The Rise of China has Ended

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Episode Transcript

Speaker 1 (00:00):
This is the story of how China actually orchestrated its
rise to economic dominance, and why the consequences of that
orchestrated growth are so costly that China may now be
facing imminent collapse. Now it's obvious the rise of China
over the last forty years has been nothing but epic, spectacular,

(00:22):
and unprecedented. Just forty years ago, it was an agrarian nation.
The people were all just farmers, subsistence level farmers at that.
Even in nineteen ninety, ninety nine percent of the population
still lived in poverty, which is measured as under five
dollars and fifty cents per day, and forty years ago

(00:43):
their total GDP was only one hundred and ninety one
billion dollars. Now, to put that into perspective, that's the
size of a regular company in the US stock market.
T Mobile, Comcast, Cisco, Shell all have a market cap
of around one hundred ninety billion dollars. But today, just
forty years later, over seventy five percent of their entire

(01:05):
population has been lifted out of poverty. That's like a
billion people. They have six point two million millionaires in China,
which ranks second just after the United States. Their total
GDP for the country is now eighteen trillion, which makes
up seventeen percent of the entire global GDP and is

(01:26):
second only to the United States, which is at twenty
seven trillion. So how did they achieve this growth so
fast and from such a small start? Well, for starters,
when Mao was in charge of China, he killed like
eighty million people through starvation and bad decisions. So at
some level it's like you can only really go up
from there, and that's exactly what they did, because after Mao,

(01:49):
China tried a little bit of freedom. Now, considering how free,
or i should say, how not free China is, they're
an extreme outlier globally in terms of their economic growth
compared to their freedom score. On this chart, countries with
a blue dot are generally rich countries, the green dots
are upper middle, orange dots are lower middle, and the
red dots are the poorest countries. Generally, the richest countries

(02:12):
are also the most free. China being the extreme outlier,
being an extremely rich country compared to the rest of
the world but having almost zero freedom now without having
an economy that is able to establish growth through innovation
and freedom from the bottom up. The only way to
orchestrate economic growth is through two different methods. Number one,

(02:35):
top down economic control and number two debt, And boy
do they have a lot of debt. As recently as
twenty twelve, the national debt compared to GDP in China
was only thirty four percent, but that has absolutely exploded
recently as they've borrowed more and more to continue their
high GDP growth rates, to the point where their national

(02:58):
debt to GDP is now eighty three percent. When you
take into account other debt other than just the national debt,
they currently have a total debt to GDP ratio of
a mind crushing two hundred eighty seven percent. Now, in reality,
the actual debt that China has is unknowable and much
larger than that, because the local governments have legal limits

(03:20):
on how much debt they can have, and so there's
a loophole where they get around this by establishing things
called local government financing vehicles, which are just separate entities
that carry all the extra debt instead of the local governments.
And the thing about debt is that eventually it's got
to be repaid, and up until recently this didn't seem
to be a problem because the top down, centrally planned

(03:42):
way they controlled the economy seemed to be orchestrating enough
growth to pay for that debt. But as the Austrians
always point out, the problem of economic calculation is one
that cannot be solved at the central level. It is
a problem that can only be solved decentralized by each
individual in the system. Here's a great example of this.
A while ago, real estate investing in China was heavily

(04:05):
incentivized because it worked, and without freedom, you didn't have
other money, other capital flowing into your country, so you
don't have sophisticated financial markets. And so in China, the
average person didn't have access to a four oh one
K or a brokerage account, so they just bought real
estate instead. For a while, this caused a boom, and
then because of the malinvestment caused by the top down

(04:27):
planning and all of the debt, suddenly you have a bubble.
Over the last couple of years, China's tried to crack
down on that, but when you end up popping a
bubble that big, you have collateral damage everywhere, And obviously
the last couple of years have been terrible for China,
and everybody knows it, but most people are not aware
of how bad it's been getting recently. China stocks have
a valuation that is currently at the lowest level then

(04:50):
it's been in a decade. When compared to the US,
the difference between the price to earnings ratio in the
United States versus China is the greatest difference it has
ever been. In fact, the difference is a staggering thirty
eight trillion dollars now. For many years, Hong Kong was

(05:12):
ranked extremely free on the global freedom ranks, and as
a result, it brought in a staggering amount of wealth
from all around the world. That is no longer the case,
as stocks in Hong Kong have you raised more than
six trillion dollars since their peak in twenty twenty one,
and the number of underwater mortgages in Hong Kong are

(05:33):
now at a twenty year high now. As one might expect,
this means that sentiment in China is in the trash can.
Foreign investors are selling China like there's no tomorrow to
get their money out. But it's not just foreign investors,
it's investors in China that are trying to get their
money out as well. Right now, there's such a scramble

(05:55):
to get money out of China that Chinese traders are
paying forty percent sent more than the value of the
assets to buy these funds. We're seeing unprecedented levels of
trading activity in these ETFs to get money invested outside
of China. And it's not like the central planners in
China are just sitting there watching all this happening and

(06:17):
hoping that it stops. They are printing money like there's
no tomorrow to try and stop the tumble. The balance
sheet for the central Bank in China has grown by
eight hundred and forty four billion dollars throughout twenty twenty three.
But despite that printing, it doesn't look like even that
is enough, and so right now they are considering a

(06:38):
stock market rescue package of two hundred and seventy eight
billion dollars. And as a result of all this stimulus,
we are now seeing China's bond yields back at the
lowest they've been in two decades. It's a bloodbath. And
when you compare where China's at now versus other emerging markets,
China is no longer leading After twenty years of leading

(07:00):
emerging markets. We are now seeing a collapse in China
while emerging markets continue to outperform. Now, I've always recommended
having international investments inside your portfolio. The problem is, for
most people, the funds that they have access to are
all international markets combined, which means it's overweight China, and
China has been overvalued for a very long time. Now,

(07:23):
I've always recommended international investing is part of your overall portfolio.
The problem is most funds that people look at that
are just foreign funds or international funds, they're way to
overweight China, and China's been very overvalued. So I've always
usually recommended funds that are foreign funds x China, which
means all the other stock markets around the world besides China. Now,

(07:45):
like I said earlier, China's not just sitting watching all
of this happen. They're trying to make the bleeding stop.
And one of the things they tried to do was
to ban short selling, which did basically nothing because Chinese
stocks now are at the lowest price they've been in
five years. But as we'll see in a little bit,
I don't know, maybe things are changing, but it's not

(08:08):
just stock markets that are getting hit. China's economy overall
is facing serious headwinds. Take for example, the fact that
the powerhouse of Chinese economy, which has been their manufacturing,
is starting to leave. Many international corporations are no longer
wanting to risk China with their supply chains and are
moving to India instead. Everybody's heard about the population problems

(08:32):
in China, that they have an aging population and not
enough young people to support all the old people. But
it's getting worse than that right now. In fact, the
country's population fell in twenty twenty two for the first
time since nineteen sixty one. China no longer has a
growing population. They have a shrinking population, and that is

(08:53):
a serious headwind moving forward for decades. Simply put, central
plan equals central destruction. You may not bear the consequences
of your actions immediately, but at some point you will.
But it's possible that even just temporarily, this is actually
a buying opportunity. In a shocking twist of events, the

(09:16):
co founders of Ali Baba, Jack Ma and Joe Sai,
are currently buying up shares of Ali Baba. There's two
things surprising about this. Number One, I guess jack Ma
is not missing anymore. And number two, they're apparently looking
at Ali Baba and thinking this is on sale. The
company is clearly worth a lot more than this. It

(09:37):
is gone down with the pack because of what's happening
in China right now. But this is a ba. Time
will tell if they're right. And it's true that even
people who are bearish on China right now are prepared
for a at least temporary rebound in stocks. When something
falls this hard, this fast, At some point the selling
is exhausted and you will get a bounce, even if

(09:59):
it's short lived. At the end of the day, everything
going on in China, it's possible that this is a
contrarian's dream, as it's saying goes, buy when there is
blood in the streets, even if it's your own, or
on Buffett says, buy when others are fearful, sell when
others are greedy. And in Chinese financial markets right now,
there's certainly a lot of fear and there's a ton
of blood in the streets. But the truth is, in
any market, there is always a long and there is

(10:21):
always a short. No matter what the overall economy is doing,
there will always be opportunities to make money, which means
that the only safe bet long term is to look
well into your investments. You may get lucky from time
to time timing the market exactly perfectly, but that's not
what long term investors do. In China right now, there
are absolutely companies that over the long term, will thrive

(10:43):
regardless of what the Chinese economy does. The key is
to be able to identify number one, which companies are
those quality companies, and then number two, being able to
calculate what price actually represents a value at What price
can you buy and you're getting the company for less
than what it's actually worth. Just because the stock price
has fallen ninety percent doesn't mean it can't fall another

(11:07):
ninety percent. It can. So the key is to find
world class companies and then identify what price they're actually
a value at. If you don't know how to do this,
don't worry. This is one of just one of the
things that I teach members of Heresy Financial University, because
if you don't have this skill, you will never be
able to take full advantage of bear markets. People make

(11:27):
money in bull markets, but they make fortunes in bear
markets because you're prepared you buy world class companies at
even better prices. If you're not already a member, sign
up below with the link in the description and use
code YouTube thirty that'll give you thirty percent off your
membership for life. As always, thanks so much for watching.
Have a great day.