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Inside China’s Property Collapse (Evergrande Disaster)
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this episode is brought to you by
brilliant hi welcome to another episode
of Cold Fusion how did a 1979 panel with
this it's a strange question but hear me
out in the late 1970s David atra was
having trouble entering China to film
his documentaries he decided to join a
committee panel in China in order to
change this atra just happened to ask a
Chinese higher pericial Den Xiao ping
what China was going to do about their
rapidly growing population in answering
David's question it was here on this
panel that China's one child policy
would be revealed to the world this
policy decision would Cascade into a
myriad of problems both demographic and
economic I've covered China's broader
economic woes in the previous video so
check the link below if you haven't
caught it yet but as for our story in
China there was now too few young people
the world's most populous country has
hit an historic turning point today
China announced its first population
decline in six decades government data
shows the birth rate at a record low the
fewest babies born last year since the
founding of communist China in 1949 this
but things would only get worse in July
of 2022 when a data leak showed that
Chinese authorities have have
overcounted the population by over 100
million young
people China now has too many
residential buildings and not enough
buyers with the real estate market about
30% of China's GDP and 70% of Chinese
wealth tied up in the sector I don't
have to tell you that this is a big deal
at the center of the crisis is everr
which was once one of China's largest
property developers by sales it had
1,300 real estate projects in over 200
80 cities in China housing 12 million
people yet the company is over $320
billion in debt making it the world's
most indebted real estate company with
the company filing for bankruptcy and
some high up officials being arrested
analysts fear that this could be China's
Leman Brothers moment since the Chinese
economy is the second largest on the
planet it's not hard to see why a total
real estate collapse would send shock
waves throughout the world now that we
have all of this context how bad will it get
get
to find out let's take a deeper look
itself you are watching T Fusion
TV before we continue I just want to
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started okay so let's continue ever
Grand was more than a property developer
you might be surprised to know that they
dip their toes into far-reaching Fields
as far as EVs and theme parks for
example everr new energy had ambitious
goals to compete with Tesla and China
and dominate the EV industry by 2025
they were planning 14 different car
models and 5 million cars per year everr
spring produces bottled water and
claimed to be China's largest water
source ever Grand also owned not one but
four soccer teams and they participated
in China's professional League everr
operated 15 theme parks under the name
Fairyland which aimed to be Disneyland
in both size and service however beneath
the surface these lofty Adventures were
funded by a pile of growing debt but
more on that
later everr began as a small company in
guango in 1996 they grew into a giant
due to a lucky break that happened in
the 1990s economic progress in China had
lifted Millions from poverty and into
the middle class and what do middle
class people want houses and lots of
them in 1998 China allowed households to
buy and sell apartments with countless
Millions gaining Prosperity over the
following years there was a huge surge
in housing demand the government
incentivized home ownership they relaxed
mortgage rules gave tax benefits and
allowed easy Bank lending meanwhile ever
Grand's founder Hui kayen saw his
chance to get started he strategically
acquired land at favorable prices from
local governments often providing
upfront payments and ambitious sales
targets for his employees this approach
led to the company's successful IPO in
Hong Kong in 2009 and it transformed its
billionaire from 2010 to 2020 ever
Grand's Revenue increased year onye at
its peak everr had a market value of $47
billion and assets worth 353 billion its
portfolio expanded from residential to
include commercial real estate hotels
Resorts schools hospitals sports
stadiums and cultural centers but all
would not remain well for the property
giant a series of events would threaten
E Grant and the stability of the Chinese
whole ever Grand's growth strategy was
straight forward first they would borrow
money for land acquisition and then sell
these homes to buyers before the homes
were even built they would then use the
proceeds to repay lenders and fund the
next project this approach while
lucrative bore the resemblance of a
classic Ponzi scheme the consequences of
which would come back to haunt
evergrand it was an aggressive
unsustainable expansion strategy in
order to work it relied heavily on
Perpetual borrowing and it worked well
for two decades but came at a steep cost
and that cost was a huge amount of
debt but ever Grand's massive debt
wasn't his only problem betting on
property and National Pastime in China
was causing further economic problems to
surface property ownership is very
important in Chinese culture some men
even deem it necessary to find a life
partner during China's one child policy
parents sadly preferred to keep only
male children as a result today men
outnumber women for those in their
mid-40s and below and usually if a man
couldn't afford his own property their
parents would help chip in over the past
few decades property demand has been
driven in a small part due to romantic
reasons as demand for property caused
the market to overheat even more fuel
was added to the fire and this included
a lack of other stable investment
options in China Investing in real
estate is preferred to stocks or bonds
as it's seen as safer and more
profitable two easy access to credit
through online platforms and relaxed l
in standards this helped China's
household debt to GDP ratio Surge from
18% in 2009 to a staggering
63.3% by March 2023 a three-fold
increase in just 15
years number three an increasing Trend
in property speculation many investors
bought properties in developing areas
intending to sell them later at a higher
price before long tiny apartments in
Shanghai were fetching City
London or New York type prices despite
the wages in Chinese cities being much
lower currently about 70% of household
estate so thinking that there was more
demand than there actually was ever
Grand overbuilt in some areas but why
would they think that there was more
people left to buy houses than there
actually were it could be because of
this next point
the one child policy was enacted on
faulty data the literal rocket scientist
who calculated the projected population
of China sjan forgot to factor in
declining birth rates due to women
getting educated and contraceptive
proliferation his predictions ended up
being completely wrong the consequences
of which would be very serious last year
births in China dropped sharply to 9.56
million that sounds like a lot but it's
the fewest since 17
90 and things just get worse a 2022 data
leak from the records of Shanghai police
showed the details of 1 billion Chinese
people the leak is believed to be
authentic and it paints a staggering
picture the population has been
overcounted by over 100 million people
to give you an idea of the scale of the
problem the Chinese government 2020
census showed that there were 18.4
million people who were born in 2017 30%
more that were born in 2002 but the 2022
League data says that there weren't 30%
more people born on this year but 70%
fewer born than in
2002 this isn't just a miscalculation
but a complete demographic disaster in
the making soon there's just not going
to be enough young people to support the
Aging Generation demographer Y fushan
has looked closely into China for over a
decade his findings line up squarely
with the data leaks giving them more
credibility in short Chinese property
developers built for a projected
population boom which never happened and
to add to this youth unemployment has hit
hit
21.3% making buying a property
increasingly hard for the younger generation
um the culmination of all of these
factors have created vivid imagery of
the problem eerily empty concrete husks
that dot the skyline in certain region
while sometimes these developments
eventually see habitation today more
empty no sounds of cars or people just
empty concrete towers and in some cases
they're completely demolished in one of
the most spectacular examples of wasted
resources as both demand for housing and
China's population growth have slowed
down in recent years developers like
everand are facing even more pressure to
sell their properties to repay their
debts but collecting revenue from
property sales has been proving harder
thought while the housing market was red
hot XI jingping was watching with a Keen
Eye the property sector was getting out
of control and action needed to be taken
fast in 2020 XI jingping ordered the
authorities to implement strict and
stringent regulations that would shake
everr and China as a whole these would
be known as the famous three red lines a
strict debt reduction and financial
compliance policy that had one main goal
to reduce the economy's heavy Reliance
on the property sector which was now
approaching 30% of
GDP ever Grand as well as many other
developers failed to meet these
requirements they continued to
accumulate debt everr spent huge sums of
money on costly land Acquisitions and
overbuilding during the property Market
frenzy Ventures into unrelated sectors
such as electric cars and theme parks
had little to no profitability moreover
the company lacked transparency and
engaged in deceptive Financial practices
concealing its true debt and cash flow
from regulators and
investors all these factors created The
Perfect Storm for
everr by 2021 ever Grand owed over $300
billion and this was owed to Banks Bond
holders suppliers and investors to put
that into perspective that is more money
than the GDP of Finland or Pakistan in
total Chinese develop had debts
exceeding trillion us stop and think
about that for a second throw in the
Chinese government zero covid policies
the strictest lockdown in the world and
there was a great level of uncertainty
and risk around the property sector the
set ever Grand announced a trading halt
in October
20121 however it didn't give details on
why the trading suspension lasted for 17
months and during that period ever
Grand's wo
deepened the liquidity crisis numerous
defaults on bond payments plunging share
prices and junk ratings from credit
agencies in 2021 alone the company lost
$81 billion customers were also
disgruntled with their unfinished
properties investors demanded refunds or
compensation this series of setbacks
over the last few years have eroded
everg grind's market value by
99% from a record high of 42 billion to
the company now worth 1 billion today on
August 17th 2023 everr made a final
attempt to save itself from Collapse by
seeking chapter 15 bankruptcy protection
in a New York
Court this form of bankruptcy protects
the US assets of foreign companies from
creditors during debt restructuring in
their home country in doing this everr
hoped to avoid potential legal actions
by us Bond holders while it facilitated
its restructuring process in China this
kind of bankruptcy protection doesn't
guarantee a successful debt
restructuring or even default avoidance
because it still requires approval from
Chinese courts and
Regulators another massive Chinese real
estate developer Country Garden would
overtake everr but they would also
instantly trip over Country Garden lost
7.1 billion in the first 6 months of
2023 investors concerned about potential
debt default have sent its stock
plummeting meanwhile ever Grand's shares
resume trading on August 27th 2023 17
months after that trading hold and it
was a disaster increasingly more
information about what's happening with
these structurings of course the poster
child off it's this everr reported
results in the weekend it's resuming
trade today this one's going through the
floor isn't it yes it'll just like many
of the other developers that have
resumed after a year plus of activity
everg Grand investors have 7 months of
news to react to uh since then we've had
$85 billion of losses that ever has
reported over the last 2 and a half
years instantly there was a massive
sell-off and the stock plunged 87% in
just one day this wiped out $2.2 billion
in market value on September 18th 2023
some arrests were made at evergr
Financial wealth management it's not
clear what the arrests were for but
police have only stated that they were
quote suspected criminals the stock fell
another 25% on the news and with that
Swift decline it's looking like the once
fallen ever Grant's collapse is
unprecedented in Chinese history it's
affected various sectors and people from
iron or miners to steel and cement
producers home retail businesses
construction workers and more as the net
worth of Chinese citizens reduces with
property prices spending in load local
and international markets will decrease
as mentioned in the previous video if
the Australian government doesn't
diversify its trading exports there
could be a ripple effect here the US
Hong Kong Japan South Korea many Western
nations in Europe and the global economy
continues and remember the middleclass
investors that we spoke about earlier in
the video many of these home buyers now
have paid deposits on unfinished
properties it's another issue in This
calamity ever Grand has pre-sold more
than 1.4 million homes that have not yet
been delivered many buyers are families
who invested their life savings and now
they risk losing their money on these
homes we may talk a lot about numbers
and policy decisions but this is the
true human
cost overall new construction is down
24.5% just this year alone prices in
some areas have Fallen by as much as 25%
from their October 2021 Peaks the banks
and other financial institutions that
lent money to evergrand could face
problems of their own for ever Grand
there's about $20 billion owed to
foreign investors this isn't to mention
the belt and Road initiative by China
carried out in over 149 different
countries ever Grant was one of the
biggest buyers of construction materials
so it's clear to see that with ever's
bankruptcy spilling into Global markets
the KnockOn effects could change the the
livelihood and well-being of millions of
people not just in China but
overseas as quoted by Fortune Magazine
on August 17th 2023 Chinese real estate
may be the world economy's most
[Music]
sector so is this China's Leman Brothers
moment well the answer is not so simple
yes both cases involved a highly
leveraged and opaque sector sectors that
were critical to the economy and
financial system and both had an element
of global risk however it's important to
note the distinctions China has an
advantage in a state controlled banking
system though whether you call that an
advantage or not depends on your view
regardless the Chinese government has
already supported the banking sector
with liquidity and relaxed some
regulations to ease the pressure on the
property Market but there's no
indication that they're going to bail
out ever Grant or any of the other
developers that are in trouble
authorities might even use accounting
methods to avoid major bank failures
this opinion was shared by George Mangus
a research associate at Oxford
University's China Center he States
quote in a state banking system the
authorities can move liabilities around
the financial system and use extend and
pretend accounting to ensure that major
Banks don't fail and that smaller ones
can be made good or managed as necessary
China also has a huge Foreign Exchange
Reserve and tight Capital flow control
unlike the United States which is the
world's biggest debtor Nation China is
actually the world's biggest creditor
Nation but all of this doesn't mean that
there's going to be no damage there are
legitimate concerns about the global
impacts given the size and influence of
China's real estate economy right now
it's about damage control but it's going
to take time maybe even years to revive
the industry once consumer sentiment
changes so drastically in a housing
back so in conclusion ever Grand's
collapse marks a significant challenge
for China as we look ahead the stakes
are exceptionally high for major
industry players in the country at the
same time it's a tense moment for those
whose Financial Futures are in Jeopardy
at this stage the only things that would
stop this from getting worse is
government intervention or a
stabilization of house prices on a final
note China does have many state-owned
property entities so it's very possible
that they could just take over and stem
the bleeding it's a totally different
kind of economy and with murky data it's
difficult for anyone to provide a
concrete analysis but in saying all of
this as is always the case this
unfolding financial disaster comes down
to Reckless financial decisions damaging
lives but this time there's some dodgy
government population estimates to go
along with it so what are your thoughts
on this matter let me know in the
comment section below I'm sure it's
going to be a very interesting
discussion anyway that's about it from
me my name is toogo and you'll been
watching cold fusion if you want to see
anything else on science technology or
business feel free to subscribe it's
free all right cheers guys have a good one
one [Music]
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