China’s Debt Problem Is 300% Bigger Than America’s

00:23:23
https://www.youtube.com/watch?v=LygiZAFZ86Y

Ringkasan

TLDRThe video explores the contrasting debt situations of the USA and China, emphasizing the complexities of each country's economic structure. The USA faces a ballooning government debt, with interest repayments becoming a significant expenditure, while China has a more hidden debt spread across various levels of government and state-owned enterprises. The implications of these debt levels are discussed, including potential impacts on taxes, inflation, and economic stability. The video also highlights the unique characteristics of each economy, such as consumption patterns and investment behaviors, and the challenges they face in managing their respective debts.

Takeaways

  • 💰 USA's debt is ballooning, with interest repayments becoming a major expenditure.
  • 🏦 China's debt is more hidden, spread across various government levels and state-owned enterprises.
  • 📊 USA's debt to GDP ratio is about 132%, while China's is around 160%.
  • 📉 High debt levels can lead to higher taxes, inflation, or economic collapse for future generations.
  • 📈 China's household consumption is only 39% of GDP, compared to 68% in the USA.
  • 🏠 Real estate is the largest asset class in China, leading to high household debt.
  • 📉 China has low inflation, while the USA faces stubborn inflation rates.
  • 🔍 The reliability of economic data from China is often questioned.
  • ⚖️ The USA has a higher credit rating than China, affecting borrowing costs.
  • 🤔 Both economies face unique challenges in managing their debts.

Garis waktu

  • 00:00:00 - 00:05:00

    近年来，美国政府债务激增引起了广泛关注，利息偿还已成为政府支出中最大的部分之一。新立法预计将进一步扩大政府收入与支出之间的赤字，导致债务累积加速。尽管美国控制着全球储备货币，拥有一定的灵活性，但其联邦政府的债务已成为历史上最庞大的。最终，债务的代价将由未来的工人、高税收、通货膨胀或经济崩溃来承担。

  • 00:05:00 - 00:10:00

    与美国相比，中国的债务情况看似更为可控，债务占GDP的比例为84%，而美国为123%。然而，深入分析后发现，中国的债务水平可能实际上比美国更高，甚至可能是其三倍。中国的债务分散在多个政府层级和国有企业中，缺乏透明度，使得真实的债务水平难以评估。

  • 00:10:00 - 00:15:00

    中国的地方政府和国有企业承担了大量债务，保守估计地方政府债务已达到12.6万亿美元，占GDP的160%。此外，国有企业的债务也相当可观，整体债务可能超过GDP的300%。尽管中国的GDP数据存在争议，但即使按乐观估计，其债务水平也已超过危机点。

  • 00:15:00 - 00:23:23

    中国的经济结构与美国截然不同，政府拥有大量资产，且债务利率较低，使得偿还债务的压力相对较小。尽管中国的债务看似庞大，但其净资产状况相对健康，政府可以通过出售国有企业的股份来减轻债务负担。中美两国的经济问题并非简单的赢家与输家关系，而是各自面临复杂的挑战。

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Video Tanya Jawab

  • What is the current debt to GDP ratio of the USA?

    The USA's debt to GDP ratio is approximately 132%.

  • How does China's debt to GDP ratio compare to the USA's?

    China's debt to GDP ratio is estimated to be around 160%, which is higher than the USA's.

  • Why is China's debt situation considered more complex?

    China's debt is spread across multiple levels of government and state-owned enterprises, making it less transparent.

  • What are the implications of high government debt?

    High government debt can lead to higher taxes, inflation, or economic collapse for future generations.

  • How does the USA's borrowing reputation compare to China's?

    The USA has a higher credit rating than China, which affects borrowing costs.

  • What role do state-owned enterprises play in China's economy?

    State-owned enterprises in China are heavily leveraged and can contribute significantly to the country's overall debt.

  • How does household consumption in China compare to the USA?

    Household consumption accounts for only 39% of China's GDP, compared to 68% in the USA.

  • What is the significance of real estate in China's economy?

    Real estate is the largest asset class in China, leading to high levels of household debt and potential economic instability.

  • How does inflation in China differ from the USA?

    China has experienced low inflation, while the USA has faced stubborn inflation rates.

  • What is the potential risk of China's debt situation?

    China's high debt levels could lead to economic instability if real estate prices fall or if inflation rises.

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Gulir Otomatis:
  • 00:00:00
    Over the last few years there has understandably been a lot of attention paid to the ballooning
  • 00:00:04
    government debt in the USA. Interest repayments alone are now one of the largest government
  • 00:00:08
    expenditures in the country and it only looks to be getting worse. New legislation is projected to
  • 00:00:13
    only further widen the deficit between government income and spending which means the rate of debt
  • 00:00:18
    accumulation will have to increase to accommodate this. Now the USA is a special economy which for
  • 00:00:23
    now at least controls the world's reserve currency so it has more wiggle room to run these
  • 00:00:27
    kinds of deficits before getting itself into too much trouble. But it's also not magic.
  • 00:00:33
    The US federal government is now the most nominally indebted institution in history.
  • 00:00:37
    Eventually through one means or another someone is going to pay the price for this debt. Whether
  • 00:00:42
    that's the next group of workers through high taxes, everybody through inflation or future
  • 00:00:46
    generations through a complete economic collapse. The latter seemingly being the popular option
  • 00:00:50
    at the moment. But anyway, on the other hand China outwardly seems like the flip side of this
  • 00:00:55
    situation. It has its debts far more under control being just 84% of GDP compared to 123% in the USA
  • 00:01:02
    or 250% in Japan. And on top of that it's actually one of the biggest purchases of other people's
  • 00:01:08
    debt. During the back and forth trade negotiations between the USA and China, one of the people's
  • 00:01:14
    republic's biggest hidden weapons was the fact that they owned hundreds of billions of dollars
  • 00:01:18
    worth of US debt. The optics were pretty clear. The USA is the borrower taking on more and more
  • 00:01:23
    debt and China is the lender saving for the future. Except that's not exactly true. Just a little bit
  • 00:01:30
    of digging under the surface reveals that China is arguably more indebted than the USA is. And
  • 00:01:35
    depending on which numbers can be believed, its debt levels could actually be more than three times as
  • 00:01:40
    high. But this all needs a significant amount of context. China is a country with a very different
  • 00:01:46
    government, private sector and overall economy. So how bad is China's debt situation really?
  • 00:01:52
    How are they proposing to use their own lending as an economic weapon? And finally,
  • 00:01:56
    if debt is just debt, why is it treated so much differently in the eyes of economists?
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  • 00:03:02
    Okay, so big disclaimer time as always. Economic figures coming out of China,
  • 00:03:05
    especially at a provincial level, are often unreliable. Data from institutions like the IMF
  • 00:03:10
    and the World Bank is what most of this video will be based on, but even then they rely on
  • 00:03:14
    reporting from the government itself and as we'll actually explore a bit later,
  • 00:03:18
    there are a long list of reasons why these numbers might be massaged a little bit.
  • 00:03:22
    Okay, with all that out of the way, one of the biggest differences between Chinese and US debt
  • 00:03:27
    is who is actually doing the borrowing. In China, the debt is a lot better hidden and spread out
  • 00:03:32
    over multiple levels of government, government corporations and special entities that exist
  • 00:03:36
    just for taking on debt off the books. Now of course in the USA, the federal government is
  • 00:03:40
    responsible for the vast majority of public borrowing, but the country also has state and
  • 00:03:44
    local governments that do take out their own debt. The difference is that in the USA,
  • 00:03:49
    all of this regional government debt collectively equates to about 12% of GDP,
  • 00:03:54
    which means including federal debt, the country has a government debt to GDP ratio about 132%.
  • 00:04:00
    Not great, not terrible, again considering the US dollar's status as a global reserve.
  • 00:04:04
    Now in China, provincial governments have a lot more capacity and much more of an incentive to
  • 00:04:08
    take on debt to fund big projects. Again, reliable figures are a little bit harder to pin down since
  • 00:04:13
    the country does not have the same public reporting standards, but conservatively, the debt owned by
  • 00:04:18
    provincial and local governments in China amounted to at least 12.6 trillion US dollars in 2023.
  • 00:04:24
    That represents roughly 76% of the country's total output, which means collectively,
  • 00:04:29
    Chinese government debt now equals 160% of their GDP or about 30% higher than the USA's. Now,
  • 00:04:35
    to make matters worse, that still doesn't account for state-owned enterprises,
  • 00:04:39
    which in China performs something of a dual function between a private firm that wants to
  • 00:04:43
    return profits and a government department that will operate to achieve the goals set
  • 00:04:46
    down to them by the party. For example, the China State Construction and Engineering Corporation
  • 00:04:51
    is the largest construction company in the world with over 320 billion US dollars in revenue.
  • 00:04:57
    It does make a profit, but it's owned by the central people's government, which means two things.
  • 00:05:02
    For starters, it builds what the government wants it to build, from small local infrastructure
  • 00:05:05
    projects all the way up to the multi-billion dollar Beijing airport. These strategic developments
  • 00:05:10
    also extend beyond the borders of the country as well. China State Construction and Engineering
  • 00:05:14
    is involved in dozens of major construction projects with partner states, including the
  • 00:05:18
    construction of an entirely new capital city in Egypt. These projects serve national interests,
  • 00:05:23
    but they are not technically conducted or funded by the government itself. Instead,
  • 00:05:27
    these companies just borrow the money so the government doesn't have to.
  • 00:05:31
    Now, it is borderline impossible to know how much debt these companies have,
  • 00:05:35
    because we don't even know how many of them there are.
  • 00:05:38
    The China State Construction and Engineering Corporation is a massive and very high profile
  • 00:05:42
    example, but an investigation by Stanford University found that there are at least 391,000 fully
  • 00:05:47
    state-owned firms in China, ranging from small civil operations all the way up to international
  • 00:05:52
    banks. Beyond that, there are more than a million firms operating across the country,
  • 00:05:56
    with some level of state ownership. These state-owned enterprises are all highly leveraged,
  • 00:06:00
    and again, conservatively, are the equivalent of 30 trillion US dollars in debt. Now, if these
  • 00:06:06
    companies default, the government will be in a position where it either loses these firms which
  • 00:06:10
    do their bidding, or they'll have to step in to bail them out. Either way, that means, collectively,
  • 00:06:14
    between all of the different vehicles that the Chinese government uses to perform services in
  • 00:06:19
    the Chinese economy, its debt is over 300% of its GDP. And it gets worse than that.
  • 00:06:25
    This is all assuming that Chinese GDP figures, as in the denominator down here,
  • 00:06:29
    are actually reliable, which is debatable at best. A lot of economists question the official figures,
  • 00:06:34
    and independent researchers suggested that routine compounded inaccuracies in reporting
  • 00:06:39
    means that the Chinese economy might be between 20% and 60% smaller than officially reported.
  • 00:06:44
    That would mean that these debt figures could conservatively be as much as 450% of GDP,
  • 00:06:49
    three times higher than in the USA. And the bad news doesn't stop there.
  • 00:06:53
    Despite being a massive economy like the USA, China still doesn't have quite the same borrowing
  • 00:06:58
    reputation. A lot of attention has been paid to the US debt being downgraded over time from AAA
  • 00:07:03
    to AA+, with most rating agencies, thanks to a combination of high sustained borrowing,
  • 00:07:07
    lower than recommended tax receipts, and the game of chicken that they like to play once every
  • 00:07:11
    few months with their debt ceiling. Now, these downgrades do have an impact,
  • 00:07:15
    and they can affect how cheaply a country can borrow. Someone looking for a low-risk,
  • 00:07:19
    fixed income bond could lend money to the USA, but if a country like Switzerland was also selling
  • 00:07:24
    bonds to raise money for their government, then they are a safer option, which means their interest
  • 00:07:28
    rates should be lower, all other things been equal. Countries' credit scores are just like
  • 00:07:32
    individual credit scores, and 850 means lower rates because they have demonstrated that they are the
  • 00:07:36
    lowest risk. Anything below that and lenders normally want to see a little bit more interest
  • 00:07:41
    to offset a little bit more risk. Now, China on the other hand is not rated AAA, or AA+,
  • 00:07:46
    or AA, or AA-, it's rated just A+, which to be clear is still fine, but it means that most
  • 00:07:54
    agencies do recognise the risks here, which in turn means China should need to pay a higher
  • 00:07:58
    interest rate on all of this debt they've been accumulating. Except they don't.
  • 00:08:03
    As of the time of making this video, the yield on a 10-year US Treasury bond is roughly 4.5%.
  • 00:08:09
    The yield on an equivalent Chinese 10-year bond is just 1.7%, almost 3 times lower.
  • 00:08:14
    So what is going on here? Why on earth would anybody lend money to the comparatively
  • 00:08:19
    riskier Chinese government when they could instead get 3 times the yield lending money to the US
  • 00:08:23
    government? Well, the assumption here is that the Chinese economy functions like a normal
  • 00:08:27
    free market economy, which especially in the case of macroeconomic instruments like this,
  • 00:08:32
    it does not. The first difference is that a lot of people in institutions with a lot of money in
  • 00:08:36
    China can't go and buy US Treasury bonds. China has strict capital controls on money
  • 00:08:41
    leaving the country, which means even if investors did want to buy US bonds instead,
  • 00:08:46
    this isn't going to be an option for them. This applies even to large institutions like banks,
  • 00:08:51
    which it's worth noting are largely state-owned as well. So yeah, when the Chinese government
  • 00:08:55
    wants to borrow money, it doesn't need to compete with every other country in the world
  • 00:08:59
    also trying to borrow money as well. The other thing is that there aren't many other options
  • 00:09:03
    like there are outside of China. When bond yields are low in a regular economy like say the USA,
  • 00:09:09
    it motivates investors to move their money into other assets like stocks, real estate,
  • 00:09:13
    or alternatives where they can get a better return. This is one of the reasons why normally
  • 00:09:17
    lower interest rates will increase stock prices, but in China investors don't really have those
  • 00:09:22
    same options. Economists will always say that the stock market is not the economy and normally
  • 00:09:26
    that's used to explain why market returns consistently outpace overall economic growth,
  • 00:09:30
    but in China it's the opposite. Despite being home to the most intense economic development
  • 00:09:35
    in history, the country's stock market is up less than 100% since the year 2000.
  • 00:09:40
    Now that might not sound so bad, but by comparison the US market has returned over 300%.
  • 00:09:46
    And it's not like we have chosen an unflattering timescale here. In the last decade alone the US
  • 00:09:50
    market is up more than 150% while China's has actually gone backwards. That means that the
  • 00:09:56
    stock market is not exactly a great alternative to even really low yield bonds. A lot of the
  • 00:10:01
    companies listed on these markets are partially or majority owned by the government, which means
  • 00:10:04
    that the returning profits to their shareholders is a secondary objective with a priority being
  • 00:10:09
    carrying out the desired functions of the government. Notably, even companies with no
  • 00:10:13
    government ownership are still very much under the thumb of the CCP through heavy handed
  • 00:10:16
    regulations and outright political smiting. Now arguably there is need for stricter enforcement
  • 00:10:21
    of regulation upon companies in markets like the USA, but China takes it too far in the other
  • 00:10:26
    direction. Famously the government blocked the listing of Jack Ma's and financial group after
  • 00:10:31
    he got on the wrong side of leadership and in 2023 when the government cracked down on tutoring of
  • 00:10:35
    all things it sparked a massive sell off as people were spooked by the government over each.
  • 00:10:39
    So this means that for most investors, or at least investors without an inside edge,
  • 00:10:43
    the stock market is simply too risky for the estimated returns. This also
  • 00:10:47
    starves independent businesses of the funding that they may need to pursue genuine innovation.
  • 00:10:51
    Outwardly China has been making some very impressive strides in new technologies,
  • 00:10:55
    but these tend to be concentrated into fields that the government has highlighted as a priority.
  • 00:10:59
    Beyond that, there is also the not so secret fact that a lot of Chinese innovation
  • 00:11:04
    is really just taking designs from manufacturing partners and relabelling it.
  • 00:11:07
    It remains unclear how robust tech development will be beyond this.
  • 00:11:10
    Now we actually made an entire video on this a few years ago comparing Shenzhen and Silicon Valley.
  • 00:11:15
    We don't want to repeat too much here, but again the important point is that genuine investment
  • 00:11:19
    into promising new technologies and businesses is far more limited in China. Now this is actually
  • 00:11:24
    a problem because households in China also don't really spend much money.
  • 00:11:29
    About 68% of the USA's GDP is accounted for with household consumption.
  • 00:11:33
    Now Americans are extremely adept at being amazing consumers, so for comparison the global
  • 00:11:38
    average is 56%. In China, household consumption only makes up 39% of GDP.
  • 00:11:45
    Of course the country is much poorer overall than the USA, so they have less money to spend,
  • 00:11:49
    but normally economists would actually expect the opposite.
  • 00:11:53
    Poor countries should naturally spend more of their total output on consumption
  • 00:11:57
    because people need to spend more of their income just to maintain the essentials,
  • 00:12:00
    and largely that is what happens. But again, China is different.
  • 00:12:05
    Now to be fair, today it's a middle income country, but even back in the early 2000s,
  • 00:12:09
    its people were spending barely anything of barely anything.
  • 00:12:13
    So the country has been bringing in a lot of money through massive exports,
  • 00:12:16
    it hasn't been spending it, and the stock market has been more or less ignored by most
  • 00:12:19
    regular investors. So then, where is all of this money going?
  • 00:12:23
    Well of course there is at least one asset class that has up until recently been extremely popular,
  • 00:12:28
    and that is real estate. And real estate is connected to the debt problem in a number of ways.
  • 00:12:33
    Chinese real estate is the single largest asset class in the world.
  • 00:12:36
    The country has taken its wealth from being the workshop of the world and invested it
  • 00:12:39
    straight into real estate speculation. This has caused a lot of problems.
  • 00:12:43
    We generally consider housing unaffordable in a city if the average home costs more than
  • 00:12:48
    5 times the average income. In Los Angeles for example, it's about 7.5 times.
  • 00:12:52
    Sydney is 13 times, and in London, the average home costs 19 times the average income.
  • 00:12:58
    But in Beijing, that number is closer to 35 times.
  • 00:13:02
    Their cities are now just as expensive as major global centres in the west,
  • 00:13:05
    but average incomes are still much further behind.
  • 00:13:08
    With an impressive savings rate nowhere else to put their money,
  • 00:13:11
    real estate has gone further than transitioning from a home to an asset class.
  • 00:13:14
    It's now really the only asset class. With that, the country has also slowly built up a
  • 00:13:19
    lot of household debt as well, mostly going to fund increasingly out-of-reach property purchases.
  • 00:13:24
    Now a real estate crisis by itself is one thing, and the potential for this literal house of
  • 00:13:28
    cards to come tumbling down is very real in China, but this also caused another curious problem.
  • 00:13:34
    Deflation. Prices for houses have gone up, but as people have been desperately saving
  • 00:13:38
    everything they make to afford these homes, prices for general consumer goods in China
  • 00:13:42
    have been more or less flat for the last 25 years.
  • 00:13:45
    The country is really good at making stuff, but really bad at buying it,
  • 00:13:48
    so supply outstrips demand, and this is the logical outcome.
  • 00:13:51
    Now that might sound like a good problem to have, but it's not.
  • 00:13:55
    Stagnant prices stagnate in the economy because it removes the motivation to both spend or invest.
  • 00:14:00
    One of the big reasons why people doing something like saving for a time and
  • 00:14:03
    invest into productive businesses is because they hope that the returns that that business
  • 00:14:06
    generates will outpace inflation and preserving their buying power long term.
  • 00:14:10
    Without that inflationary stick at their back, there is less motivation to invest into productive
  • 00:14:14
    businesses, and without consumers there's less motivation for those businesses to exist at all.
  • 00:14:19
    For now that's been okay, because just like the world outsourced jobs to China,
  • 00:14:23
    China outsourced consumption to the world, but heightened trade tensions and emerging
  • 00:14:27
    competitors could seriously jeopardize this lifeline.
  • 00:14:30
    China knows this, which is why they've been trying to stimulate domestic consumption for
  • 00:14:33
    a long time now, and one of the ways they've been doing that is by taking on a lot of debt
  • 00:14:37
    to pump a lot of money into their economy. But again, where is this money coming from?
  • 00:14:42
    International investors are not nearly as interested in buying Chinese government
  • 00:14:45
    bonds as they are in US government bonds, and that's because even despite the risk of China's
  • 00:14:49
    money markets, they are again paying far less than the comparatively risk-free US bonds.
  • 00:14:54
    The actual answer to where this money is coming from is, it's been made up.
  • 00:14:58
    We all like the money printer memes, but between 2000 and the end of 2019,
  • 00:15:02
    the M2 money supply in the USA roughly tripled. Of course, things got a little bit spicy after
  • 00:15:07
    covid and the economy slightly redefined this metric hence the big spike, but even still,
  • 00:15:11
    in China by comparison, the money supply sexed a couple, which probably doesn't mean anything to
  • 00:15:16
    most of you watching, but it means that it multiplied 16 times over. I just thought the word
  • 00:15:20
    sounded fun to say. Anyway, that means the money supply in China has grown four times faster than
  • 00:15:25
    the money supply in the USA. That's because when China wants to borrow, it just gets one of its
  • 00:15:29
    state-owned banks to bippy-boppy-boop some cash into existence and loan it to whatever level of
  • 00:15:34
    government or state-owned enterprise needs it. Now again, the USA and most other advanced economies
  • 00:15:38
    do this as well, but not to the same extent. It's the most logical question in all of economics.
  • 00:15:43
    Why can't governments just print more money to pay for everything? Of course, the usual answer to
  • 00:15:48
    this would be that it would cause rampant inflation. Normally, creating that much money that quickly
  • 00:15:52
    would cause prices to rise because there is more money chasing for your goods, but that hasn't
  • 00:15:57
    happened in China, at least not yet. The country has been able to get away with such an extreme
  • 00:16:01
    level of money creation because consumer prices have stayed very low, despite all of this extra
  • 00:16:06
    money floating around because Chinese consumers are still incredibly frugal. This low level of
  • 00:16:10
    inflation also means that banks are happy to lend at the lower rates in the country because
  • 00:16:14
    even smaller returns would end up being the same after taking inflation into account. So, is this
  • 00:16:20
    a problem? By debt to GDP numbers, even by optimistic estimates, the country is already
  • 00:16:25
    beyond what would be considered crisis point. The line is blurry, but generally it's extremely
  • 00:16:30
    hard to come back from a debt to GDP ratio above 120% without exceptional sacrifices.
  • 00:16:36
    Some economists argue that this line is more like 150% in today's global economy.
  • 00:16:41
    Wherever the line is, China is so far beyond it that specifics don't really matter anymore.
  • 00:16:45
    The line is a dot to them. 300% of GDP is borderline unheard of outside of failed states, so not great.
  • 00:16:52
    But is it time for the fire thumbnails predicting that China will collapse in 69 seconds?
  • 00:16:56
    Well, maybe, but there are some things working in China's favour as well.
  • 00:17:00
    Normally when we consider debt on a personal level, we consider two ratios.
  • 00:17:04
    Debt to income, which is roughly analogous to debt to GDP, and also debt versus assets.
  • 00:17:09
    Someone with a million dollars in debt and a very low income might look like they are in trouble,
  • 00:17:13
    but if they have 5 million dollars in assets, they're probably going to be just fine.
  • 00:17:17
    Now the reason that we normally don't consider this when looking at governments is that over
  • 00:17:21
    the last several decades, they generally don't hold that many assets, especially when compared to
  • 00:17:25
    households. The federal government of the USA, for example, obviously has some assets. A vast
  • 00:17:30
    array of military and civilian equipment, government buildings, some state-owned infrastructure,
  • 00:17:34
    gold and Fort Knox, and a lot of federal land. But all of this is still relatively incidental
  • 00:17:39
    compared to its debt. The Bureau of Fiscal Services estimates that these assets are collectively
  • 00:17:43
    worth about 5.6 trillion dollars. So yeah, not nothing. But not really enough to put a meaningful
  • 00:17:49
    dent in the 30 trillion dollars worth of debt and 15 trillion dollars worth of unfunded commitments,
  • 00:17:54
    which means the US government has a net worth of around negative 40 trillion dollars.
  • 00:17:59
    The other thing is that a lot of these assets are not exactly liquid.
  • 00:18:02
    There has actually been growing talk about selling off federal land holdings in western
  • 00:18:06
    states to help pay down some debt. But releasing that much real estate onto the market could
  • 00:18:10
    significantly destabilize the local economy, and ultimately it would take decades without accepting
  • 00:18:15
    fire sale prices. Beyond that, clearly the USA has a lot less interest in selling something like
  • 00:18:20
    an aircraft carrier or a B2 bomber as a completely random example and not something I had to include
  • 00:18:24
    for the algorithm. Anyway, that's why, well, isn't really a consideration for countries like the USA
  • 00:18:29
    and most advanced nations for that matter. But China is different. The government officially
  • 00:18:34
    owns all the land in China and rents it out on decades-long leases. But even accounting for the
  • 00:18:39
    land that has already been committed to rentals, it's still worth a lot, especially around commercial
  • 00:18:43
    centers. What's more is that all of these state-owned enterprises are worth something,
  • 00:18:48
    and they are highly liquid. A lot of them already have a small number of their shares listed on
  • 00:18:52
    stock exchanges, so the government already has a tool to sell off these if it ever felt it needed to.
  • 00:18:57
    The other, more immediate consideration, is that the vast majority of utilities are also
  • 00:19:01
    owned by the government, which means that they don't represent an ongoing expense on top of the
  • 00:19:05
    debt. In China, the government has a positive net worth of about 40 trillion dollars according
  • 00:19:10
    to estimates from the Chinese Academy of Social Sciences. Now again, as a reminder,
  • 00:19:14
    putting an accurate value on all of these assets is difficult at the best of times,
  • 00:19:18
    and government agencies have some motivation to produce some numbers that are a little bit
  • 00:19:22
    funky. The only other numbers that we have to go off are from the Bank of International
  • 00:19:26
    Settlements, which estimated a net worth of approximately 20 trillion dollars, but that was
  • 00:19:30
    from 2014 and obviously a lot could have changed since then. Either way, and regardless of the
  • 00:19:36
    exact number, it's clear that while China's debt to GDP looks catastrophically bad, its net
  • 00:19:41
    worth is far healthier than most of its rivals. It also means that its debt is a lot easier to take
  • 00:19:46
    back. In the USA, any increase in government debt is almost perfectly correlated with increases in
  • 00:19:51
    household wealth, because by one means or another, lower taxes and more government spending make
  • 00:19:55
    their way to individuals. The economist Richard Baig did a talk about this a year ago that's
  • 00:19:59
    available for free here on YouTube, and it's definitely worth watching if you're interested,
  • 00:20:02
    so we'll leave a link to that below. Of course, it's not all households that benefit from
  • 00:20:06
    stimulus equally, but that's a whole separate discussion. The point is, taking this back would
  • 00:20:10
    necessitate an equal and opposite reduction in household wealth, which would not only be politically
  • 00:20:15
    unpopular, would also be economically destabilizing and probably result in reduced tax revenues.
  • 00:20:20
    In China, that wouldn't need to be extracted from households because most of this debt goes to
  • 00:20:24
    build up government assets, so they can untie themselves from this debt with fewer restrictions,
  • 00:20:29
    in theory at least. Another thing to consider is those low interest rates.
  • 00:20:33
    A big debt at a low rate can have the same repayments as a smaller debt at a higher rate,
  • 00:20:37
    putting the same net strain on government budgets, and as we've explored earlier, by luck or by
  • 00:20:41
    design, the Chinese government is able to borrow at very very low rates. But this is where breaking
  • 00:20:46
    up that debt over so many different government entities actually hurts them. Sure, the central
  • 00:20:51
    government can borrow at low rates, but provincial governments pay significantly more as they are
  • 00:20:55
    riskier and don't have the same direct control over state banks. And then beyond that, state-owned
  • 00:20:59
    enterprises often pay rates as high as 10%. The country has an immense amount of debt all hidden
  • 00:21:05
    away amongst various different levels of government, used to fund various government and
  • 00:21:08
    semi-government organizations that may or may not be developing genuine long-term prosperity for the
  • 00:21:13
    country. So far, they've been able to get away with it because rates are low and money has been
  • 00:21:17
    easy to create because inflation has remained stubbornly stagnant, but that's come with its own
  • 00:21:21
    problems and it's also a narrow view of things. Inflation may be low, but only in the way that
  • 00:21:26
    we typically measure it, which is the consumer price index or basically a basket of household goods
  • 00:21:31
    roughly indicative of average household spending. Yeah, sure. Those items have had incredibly
  • 00:21:36
    stable pricing because the country basically makes everything and the average consumer is still very
  • 00:21:41
    frugal. But inflation is basically like holding a balloon in your hand. Fill it up with enough money
  • 00:21:46
    and it's going to bulge out somewhere. Sometimes this is consumer prices or stock market prices,
  • 00:21:50
    but in the case of China, it's clearly been real estate prices. Unfortunately, this is not a
  • 00:21:55
    particularly productive asset class. If the housing bubble continues to wobble or general inflation
  • 00:22:00
    takes hold, China could be in a lot of trouble. A debt burden that large, even if it is owned by
  • 00:22:06
    internal state control banks, is always going to be unwieldy. But there is probably a bigger takeaway
  • 00:22:11
    in all of this, and that is that the Chinese economy is incredibly weird. We've been comparing
  • 00:22:15
    figures to the USA as the most logical peer, but in reality, it just functions completely
  • 00:22:21
    differently. The USA has a private sector that's under regulated with too much capital being
  • 00:22:24
    thrown around. China is over regulated with the government really pushing out most natural
  • 00:22:28
    development. The USA over consumes, China under consumes. The USA has had problems with stubborn
  • 00:22:33
    inflation, China deflation. And yeah, when it comes to debt, the situation isn't as adversarial as it
  • 00:22:39
    would look on the surface. China may buy a lot of US debt, but it has a lot of its own that it's
  • 00:22:43
    buying from itself. A real falling out between these two economies wouldn't have a winner and a
  • 00:22:48
    loser, it would just have losers. It is easy to look at current global events and conclude that this
  • 00:22:53
    is China's time to shine because the USA is making so many missteps. But that's also unfair.
  • 00:22:58
    China has just as many, if not more problems than the USA. They're just a lot better at keeping it
  • 00:23:03
    to themselves. Now one of the root causes of this weirdness is of course the government itself,
  • 00:23:07
    or rather the party. But even that is widely misunderstood and we've made an entire video
  • 00:23:12
    on the hierarchy of the CCP to see who has control over what on our new channel context matters.
  • 00:23:18
    You should be able to click to that on your screen now. Thanks for watching mate, bye.
Tags
  • USA
  • China
  • government debt
  • economy
  • debt to GDP
  • state-owned enterprises
  • inflation
  • real estate
  • household consumption
  • economic stability