There were several noteworthy happenings in China’s financial industry in the month of August. These trends will play out in the next months and beyond, even though they are relatively little understood and so far have only been selectively reported by U.S. financial news media.
Among these is a longer-term tendency that dampens that country’s future, the repercussions of which will become apparent in the next decades.
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Okay, so first, the quick stuff.
An impending financial meltdown
Many of this month’s financial stories out of China have experts scratching their heads.
Evergrande, a massive real estate developer, filed for bankruptcy in August after two years of struggling financially. Another major property developer, Country Garden, which was widely believed to be considerably more financially stable than Evergrande, defaulted on certain dollar-denominated loans on August 8, with a 30-day deadline of September 8. Meanwhile, Sino Ocean firm, another state-backed developer, has missed bond payments and is in negotiations with shareholders and bondholders to restructure its obligations.
For Chinese families, having their own home and property is the pinnacle of financial security. Defaults by property developers threaten bringing large household investment firms, termed trusts, to the edge of default due to the close but sometimes opaque financial relationships between property developers and investment companies.
Midway through August, investors’ funds were frozen at Zhongrong International Trust Co., adding to rumors that China is experiencing a slow-moving financial contagion crisis akin to the one that ensued after the September 2008 failures of Lehman Brothers, American International Group, Fannie Mae, Freddie Mac, and Washington Mutual.
Financial contagion may have spread from the faltering property developers to Zhongrong Trust. Even if Zhongrong were to collapse, it would only be the ninth largest financial trust in the nation. However, when it comes to investments like these, we fear that the collapse of one trust company is significantly connected with weakness and eventual failure in larger trusts. Among the year’s many important lessons is this: When an investing firm fails, it’s a portent of failure for other firms.
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Some context for the current Chinese financial crisis is helpful. In the early 1990s, Japan went through a similar property boom, bubble, and crash, leading to a precipitous drop in property prices and a deflationary cycle. In 2008, this same trend was seen in real estate markets throughout the United States. It hurts like hell.
China has faced and overcome previous financial crises. Because of China’s rising economic prominence over the previous two decades, this event has received some coverage in the Western financial press.
What, as an American investor, should you do if the Chinese financial problem develops into a full-blown catastrophe? Perhaps nothing at all. For a few years, this may restrict China’s economic expansion, but it should have no worldwide repercussions.
While we rely on Chinese factories as worldwide suppliers, our business is not too reliant on domestic demand in China. Still, surprising outcomes are possible during a financial crisis in a major economic power. It’s something to keep an eye on and worry about, if only a little.
The national government of China is widely predicted to step in, issue new debt, and mitigate the crisis’s worst effects. No such intervention had taken place by late August.
Collapse of the population?
A longer cycle is at work in China as this plays out over the next several months. Population decline is a major threat to its future. This was the first time I had heard of it, and it was because to Peter Zeihan’s 2022 book “The End of the World Is Just the Beginning: Mapping the Collapse of Globalization.”
The topics covered in Zeihan’s book are extensive, and his predictions for the future are bold.
His main argument is that a country’s fate is decided by factors like its location and population. His forecasts regarding China are particularly striking. Current birthrates and the size of previously recorded demographic cohorts are used to project the future population. The population of China is declining rapidly. China’s population is expected to decrease by hundreds of millions from its present 1.4 billion people.
This year, China said that 2022 was the first year population fall in the country since 1961. And that’s only the start of a general development.
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Changing birthrate assumptions are used to predict future population growth or decline. Therefore, it is unclear whether China’s population would fall to 900 million by 2050, a relative collapse, or 1.1 billion by 2050, a significant but not catastrophic reduction.
A alarmingly low 1.09 children per woman during her lifetime was the figure reported for China’s fertility rate in June of this year. That low birthrate will cause a demographic disaster in the future decades unless anything is done to increase it, such as financially rewarding families for having more children.
Meanwhile, in August, India is thought to have surpassed China as the world’s most populated nation for the first time since 1750. If population trends are any indication, as Zeihan claims they are, then China’s rise to global prominence may have peaked a decade earlier, in 2023.
rigidity in authority
Over the last 30 years, China’s climb to global superpower status has paralleled, in reverse, the decline and dissolution of the Soviet Union. In only one generation, China lifted almost a billion people out of abject poverty and food insecurity to enjoy the material comforts of the middle class.
No economic feat I’ve seen in my lifetime compares to this one. The fact that this amazing change occurred under authoritarian rule is even more puzzling. This should give pause to all of us liberal capitalists in the West.
The economic progress China has made in the last 30 years is really remarkable. Authoritarian governments, on the other hand, are not always the best at adapting to new circumstances.
China’s investment firms, banks, and even its construction industry have a long history of shady practices owing to the country’s chronic lack of openness. As long as the state backs it, obscurity may function normally inside a state-dominated system. Unscrupulous financial systems, however, tend to implode at the most inopportune moments, as maybe now, when nations decide to stop backing them.
May we be blessed with intriguing times, as the old Chinese adage says.