We can´t hide it, here at VisualPolitik we
love Asia, and that’s partly because, we believe that the world’s centre is already
on this continent. But in the last few decades, one country has
stood out of the crowd, and that is China. For its huge size and the speed at which this
country is growing, China deserves to be given the chief role in this super production that
is changing our planet. But wait a second, let’s not rush into this. China is not perfect, indeed the country has
some pretty major problems.   (The last 23rd of May 2017, the rating agency
Moody’s, one of the three agencies in charge of rating the solvency and the risk of its
financial products, reduced the rating of China´s debt) And this is the first reduction Moody has
made on China’s debt in 27 years. Yes, Ok, I know what you are thinking: Moody’s? Rating agencies in general? I mean, they rarely seem to get it right… Now that is true, but it’s also one of the
only things that we have to judge this sort of thing. “Investors still overwhelmingly rely on
Standard & Poor’s, Moody’s and Fitch when deciding whether to buy bonds. The three issue more than 95% of global bond
ratings”. The things is, dear viewers, China has faced
two major threats in the last years: less growth and much, much, more debt. In fact, this has even lead to an important
question: Can China go bankrupt? (CHINA’S GREAT GROWTH) If we had a time machine and the opportunity
to travel to Mao Tse Tung’s China, the country we would find would be completely different
to the one we find today. There wouldn’t be any skyscrapers, and malls,
in fact, there wouldn’t really be much around at all… In the 1970s China was mainly an agricultural
country, and it was extremely poor… But a few years after Mao had died, a man
known as Deng Xiaoping came to power and he realized that communism…well, it hadn’t
worked at all. He immediately put into practise a set of
measures that would change China forever… These reforms, and the change China has gone
through since, are going to be the subject of an upcoming video, so please don’t forget
to subscribe to this channel! But, for now, it is important to remember
something: Deng Xiaoping was a turning point for the country. (Since then, China has undergone the greatest
economical revolution in the history of mankind. In the last three decades, China has managed
to take 500 million people out of poverty and to become the largest industrial and trading
power on the planet). In other words, if we ask any Chinese person
about his or her living standards, the answer will be that now it is infinitely better that
it was before. And don’t get me wrong, there is still a lot
of poverty in China, but compared to how it was, it’s a whole lot better today. But, as I was saying earlier, it’s not all
roses, and there are some serious clouds on the horizon. (A SYSTEM ADDICTED TO DEBT) Have a quick look at this chart which shows
what happened to China’s debt in the last few years. As you can see it goes up and up and up… That is a seriously steep line… On the other hand, look closely at what has
happened to Chinese economic growth. As you can see, this chart is headed in the
opposite direction. So, in other words, in China, the economy
is declining and the debt won’t stop rising. Look, in gross terms, the Chinese debt has
multiplied by four since 2007. (The Chinese debt equals now more than 260%
of the GDP and many analysts consider this number to be especially high for a country
that is yet to become one of the richest in the world). Well, most of the debt is actually the responsibility
of Chinese companies.   Well, the thing is, there is a silver lining,
but there is also a significant negative side: All that international expansion needs money,
and a great deal of it. And while much of the debt has financed the
expansion of Chinese companies, they have also paid for this kind of nonsense: “Throughout China, there are hundreds of
cities that have almost everything one needs for a modern, urban lifestyle: high-rise apartment
complexes, developed waterfronts, skyscrapers, and even public art. Everything, that is, except one major factor:
people” So you can get an idea of the size of all
of that has been built in China in the last few years, pay attention to the following
number: in just three years, China has used more concrete than the United States in the
entire 20th Century: And as I said, everything, absolutely everything,
has been paid for with debt. So now, we come to a really important question:
What the hell has happened in this country to cause it to get into so much debt? (THE CHINESE GOVERNMENT’S FORWARD FLIGHT) For the last few decades, if you could say
the Chinese people were good at one thing it would be saving money… Especially the oldest Chinese citizens, they
work and save, that is all they do. So, thanks to all that effort, China has had
high investment rates. But don’t be fooled, what has happened in
the last years has nothing to do with this. In order to know what has happened, we need
to go back to 2008. At that time, all developed countries were
going through a major financial crisis, and you can imagine how this affected China’s
exports, which are the engine that keeps driving China’s forward. The truth is that, at that time, the Chinese
government was terrified that the country would be affected by the international crisis. So, in order to prevent it, they came up with
an idea: the economic system had to be transformed, and they had to bet on domestic demand. And when it comes from a politician, that
“domestic demand” thing almost always means  they are planning to start overspending. And, well, that is exactly what Beijing did… (In 2008, the Chinese government started a
colossal programme of extra public spending of 4 trillion yuans, around 600 billion dollars,
meant to be used for building all kinds of infrastructure: high speed trains, undergrounds,
highways, houses, offices…) But they went further. The Chinese government thought that government
overspending wasn’t enough, so they had to encourage the companies to do the same. Well, how could they do it? Well, they decided to use a traditional remedy: (In 2008, China also started one of the most
expansive monetary policies ever known. The authorities lowered interest rates and
banks gave money loans to everyone who asked for them. They practically established an open bar of
cheap loans) And as always happens, they got completely
drunk. In just three years, the price of housing
was an average of 2.4 times more expensive. So, an apartment which cost $100,000 three
years before, would now be worth $240,000. And, the result? Companies started to make all kinds of investments:
they built ghost towns, bought out companies all over the world, and engaged in all kinds
of projects. They took on whatever crazy risky projects
they felt like! After all, with the Central Bank was almost
giving the money away… “Overproduction in key industries is damaging
both China’s economic sustainability and foreign trade relations”
Obviously, many of these projects have never been profitable, so the companies can’t
give the money back. So what do they do then? Well, they ask for new loans to pay back the
old ones, and the snowball keeps rolling and growing bigger and bigger. And this is how the Chinese economy became
addicted to debt. And now I’ve probably got an idea of you
are thinking… Those stupid private companies, right? Well, not exactly. “More than half of the bank debt in China
consists of loans from state-owned banks to state-owned enterprises”. And wait a second because there, ohh, there
is much, much more… (CHINESE BANKS: A WEAPON OF MASS DESTRUCTION) We’ve already seen how China is currently
going through a debt overdose, but, if this wasn’t enough, there is another danger hiding
in the bushes: a bank in the shadows. Banks face certain limitations on the amount
of money they can loan. But Chinese banks have managed to skip these
controls and, in a way, these banks have copied what the American banks did with their mortgages. Let me explain: instead of just giving loans,
they set up off-balance companies that issued debt that banks bought. And that is the money they lent, but… surprise
surprise, in the bank’s accounts these aren’t listed as loans, but as other investments. A pretty smart workaround, right? Well, it is estimated that Chinese banks have
hidden more than $2 trillion. And it has a straightforward consequence:
Chinese banks can be way less solvent that their official numbers might indicate. And, besides, much of this debt is opaque,
so the actual debt in China could be much higher. (“The fast spread of off-balance activities
and bank investment actually means risk of hidden loans which could threaten China’s
financial security” Shang Fulin, Ex-President of China’s Banking Regulatory Commision.) And wait, because there’s more: “A growing number of nonbank financial firms
also market their own wealth management products and invest the money with little disclosure
of where the money goes”. That’s right, in the last few years, those
companies which get money from people to make investments that are risky and opaque have
become more and more popular. And why is that? Well, of course, that’s in exchange for
higher rates of return. The thing is this craving for loans can cause
quite a bit of indigestion. This is a risk and the government has admitted
that it has tried to limit company loans. But since there are a lot of unsold ghost
towns, empty houses, and bankrupt real estate agencies, the government told the banks in
the last few years to give away loans as if there were no tomorrow, because the family
debt level is still so low… “The Fed economists note that China’s mortgage
loans increased by 35% in 2016”. And now, dear viewer, you might know why some
analysts are warning that if they don´t stop this debt vortex China could become a new
Japan, a country that has been in crisis since the 80s. And there is still more, now we know why Xi
Jinping and China need globalization so much – their companies need foreign markets to
deal with all the debt they have issued. But not everything is doomed and the future
is yet to come. In China, the saving rate is still high, enough
for foreign capital to arrive in the country. But…there a risk, and Moody’s has given
the first warning. Now, it is time for the government to start
working to make reforms… And now we’d like to know your thoughts. You can tell us what you think in this survey
as well as the comments. What do you think will happen in China? Do you think stagnation will turn it into
a new Japan? Or will we see new reforms to open China even
wider to the west? So, I really hope you enjoyed that video,
please hit like if you did, and don’t forget to subscribe if you haven’t already, brand
new videos every Monday and Thursday. And don’t forget to check out the Reconsider
Media podcasts – they provided the vocals in this episode that aren’t mind. And as always, I’ll see you in the next
video.