And now, another one of our neighbours is grabbing global attention. C H I N APeople of China have lost their confidence in real estate and now a full-blown economic crisis is knocking on China's door.

Constructions, as well as mortgage payments, have been stopped there. After battling the major economic setback from the Covid-19 pandemic

— this will put a major strain on the world's second-largest economy and its financial system.

At the root of these upcoming crises is a real estate giant in China- EVERGRANDE GROUP.They currently own more than 1300 projects in more than 280 cities across China.

On top of that, now they're in wealth management, electric cars, and food & drink manufacturing as well.

A company that was 'too big to fail'- got itself into trouble.They borrowed more than $300 bn to expand aggressively and then things went south.

First, many people bought their homes from Evergrande even before they started their construction work and took loans.

Second, they hired many design firms along with material suppliers. Now, these co.s are incurring losses as Evergrande is not able to pay their due diligence.And at last, Evergrande borrowed money from major financial institutions and foreign lenders.

In the last year, it OFFICIALLY DEFAULTED on instalments due to a liquidity crunch.

This led FITCH- one of the biggest Credit Rating agencies- to downgrade Evergrande's rating from B+ to CC.This drained down the entire credit worthiness of this company into the gutter.

The story doesn't end here. A Lil late, but some other debt-laden developers joined this default party too - after facing heavy losses in the first half of this year.This raised a lot of concerns about debt repayment in the financial ecosystem.

That was just the FIRST part of the distress.

The SECOND element of this major economic turmoil is

— a widespread loss of confidence in real estate.

What are we talking about??

See, hundreds and thousands of people have stopped paying their mortgages because-- even after receiving the down payment last year, the developers withdrew from the project and the construction stalled. Are you having Deja vu?

Because the world has already witnessed the same thing in the US subprime mortgage crisis in 2007-- high-risk borrowers defaulting on their loans.But NO.

Situation is a Lil different in China. Many of them here CAN pay but CHOOSING not to.

Real estate prices are plunging with every passing day because

— the demand for new houses is drastically going down. Now, this is putting further pressure on the struggling developers to complete their ongoing projects.

Do you think the story ends here?Umm NO.

One last element is yet to be discussed, guys.

BANKS and FINANCIAL INSTITUTIONS. You see, no economic crisis can be caused without the participation of these economic pillars.

Banks got caught in the middle of developers and the public who are boycotting mortgage payments.

On one hand, they are not able to collect their instalments from people who took home loans.

7% of the outstanding mortgage loans could be impacted if the default spreads.

And on the other hand, Chinese banks have been told

— to bail out the struggling property developers. Banks have been asked to extend loans to these developers to complete their housing projects.

Banks aren't the only institutions which are expected to bear this economic burden.Asset Management Companies are also expected to provide their assistance.

BUT The health of these financial giants is already deteriorating due to BAD BANKS.

Govt. is also setting up a rescue fund of $44 bn to help the developers

— but the entire financial system is in distress.And all of us are well aware of the reason.

COVID-19 PANDEMIC.

Pandemic has already lowered the tax revenue of govt. and on top of it

— govt. spent endlessly on Covid-19 testing.Deep-pocketed Chinese govt. and banks are having a hard time setting up these rescue funds which might not even fix

— the failing real estate industry.

Now what we need to understand is the severe impact of this property crisis on China and the WORLD. China is the world's second-largest economy.

It's the MANUFACTURING HUB for the entire world and every country is heavily dependent on China for the finished products.

The heavy dependence of the global economy on China

— will cost every country more with EXPENSIVE EXPORTS. Moreover, as the FINANCIAL MARKETS are more integrated than ever due to globalization

— falling Chinese indices will INCREASE THE VOLATILITY everywhere.

The capital market has already lost its confidence in some of the property management companies

— and this is creating DISTRUST AMONG INVESTORS

and might WIPE OFF THEIR WEALTH even more.

BOND INVESTORS might yield LOW RETURNS in the upcoming days because

— China's real estate bonds were key performance drivers for Asian bonds.

China is also a GLOBAL CREDITOR of the developing nations.

— countries take loans from China for their infrastructure development.

Bangladesh and Sri Lanka are also some of those nations.

— economies of these nations might take a hard hit as China might not be able to extend further loans to these countries.

One thing that we need to realize now is that the stability in the property market affects — the social and financial stability of a country.

OR we can say THE SOCIAL AND FINANCIAL STABILITY OF THE ENTIRE WORLD.