TFI Global has been stating for a long time that China has become wealthy, but not quite as wealthy as it pretends to be.
According to a recent Bloomberg article, much of China's wealth might be lost owing to artificially inflated real estate prices.
Over the last two decades, China's wealth has risen dramatically:
Over the last two decades, China's wealth has exploded. While global net worth increased from $156 trillion in 2000 to $514 trillion in 2020. China is the major driver of this increase in global wealth, accounting for over one-third of it.
According to a survey by McKinsey & Co.'s research arm, which examined the national balance sheets of ten nations representing over 60% of global wealth, Chinese wealth has increased from $7 trillion to $120 trillion in only twenty years. China joined the World Trade Organization (WTO) in 2001, resulting in a meteoric rise in Chinese economic growth.
In terms of net worth, China has effectively surpassed the United States of America to occupy the top rank in the globe. Nonetheless, wealth distribution remains severely uneven in both the United States and China. In the two largest international economies, the richest ten percent of families own two-thirds of total wealth, and their proportion is growing.
How the ongoing real estate crisis can evaporate Chinese wealth:
However, China's rise has been fueled by rampant property market speculation and rising real estate prices, which have been fueled by excessive debt issued by Chinese financial institutions for unsustainable projects. On the other hand, the real estate market in the United States of America has not experienced such dramatic expansion. The United States' net worth has doubled in the previous twenty years to $90 trillion, thanks to lukewarm gains in real estate values.
Indeed, real estate development is credited with the dramatic growth in global wealth. According to McKinsey, real estate accounts for 68 percent of worldwide net wealth. Other sectors, such as infrastructure, machinery and equipment, and intangibles like intellectual property and patents, store the balance wealth.
According to McKinsey, the extraordinary rise in net worth over the last two decades has surpassed the high rise in global GDP (GDP). The disparity is being blamed on rising home prices, which have been fueled by low loan rates. As a result, asset values are roughly 50% higher than their long-run average when measured against income. This implies that the current wealth bubble isn't truly sustainable.
Let us explain what this implies. The liquid and fixed assets you hold are used to calculate your net worth. If the majority of your fortune is invested in real estate, any knee-jerk movements in the market might wipe out the majority of your wealth. This is precisely what will happen in China's case as well.
China’s Lehman moment is here:
The global markets' soaring real estate values, cheap interest rates, and huge debt are destined to repeat the horrors of the global financial crisis of 2008. The bankruptcy of Lehman Brothers in the United States and a house price meltdown in 2008 caused a contagion effect that destroyed the American and worldwide financial markets.
This time, China is in the midst of a comparable upheaval. Of course, the China Evergrande Group was the first to fall. Evergrande's demise has triggered a broader crisis in the Chinese real estate sector, with several other companies such as Modern Land China, Fantasia Holdings, Sinic Holdings, and China Properties defaulting on loan obligations.
Because the overstretched real estate industry is further stressing prominent private corporations, state-owned enterprises, and regional banks, the Chinese financial markets, which were already racked with unsustainable debt, are suffering even greater pressure.
The real estate sector in China has become a significant engine of economic growth and wealth. The Communist country's economic progress has always relied on the real estate industry, which has fueled wealth accumulation and improved investor mood. Beijing depended on real estate construction to generate growth even when the Chinese economy was experiencing slow growth or the stock markets were falling.
The Chinese real estate market, on the other hand, has reached saturation. China's housing bubble is about to explode, with 65 million unoccupied apartments, which is why a property behemoth like Evergrande Group has found itself in a vulnerable position.
Most of China's wealth is held in real estate, which will eventually deteriorate. We're talking about the poverty of the world's second-largest economy, as Beijing appears to be on the verge of losing a major portion of its riches as a result of the current instability.