WEBVTT 00:00:00.000 --> 00:00:02.180 I was looking at this photo the other day, and 00:00:02.180 --> 00:00:04.540 honestly, I thought my brain was glitching. It's 00:00:04.540 --> 00:00:06.719 a picture of the Eiffel Tower. Okay. It's got 00:00:06.719 --> 00:00:08.960 the iron lattice, the observation deck, the whole 00:00:08.960 --> 00:00:12.339 thing. It looks exactly like Paris, but then 00:00:12.339 --> 00:00:14.339 you zoom out. And you realize the context is 00:00:14.339 --> 00:00:17.100 all wrong. Completely wrong. Instead of the Champ 00:00:17.100 --> 00:00:20.300 de Mars or, you know, these beautiful Haussmannian 00:00:20.300 --> 00:00:23.320 boulevards, it's surrounded by what look like 00:00:23.320 --> 00:00:26.660 cabbage patches and misty farmland. Right. And 00:00:26.660 --> 00:00:28.940 there's nobody there. It's not Paris. It's Tian 00:00:28.940 --> 00:00:32.679 Du Cheng. in china ah yes the fake paris that's 00:00:32.679 --> 00:00:34.759 one of the most famous examples of that copycat 00:00:34.759 --> 00:00:37.320 architecture era but it's not just the architecture 00:00:37.320 --> 00:00:40.979 that's so weird it's the silence for years photos 00:00:40.979 --> 00:00:43.780 of this place went viral because it was for all 00:00:43.780 --> 00:00:46.240 intents and purposes a ghost town right a complete 00:00:46.240 --> 00:00:48.700 replica of a european capital built for thousands 00:00:48.700 --> 00:00:51.590 of people sitting almost entirely empty And it 00:00:51.590 --> 00:00:53.609 brings up this image that I think a lot of us 00:00:53.609 --> 00:00:54.909 have when we think about the Chinese economy 00:00:54.909 --> 00:00:58.149 over the last decade, massive gleaming infrastructure 00:00:58.149 --> 00:01:02.310 and nobody home. It's the defining image of the 00:01:02.310 --> 00:01:05.329 early 2010s, isn't it? The ghost city. You had 00:01:05.329 --> 00:01:07.629 the New South China Mall in Dongguan. I mean, 00:01:07.650 --> 00:01:10.409 this place had leasable space for thousands of 00:01:10.409 --> 00:01:14.019 stores, an indoor roller coaster. You're the 00:01:14.019 --> 00:01:17.000 Phoenician in Vegas. Exactly. But for years, 00:01:17.120 --> 00:01:20.099 the only thing in the corridors was dust. Or, 00:01:20.099 --> 00:01:22.560 you know, the most famous one, Ordos Kangbashi 00:01:22.560 --> 00:01:25.120 in Inner Mongolia, which looked like a sci -fi 00:01:25.120 --> 00:01:27.980 metropolis but had virtually zero residents for 00:01:27.980 --> 00:01:30.209 a long time. And the narrative back then was 00:01:30.209 --> 00:01:32.469 pretty straightforward, right? It was, look at 00:01:32.469 --> 00:01:35.349 this massive bubble. Look at this waste. It felt 00:01:35.349 --> 00:01:37.129 like a house of cards just waiting for a slight 00:01:37.129 --> 00:01:40.170 breeze. A spectacular misallocation of capital 00:01:40.170 --> 00:01:42.870 was the line. Exactly. But here we are over a 00:01:42.870 --> 00:01:44.810 decade later, and we need to figure out if that 00:01:44.810 --> 00:01:47.269 was actually the whole story. Because the headlines 00:01:47.269 --> 00:01:50.099 today... Evergrande collapsing, Country Garden, 00:01:50.359 --> 00:01:53.079 all these mortgage boycotts, the debt crisis. 00:01:53.480 --> 00:01:56.060 They feel like the sequel to that Ghost City 00:01:56.060 --> 00:01:58.379 movie. Well, I'd argue it's not really a sequel. 00:01:58.459 --> 00:02:00.980 It's the third act of the very same movie. And 00:02:00.980 --> 00:02:02.659 that's what makes this so difficult to unpack. 00:02:02.900 --> 00:02:05.739 Because you have these two completely contradictory 00:02:05.739 --> 00:02:09.639 ideas that are both true at the same time. Was 00:02:09.639 --> 00:02:12.620 that era the greatest housing bubble in human 00:02:12.620 --> 00:02:17.259 history? Probably. Yes. OK. But was it also somehow 00:02:17.259 --> 00:02:20.699 a successful urbanization strategy that moved 00:02:20.699 --> 00:02:22.560 hundreds of millions of people out of poverty 00:02:22.560 --> 00:02:25.740 and built a modern nation? Also, yes. That's 00:02:25.740 --> 00:02:28.740 the tension we're digging into today. This is 00:02:28.740 --> 00:02:31.659 the central paradox. We have a massive stack 00:02:31.659 --> 00:02:34.599 of sources here, history, economic data, boots 00:02:34.599 --> 00:02:36.819 on the ground reporting. And we're going to trace 00:02:36.819 --> 00:02:39.539 the arc of Chinese real estate from, well, the 00:02:39.539 --> 00:02:42.699 1840s all the way to the debt crisis of the 2020s. 00:02:42.699 --> 00:02:44.840 And the stakes are just incredibly high. We aren't 00:02:44.840 --> 00:02:46.699 just talking about empty malls or weird Eiffel 00:02:46.699 --> 00:02:48.780 Tower replicas. We are talking about where Chinese 00:02:48.780 --> 00:02:51.199 citizens have parked 60 percent of their household 00:02:51.199 --> 00:02:53.439 assets. 60 percent? Wait, say that again? Six. 00:02:53.580 --> 00:02:56.319 Zero. 50%. That's staggering. For comparison, 00:02:56.419 --> 00:02:59.139 in the U .S., what is it? It's closer to 25 % 00:02:59.139 --> 00:03:02.020 or 30%, depending on how you measure it. In China, 00:03:02.080 --> 00:03:04.379 the home isn't just a place to live. For two 00:03:04.379 --> 00:03:06.219 generations, it has been the primary savings 00:03:06.219 --> 00:03:08.479 account for over a billion people. So if that 00:03:08.479 --> 00:03:10.759 market cracks, it's not just a bad day on the 00:03:10.759 --> 00:03:12.639 stock market. It's a fundamental catastrophe 00:03:12.639 --> 00:03:16.060 for, you know, Main Street. For almost every 00:03:16.060 --> 00:03:19.780 single family. Precisely. So to understand why 00:03:19.780 --> 00:03:22.139 the world is watching Evergrande so nervously, 00:03:22.259 --> 00:03:25.139 you have to understand how we got here. You have 00:03:25.139 --> 00:03:27.419 to understand why a factory worker in a second 00:03:27.419 --> 00:03:30.500 -tier city would sink every single penny they 00:03:30.500 --> 00:03:33.620 have and their parents' pennies into an unbuilt 00:03:33.620 --> 00:03:36.500 concrete box. Okay, let's rewind then, because 00:03:36.500 --> 00:03:38.180 to get to the bubble, we have to start where 00:03:38.180 --> 00:03:40.280 there was no bubble. In fact, there was no market 00:03:40.280 --> 00:03:42.360 at all. Well, that's exactly right. We need to 00:03:42.360 --> 00:03:45.199 go back to the pre -1998 era. From the founding 00:03:45.199 --> 00:03:47.900 of the People's Republic in 1949 up until the 00:03:47.900 --> 00:03:51.120 late 90s, the concept of real estate, as we know 00:03:51.120 --> 00:03:53.560 it, it just didn't exist in China. So if I'm 00:03:53.560 --> 00:03:56.259 living in Beijing in, say, 1980, and I want to 00:03:56.259 --> 00:03:57.960 move out of my parents' house, I don't go on 00:03:57.960 --> 00:04:00.199 Zillow. I don't call a realtor. You definitely 00:04:00.199 --> 00:04:02.080 don't call a realtor. There's literally nothing 00:04:02.080 --> 00:04:04.580 to sell. The entire country was in a system of 00:04:04.580 --> 00:04:07.360 welfare housing allocation. Housing wasn't a 00:04:07.360 --> 00:04:09.479 commodity you bought and sold. It was a benefit, 00:04:09.599 --> 00:04:12.400 a benefit provided by your employer. My employer. 00:04:12.909 --> 00:04:15.349 You mean like the factory owns my house? The 00:04:15.349 --> 00:04:18.629 work unit, or Danway. Whether you worked for 00:04:18.629 --> 00:04:20.829 a state -owned steel mill, a government bureau, 00:04:20.970 --> 00:04:24.129 or a university, the Danway was responsible for 00:04:24.129 --> 00:04:26.290 your entire existence, from cradle to grave. 00:04:26.430 --> 00:04:28.990 Wow. They provided your salary, your health care, 00:04:29.170 --> 00:04:31.569 your pension, your kids' schooling, and yes, 00:04:31.629 --> 00:04:34.959 your apartment. That sounds, I mean, on one hand, 00:04:34.959 --> 00:04:37.720 remarkably stress -free. No mortgage, no rent 00:04:37.720 --> 00:04:40.259 hikes. On paper, sure. It sounds a bit like a 00:04:40.259 --> 00:04:43.319 socialist utopia. But the reality was a severe 00:04:43.319 --> 00:04:45.879 shortage economy. Because the housing was free, 00:04:46.000 --> 00:04:48.620 or at least cost a nominal fee, there was zero 00:04:48.620 --> 00:04:50.980 incentive for the state to build anything comfortable 00:04:50.980 --> 00:04:54.339 or, frankly, adequate. It was a cost center for 00:04:54.339 --> 00:04:56.480 the state, not a profit center. So what did that 00:04:56.480 --> 00:04:58.220 look like for the average person? What did it 00:04:58.220 --> 00:05:00.939 feel like? It felt cramped. The sources point 00:05:00.939 --> 00:05:03.259 to these surveys from the late 1970s that are 00:05:03.259 --> 00:05:05.980 just mind -boggling. The average urban living 00:05:05.980 --> 00:05:08.420 space per person was less than four square meters. 00:05:08.639 --> 00:05:12.360 Four square meters. Hold on. A standard king 00:05:12.360 --> 00:05:14.399 -size bed is about three and a half square meters. 00:05:14.480 --> 00:05:17.759 So you're telling me my entire personal existence, 00:05:17.959 --> 00:05:22.759 my sleeping, eating, living area was the size 00:05:22.759 --> 00:05:24.899 of a mattress? Basically, I mean, you'd have 00:05:24.899 --> 00:05:27.360 entire families, multiple generations squeezed 00:05:27.360 --> 00:05:29.680 into one room. You'd share a kitchen down the 00:05:29.680 --> 00:05:31.480 hall with five other families. You'd share a 00:05:31.480 --> 00:05:34.240 bathroom. One of the sources calls it a dwelling 00:05:34.240 --> 00:05:37.100 narrowness that is hard for us to even imagine 00:05:37.100 --> 00:05:40.800 today. So the demand, the pent up desire for 00:05:40.800 --> 00:05:43.680 space was clearly there. People must have been 00:05:43.680 --> 00:05:46.360 desperate, but they couldn't buy it. Not until 00:05:46.360 --> 00:05:49.699 1998. That's the year everything changed. It's 00:05:49.699 --> 00:05:52.000 really the big bang of the Chinese property market. 00:05:52.240 --> 00:05:55.120 Why 1998 specifically? What happened? Well, the 00:05:55.120 --> 00:05:57.839 Asian financial crisis was raging and China's 00:05:57.839 --> 00:06:00.420 old economic model was sputtering. They needed 00:06:00.420 --> 00:06:03.439 a new engine for growth and fast. The state council, 00:06:03.560 --> 00:06:06.779 led by Zhu Rongji, issued a directive effectively 00:06:06.779 --> 00:06:09.660 ending the in -kind housing system. So they just 00:06:09.660 --> 00:06:11.379 pulled the plug. They pulled the plug. They told 00:06:11.379 --> 00:06:13.800 the work units, stop building houses for your 00:06:13.800 --> 00:06:15.720 people. Let them buy their own. That sounds like 00:06:15.720 --> 00:06:18.029 a terrifying shock to the system. Hey, you know 00:06:18.029 --> 00:06:20.189 that free apartment you have. Good luck. It was 00:06:20.189 --> 00:06:22.589 a shock. But they softened the blow with a massive 00:06:22.589 --> 00:06:25.470 one -time privatization scheme. They allowed 00:06:25.470 --> 00:06:27.769 people to buy their current work unit apartments 00:06:27.769 --> 00:06:30.529 at incredibly steep discounts. Oh, interesting. 00:06:30.790 --> 00:06:33.269 These were heavily subsidized prices based on 00:06:33.269 --> 00:06:35.149 seniority, years of service, things like that. 00:06:35.689 --> 00:06:38.430 So if you were a loyal party member who'd worked 00:06:38.430 --> 00:06:41.889 at the steel mill for 30 years, you got a great 00:06:41.889 --> 00:06:45.750 deal. So it's like the right to buy scheme that 00:06:45.750 --> 00:06:48.149 Thasher did in the UK, but on a continental, 00:06:48.449 --> 00:06:51.769 almost unimaginable scale. Exactly. That's the 00:06:51.769 --> 00:06:54.649 perfect analogy. Overnight, millions of people 00:06:54.649 --> 00:06:56.829 went from being tenants of the state to being 00:06:56.829 --> 00:06:59.350 property owners. And suddenly, for the very first 00:06:59.350 --> 00:07:01.769 time, they had equity. They had an asset that 00:07:01.769 --> 00:07:05.009 could theoretically appreciate in value. And 00:07:05.009 --> 00:07:06.829 I imagine that just flipped a switch in the collective 00:07:06.829 --> 00:07:09.350 psyche. It absolutely did. It moved housing from 00:07:09.350 --> 00:07:12.389 welfare to wealth, from right to a commodity. 00:07:12.649 --> 00:07:14.889 And you have to layer on the cultural drivers 00:07:14.889 --> 00:07:17.449 here, which are just so powerful. It's not just 00:07:17.449 --> 00:07:19.410 about money. The sources talk extensively about 00:07:19.410 --> 00:07:21.790 what they call bachelor's angst. I saw that term. 00:07:21.829 --> 00:07:24.389 And the mother -in -law requirement, which I 00:07:24.389 --> 00:07:26.949 have to say sounds formidable. It is the ultimate 00:07:26.949 --> 00:07:29.750 barrier to entry in the marriage market. You 00:07:29.750 --> 00:07:32.410 have to remember. In China, due to the one -child 00:07:32.410 --> 00:07:35.509 policy and a lingering cultural preference for 00:07:35.509 --> 00:07:38.310 sons, there is a significant gender imbalance. 00:07:38.810 --> 00:07:41.350 There are millions more men of marriageable age 00:07:41.350 --> 00:07:44.290 than women. So the dating market is competitive. 00:07:44.649 --> 00:07:46.670 Competitive puts it very mildly. It's a battlefield. 00:07:47.490 --> 00:07:51.290 And in that battle, a house is the price of admission. 00:07:51.930 --> 00:07:54.930 It's the ultimate signal of stability and success. 00:07:55.230 --> 00:07:57.470 So the saying goes the mother -in -law won't 00:07:57.470 --> 00:07:59.250 even let you in the door if you don't have a 00:07:59.250 --> 00:08:02.410 deed to show her. That's not even an exaggeration. 00:08:02.649 --> 00:08:04.769 If you are a young man and you don't own property, 00:08:04.970 --> 00:08:07.209 you are effectively invisible to many prospective 00:08:07.209 --> 00:08:09.350 brides, and more importantly to their mothers, 00:08:09.509 --> 00:08:11.910 who often have the final say. The apartment is 00:08:11.910 --> 00:08:13.930 for her daughter's security. So you have this 00:08:13.930 --> 00:08:16.490 intense social pressure you must buy to get married. 00:08:16.649 --> 00:08:18.449 But then there's the investment angle. You mentioned 00:08:18.449 --> 00:08:21.310 earlier that 60 % of assets are in housing. Why 00:08:21.310 --> 00:08:24.350 not buy stocks? Why not bonds or mutual funds? 00:08:24.649 --> 00:08:27.430 Because for most of this period, those markets 00:08:27.430 --> 00:08:30.290 were either underdeveloped or seen as incredibly 00:08:30.290 --> 00:08:33.340 risky. The Chinese back market, especially in 00:08:33.340 --> 00:08:35.919 the 90s and 2000s, has historically been treated 00:08:35.919 --> 00:08:38.460 like a casino. Not a place for your life savings. 00:08:38.659 --> 00:08:41.240 Absolutely not. It's incredibly volatile, was 00:08:41.240 --> 00:08:44.179 rife with insider trading, and retail investors, 00:08:44.440 --> 00:08:47.159 the so -called leaks who get harvested, often 00:08:47.159 --> 00:08:49.620 get burned badly. And what about investing overseas? 00:08:50.120 --> 00:08:52.120 Capital controls. You can't just take your life 00:08:52.120 --> 00:08:54.919 savings in yuan and go buy Apple stock or U .S. 00:08:54.919 --> 00:08:57.080 Treasury bonds easily. There are strict limits 00:08:57.080 --> 00:08:58.759 on how much money you can move out of the country. 00:08:59.070 --> 00:09:01.110 So your money is effectively trapped in the country. 00:09:01.289 --> 00:09:03.669 The banks pay terrible interest rates, often 00:09:03.669 --> 00:09:06.710 below inflation. The stock market is a gambling 00:09:06.710 --> 00:09:09.450 den. So what's left? Where do you put your money 00:09:09.450 --> 00:09:11.570 to save for retirement or your child's future? 00:09:11.850 --> 00:09:14.809 Concrete. Concrete. For 20 years, from roughly 00:09:14.809 --> 00:09:18.649 2000 to 2020, property was the can't lose piggy 00:09:18.649 --> 00:09:21.730 bank. It was the only major asset class that 00:09:21.730 --> 00:09:24.190 seemed to go up year after year without fail. 00:09:24.330 --> 00:09:27.289 And that belief that property only goes up is 00:09:27.289 --> 00:09:30.039 a hell of a drug. Which brings us, I think, to 00:09:30.039 --> 00:09:34.240 the bubble era, roughly 2005 to 2011. This is 00:09:34.240 --> 00:09:37.460 when things went completely parabolic. The sources 00:09:37.460 --> 00:09:39.860 indicate that average housing prices across the 00:09:39.860 --> 00:09:43.840 country tripled between 2005 and 2009. Tripled? 00:09:43.860 --> 00:09:47.759 In four years? That's Bitcoin -level growth for 00:09:47.759 --> 00:09:51.139 a physical illiquid asset? That's insane. And 00:09:51.139 --> 00:09:53.039 you have to remember the global context. 2008 00:09:53.039 --> 00:09:56.059 was the global financial crisis. The rest of 00:09:56.059 --> 00:09:58.720 the world was melting down. Lehman Brothers collapsed. 00:09:59.039 --> 00:10:01.860 Right. The world was ending. But China, in an 00:10:01.860 --> 00:10:04.539 effort to insulate itself, responded with a massive 00:10:04.539 --> 00:10:07.419 stimulus package, a $4 trillion RMB package, 00:10:07.580 --> 00:10:11.019 plus a huge expansion of bank lending. They flooded 00:10:11.019 --> 00:10:13.240 the economy with cheap credit to keep growth 00:10:13.240 --> 00:10:15.039 alive. And all that money had to go somewhere. 00:10:15.299 --> 00:10:17.840 And it went directly into real estate. State 00:10:17.840 --> 00:10:19.860 -owned enterprises, local governments, private 00:10:19.860 --> 00:10:22.559 developers, everyone gorged on cheap credit to 00:10:22.559 --> 00:10:24.940 build, build, build, and regular people borrowed 00:10:24.940 --> 00:10:27.019 whatever they could to buy. But wait, here's 00:10:27.019 --> 00:10:29.340 the part my brain gets stuck on. If prices are 00:10:29.340 --> 00:10:31.620 tripling and wages are clearly not tripling, 00:10:31.779 --> 00:10:35.000 how are people paying for this? The math just 00:10:35.000 --> 00:10:37.659 doesn't seem to work. The math gets very, very 00:10:37.659 --> 00:10:39.419 scary when you look at the price -to -income 00:10:39.419 --> 00:10:42.399 ratios. In international economics, there's a 00:10:42.399 --> 00:10:45.789 general benchmark. A ratio of 5 to 1, meaning 00:10:45.789 --> 00:10:48.250 the median house costs 5 times the median annual 00:10:48.250 --> 00:10:51.350 household income, is considered severely unaffordable. 00:10:51.610 --> 00:10:54.649 Okay, 5 to 1 is the red zone. Where was Beijing? 00:10:55.309 --> 00:10:57.889 Or Shanghai? At the peak of the bubble, in the 00:10:57.889 --> 00:11:00.350 Tier 1 cities like Beijing, the ratio hit 27 00:11:00.350 --> 00:11:05.049 to 1. 27. 27 years of a household's entire income. 00:11:05.629 --> 00:11:07.629 That's essentially a lifetime of labor for a 00:11:07.629 --> 00:11:09.570 two -bedroom condo. How is that even possible? 00:11:09.730 --> 00:11:11.690 Who is buying these places? Well, this is where 00:11:11.690 --> 00:11:13.009 we have to talk about something the official 00:11:13.009 --> 00:11:14.789 data doesn't capture. We have to talk about gray 00:11:14.789 --> 00:11:16.970 income. This is the theory from the economist 00:11:16.970 --> 00:11:19.370 Andy Hsieh, right? He was a bit of a contrarian 00:11:19.370 --> 00:11:21.610 voice at the time. A very loud and often correct 00:11:21.610 --> 00:11:24.590 one, yes. Andy Hsieh is this brilliant independent 00:11:24.590 --> 00:11:27.169 economist who looked at the official data and 00:11:27.169 --> 00:11:29.509 basically said, this is nonsense. What was his 00:11:29.509 --> 00:11:31.629 argument? He said, look, the official income 00:11:31.629 --> 00:11:33.990 stats say people can't afford these homes, but 00:11:33.990 --> 00:11:36.950 the homes are selling. often for cash. So the 00:11:36.950 --> 00:11:38.990 money must be coming from somewhere else. And 00:11:38.990 --> 00:11:41.789 somewhere else was. Off the books. Undisclosed 00:11:41.789 --> 00:11:44.830 income. This could be corruption, kickbacks, 00:11:45.009 --> 00:11:47.129 undeclared business profits, consulting fees 00:11:47.129 --> 00:11:49.570 paid in cash, red envelopes filled with money. 00:11:50.370 --> 00:11:54.590 Xie Gas estimated that this gray income could 00:11:54.590 --> 00:11:57.230 account for as much as 10 % of China's entire 00:11:57.230 --> 00:12:02.259 GDP. A tenth of the economy was just... Potentially. 00:12:02.259 --> 00:12:04.840 He famously would do these very unconventional 00:12:04.840 --> 00:12:07.639 analyses. He'd sit in hotel lobbies in the Yangtze 00:12:07.639 --> 00:12:10.139 Delta and just count the traffic or look at electricity 00:12:10.139 --> 00:12:14.120 usage versus reported factory output. And he 00:12:14.120 --> 00:12:16.279 concluded there was a massive shadow economy 00:12:16.279 --> 00:12:19.360 flooding cash into real estate in the big cities. 00:12:19.799 --> 00:12:21.980 So the guy buying the $2 million apartment in 00:12:21.980 --> 00:12:24.759 Shanghai officially makes, say, $50 ,000 a year 00:12:24.759 --> 00:12:27.059 as a civil servant. But under the mattress, he's 00:12:27.059 --> 00:12:29.720 sitting on a pile of cash from, let's call it, 00:12:29.740 --> 00:12:32.159 informal business activities. That's the theory. 00:12:32.340 --> 00:12:34.259 Yeah. And that cash needed to be laundered or 00:12:34.259 --> 00:12:36.179 at least stored somewhere safe where the taxman 00:12:36.179 --> 00:12:37.940 couldn't see it. Real estate was the perfect 00:12:37.940 --> 00:12:40.700 bolt. It was tangible. And the speculation got 00:12:40.700 --> 00:12:43.159 so crazy that even non -real estate companies 00:12:43.159 --> 00:12:45.460 started pivoting, didn't they? I remember reading 00:12:45.460 --> 00:12:47.559 in the sources about shoe companies getting into 00:12:47.559 --> 00:12:50.879 the game. Oh, that is the classic textbook bubble 00:12:50.879 --> 00:12:55.139 signal. You had manufacturers of shoes, cigarette 00:12:55.139 --> 00:12:59.120 lighters, chemicals, you know, boring low -margin 00:12:59.120 --> 00:13:01.679 industrial businesses suddenly opening property 00:13:01.679 --> 00:13:04.320 divisions. Why would they do that? Because why 00:13:04.320 --> 00:13:06.620 would you grind out a 3 % profit margin making 00:13:06.620 --> 00:13:09.220 sneakers when you can borrow cheap money from 00:13:09.220 --> 00:13:12.419 a state bank? buy a plot of land, build a tower, 00:13:12.539 --> 00:13:15.179 and make a 30 % or 40 % return in two years. 00:13:15.679 --> 00:13:18.299 The incentives were completely skewed. It reminds 00:13:18.299 --> 00:13:20.299 me of the dot -com bubble when every company 00:13:20.299 --> 00:13:22.779 added dot -com to their name, or more recently 00:13:22.779 --> 00:13:24.740 when everyone suddenly became an AI company. 00:13:24.980 --> 00:13:27.279 When the shoe factory becomes a condo developer, 00:13:27.379 --> 00:13:29.899 you should probably run for the hills. And to 00:13:29.899 --> 00:13:32.419 be fair, the government tried to stop it. They 00:13:32.419 --> 00:13:35.000 weren't completely blind to the risks. Around 00:13:35.000 --> 00:13:38.039 2010 and 2011, they actively tried to deflate 00:13:38.039 --> 00:13:40.809 the bubble, but gently. How? What did they do? 00:13:40.950 --> 00:13:42.529 They started putting the brakes on. They raised 00:13:42.529 --> 00:13:44.350 down payment requirements, especially for second 00:13:44.350 --> 00:13:47.009 or third homes, up to 40 percent, 50 percent, 00:13:47.090 --> 00:13:49.889 even 60 percent. That's a serious barrier. A 00:13:49.889 --> 00:13:52.409 huge one. And they did things like banning non 00:13:52.409 --> 00:13:55.210 -residents from buying property in Beijing unless 00:13:55.210 --> 00:13:57.070 they'd paid taxes there for five consecutive 00:13:57.070 --> 00:13:59.809 years. That's drastic. Imagine if New York City 00:13:59.809 --> 00:14:01.750 said, unless you've lived and worked here for 00:14:01.750 --> 00:14:04.370 five years, you literally cannot buy an apartment. 00:14:04.610 --> 00:14:07.029 The market would seize up. And it did, temporarily. 00:14:07.309 --> 00:14:10.190 It cooled the market. Prices dipped or flattened 00:14:10.190 --> 00:14:13.389 in 2011. But the economy's dependence on real 00:14:13.389 --> 00:14:16.490 estate was already too deep. The moment overall 00:14:16.490 --> 00:14:20.029 GDP growth slowed down in 2012, the government 00:14:20.029 --> 00:14:22.649 would panic and quietly loosen the rules again. 00:14:22.990 --> 00:14:25.490 It was an addiction they couldn't kick. And while 00:14:25.490 --> 00:14:27.629 this absolute frenzy was happening in the major 00:14:27.629 --> 00:14:30.389 cities, out in the provinces, we started seeing 00:14:30.389 --> 00:14:33.820 the phenomenon we opened with. The ghost cities. 00:14:33.919 --> 00:14:36.860 Yes. And this is genuinely one of the most misunderstood 00:14:36.860 --> 00:14:39.779 parts of the entire story. Misunderstood how? 00:14:39.919 --> 00:14:42.580 I mean, we've all seen the videos. Miles of empty 00:14:42.580 --> 00:14:45.360 six -lane highways, gleaming skyscrapers with 00:14:45.360 --> 00:14:47.659 no lights on. That seems pretty clear -cut, doesn't 00:14:47.659 --> 00:14:50.360 it? It seems that way on the surface. But we 00:14:50.360 --> 00:14:52.919 have to look at the timeline. Take Ordos Kangbashi, 00:14:53.120 --> 00:14:56.700 the poster child. When Al Jazeera's Melissa Chan 00:14:56.700 --> 00:14:59.879 went there in 2009, and made it world famous 00:14:59.879 --> 00:15:02.559 as a ghost town, the city was practically a newborn. 00:15:02.820 --> 00:15:05.259 It was only five years old. Construction had 00:15:05.259 --> 00:15:07.159 just started. So you're saying we're essentially 00:15:07.159 --> 00:15:09.500 judging a construction site and calling it a 00:15:09.500 --> 00:15:11.399 failure. We were judging a different model of 00:15:11.399 --> 00:15:14.519 urbanization. In the West, we generally build 00:15:14.519 --> 00:15:17.519 demand -led. People move to a suburb, traffic 00:15:17.519 --> 00:15:21.120 gets bad. Then maybe 10 years later, we get around 00:15:21.120 --> 00:15:23.799 to widening the road. We build the school after 00:15:23.799 --> 00:15:25.919 the classrooms are already overflowing. Which 00:15:25.919 --> 00:15:28.299 is incredibly annoying, by the way. It is. It's 00:15:28.299 --> 00:15:30.659 inefficient. China operates on a supply -led 00:15:30.659 --> 00:15:32.919 model. They build the infrastructure, the six 00:15:32.919 --> 00:15:34.639 -lane highways, the grand government centers, 00:15:34.759 --> 00:15:37.080 the universities, the high -speed rail station 00:15:37.080 --> 00:15:39.600 first. Then they expect the population to fill 00:15:39.600 --> 00:15:41.879 it in over the next 10 to 20 years. The field 00:15:41.879 --> 00:15:44.759 of dreams model. Build it and they will come. 00:15:45.129 --> 00:15:47.110 And you know what? In many of these famous cases, 00:15:47.289 --> 00:15:50.210 they did come. Really? Ordos isn't empty anymore. 00:15:50.509 --> 00:15:53.649 Not at all. Ordos -Kangbashi now has a population 00:15:53.649 --> 00:15:57.090 of over 150 ,000. It turns out they built some 00:15:57.090 --> 00:15:59.250 of the best schools in the province there, which 00:15:59.250 --> 00:16:01.190 acted as a magnet for middle -class parents. 00:16:01.710 --> 00:16:04.009 Housing crisis rebounded. It's a functioning, 00:16:04.070 --> 00:16:06.450 vibrant city. OK, what about the Zendong New 00:16:06.450 --> 00:16:08.850 Area? That was the one that the show 60 Minutes 00:16:08.850 --> 00:16:11.990 just roasted in 2013. They had that classic segment 00:16:11.990 --> 00:16:14.309 with the empty towers and deserted plazas. I 00:16:14.309 --> 00:16:17.070 remember it well. But if you go there today or 00:16:17.070 --> 00:16:20.490 look at the 2023 data, that ghost city has 1 00:16:20.490 --> 00:16:23.950 .3 million residents. It's a major financial 00:16:23.950 --> 00:16:27.169 and logistics hub for central China. It's bustling. 00:16:27.250 --> 00:16:30.480 So the Western media was just wrong. I think 00:16:30.480 --> 00:16:32.600 we were impatient. We looked at a 20 -year plan 00:16:32.600 --> 00:16:35.200 in year three and called it a failure. Wade Shepard, 00:16:35.279 --> 00:16:37.720 an author who wrote extensively on this, has 00:16:37.720 --> 00:16:39.659 a great line. He calls it calling the game at 00:16:39.659 --> 00:16:41.769 halftime. However, I mean, surely they can't 00:16:41.769 --> 00:16:44.149 all be success stories. You don't build an estimated 00:16:44.149 --> 00:16:46.710 65 million empty homes, which is the number from 00:16:46.710 --> 00:16:49.529 a 2020 study, without some significant waste. 00:16:49.750 --> 00:16:51.669 That's enough to house the entire population 00:16:51.669 --> 00:16:54.389 of France. Oh, absolutely. And this is where 00:16:54.389 --> 00:16:56.769 we need to make a critical distinction. There's 00:16:56.769 --> 00:16:58.629 a difference between a city that is growing into 00:16:58.629 --> 00:17:01.590 its skin and a development that is just structurally 00:17:01.590 --> 00:17:06.029 useless. There are plenty of remote, poorly planned 00:17:06.029 --> 00:17:07.690 developments that never filled up and probably 00:17:07.690 --> 00:17:10.529 never will. But even in the successful cities, 00:17:10.670 --> 00:17:14.349 you have this other phenomenon of millions of 00:17:14.349 --> 00:17:16.950 sold but empty units. This is the weird part 00:17:16.950 --> 00:17:20.430 to me. I buy a house, but I don't live in it. 00:17:20.650 --> 00:17:22.970 I don't even rent it out. Why? It goes back to 00:17:22.970 --> 00:17:24.750 that investment mindset we talked about. If you 00:17:24.750 --> 00:17:26.970 buy an apartment as a store of value, like it's 00:17:26.970 --> 00:17:29.430 a gold bar with windows, you don't necessarily 00:17:29.430 --> 00:17:32.170 want tenants in it. Why not? That's income. Tenants 00:17:32.170 --> 00:17:34.130 wear things out. They scratch the floors. They 00:17:34.130 --> 00:17:36.849 scuff the walls. They break things. In the Chinese 00:17:36.849 --> 00:17:39.769 market, a lived -in secondhand apartment often 00:17:39.769 --> 00:17:42.930 has a lower resale value than a pristine, untouched 00:17:42.930 --> 00:17:45.289 shell. Wait, a rough shell? What does that mean? 00:17:45.390 --> 00:17:47.690 Yes. In China, it's very common for apartments 00:17:47.690 --> 00:17:50.650 to be sold as concrete shells. No floors, no 00:17:50.650 --> 00:17:52.869 toilets, no drywall, no kitchen cabinets, just 00:17:52.869 --> 00:17:55.430 the box. The buyer is expected to fit it out 00:17:55.430 --> 00:17:57.869 themselves. So people buy the concrete box and 00:17:57.869 --> 00:18:00.849 just let it sit there? For 10 years, yes. It's 00:18:00.849 --> 00:18:03.529 literally a concrete safety deposit box in the 00:18:03.529 --> 00:18:07.490 sky. It's a way to park your savings for your 00:18:07.490 --> 00:18:09.690 child's future marriage or for your own retirement. 00:18:10.670 --> 00:18:13.329 Occupying it would devalue the asset. That's 00:18:13.329 --> 00:18:15.809 a completely alien way of thinking about housing 00:18:15.809 --> 00:18:19.029 to me. And this led to some truly bizarre marketing 00:18:19.029 --> 00:18:22.069 tactics to sell these remote, empty developments, 00:18:22.269 --> 00:18:24.029 didn't it? We have to talk about the rent -a 00:18:24.029 --> 00:18:25.990 -foreigner industry. I was hoping we'd get to 00:18:25.990 --> 00:18:28.069 this. It sounds like a crazy urban legend. But 00:18:28.069 --> 00:18:31.309 it was very, very real. So what was it? Well, 00:18:31.349 --> 00:18:33.349 you have developers in these third or fourth 00:18:33.349 --> 00:18:35.609 tier cities, basically in the middle of nowhere. 00:18:36.009 --> 00:18:38.089 And they want to project an image of international 00:18:38.089 --> 00:18:40.750 success. They want to tell the local farmers 00:18:40.750 --> 00:18:42.910 and small -time investors, this isn't just a 00:18:42.910 --> 00:18:45.069 building in a field, this is a global commerce 00:18:45.069 --> 00:18:47.470 hub. Okay, a classic marketing pitch. So how 00:18:47.470 --> 00:18:49.829 do you prove that? You import white people. Seriously. 00:18:50.250 --> 00:18:52.910 If you were a Westerner in China in the early 00:18:52.910 --> 00:18:56.789 2010s, a student, a teacher, a backpacker, you 00:18:56.789 --> 00:18:59.509 could pick up these weekend gigs. You put on 00:18:59.509 --> 00:19:01.529 a cheap suit, go out to some remote development, 00:19:01.730 --> 00:19:04.710 and stand at a ribbon -cutting ceremony. The 00:19:04.710 --> 00:19:06.829 developer would introduce you as a famous architect 00:19:06.829 --> 00:19:10.069 from Canada or a diplomat from France or the 00:19:10.069 --> 00:19:12.609 CEO of an American investment firm. They just 00:19:12.609 --> 00:19:15.730 paid you to stand there and look foreign. Yes. 00:19:15.809 --> 00:19:18.269 One of the sources describes it as creating an 00:19:18.269 --> 00:19:21.210 erotic fantasy of internationalism and success. 00:19:21.829 --> 00:19:23.930 It didn't matter if you were an unemployed English 00:19:23.930 --> 00:19:26.309 teacher from Ohio. If you had the right look, 00:19:26.490 --> 00:19:28.950 you were a prop in the sales pitch to convince 00:19:28.950 --> 00:19:31.069 locals that this place was the next big thing. 00:19:31.230 --> 00:19:34.509 That is hilarious and also incredibly cynical. 00:19:34.609 --> 00:19:36.769 It's selling a dream that is literally built 00:19:36.769 --> 00:19:39.910 on a lie. But that lie or maybe that belief that 00:19:39.910 --> 00:19:42.410 growth is inevitable wasn't just marketing. It 00:19:42.410 --> 00:19:44.170 was baked into the very structure of the government. 00:19:44.710 --> 00:19:46.650 And this is the most critical part of the deep 00:19:46.650 --> 00:19:48.769 dive, I think. We have to talk about the engine 00:19:48.769 --> 00:19:51.769 under the hood, land finance. Okay, lay it on 00:19:51.769 --> 00:19:53.910 me. I hear this term land finance all the time. 00:19:54.009 --> 00:19:56.630 What does it actually mean in simple terms? It 00:19:56.630 --> 00:19:59.589 answers the fundamental question. How do local 00:19:59.589 --> 00:20:02.549 governments in China pay for anything? In the 00:20:02.549 --> 00:20:05.630 U .S. or Europe, your town pays for schools and 00:20:05.630 --> 00:20:08.029 police and roads mostly through property taxes, 00:20:08.069 --> 00:20:10.930 right? You own a house. You pay the town a percentage 00:20:10.930 --> 00:20:13.309 of its value every single year. Right. Everyone 00:20:13.309 --> 00:20:16.190 hates it, but it pays the bills. Well, for this 00:20:16.190 --> 00:20:18.670 whole period, China didn't have a recurring annual 00:20:18.670 --> 00:20:21.130 property tax like that. And the central government 00:20:21.130 --> 00:20:23.950 in Beijing takes the lion's share of other taxes, 00:20:24.029 --> 00:20:27.349 like income tax and VAT. So the mayors of these 00:20:27.349 --> 00:20:30.250 cities are, on paper, broke. But they have one 00:20:30.250 --> 00:20:33.150 massive asset. They have the land. In China, 00:20:33.190 --> 00:20:35.950 the state owns all urban land. So what a local 00:20:35.950 --> 00:20:38.529 government can do is rezone agricultural land 00:20:38.529 --> 00:20:41.509 on the edge of the city, evict the farmers, compensate 00:20:41.509 --> 00:20:44.430 them, and then sell the long -term land use rights 00:20:44.430 --> 00:20:46.950 to a developer like Evergrande. And because land 00:20:46.950 --> 00:20:49.710 prices were skyrocketing for 20 years, this was 00:20:49.710 --> 00:20:51.829 a goldmine. Here's a printing press. In some 00:20:51.829 --> 00:20:54.809 peak years, selling land accounted for 50 % half 00:20:54.809 --> 00:20:57.519 of all local government revenue. Now, just think 00:20:57.519 --> 00:20:59.019 about that incentive structure for a minute. 00:20:59.119 --> 00:21:01.380 If half my paycheck depends on selling land at 00:21:01.380 --> 00:21:03.720 ever higher prices, what am I going to do? You're 00:21:03.720 --> 00:21:05.680 going to do everything in your power to make 00:21:05.680 --> 00:21:08.380 sure land prices stay high. You're going to encourage 00:21:08.380 --> 00:21:10.799 developers to build as much as possible. And 00:21:10.799 --> 00:21:12.539 you're going to borrow against that future land 00:21:12.539 --> 00:21:15.519 revenue to build shiny new subways and parks 00:21:15.519 --> 00:21:17.819 and convention centers to make the land even 00:21:17.819 --> 00:21:19.920 more valuable. It's a self -reinforcing cycle, 00:21:20.119 --> 00:21:23.579 a feedback loop. A very dangerous one. And it 00:21:23.579 --> 00:21:26.019 gets even more complicated. The local government. 00:21:26.440 --> 00:21:29.480 creates a shell company. It's called an LGFV, 00:21:29.500 --> 00:21:33.420 or local government financing vehicle. This LGFV 00:21:33.420 --> 00:21:36.099 borrows billions from state banks to clear the 00:21:36.099 --> 00:21:38.480 land and build the infrastructure. Then the government 00:21:38.480 --> 00:21:40.859 sells the land to Evergrande. Evergrande, in 00:21:40.859 --> 00:21:43.059 turn, borrows billions to buy the land and build 00:21:43.059 --> 00:21:45.460 the apartments. Everyone is borrowing. The whole 00:21:45.460 --> 00:21:47.460 system is built on leverage. Everyone is borrowing. 00:21:47.660 --> 00:21:50.799 And the collateral for all of it is the single 00:21:50.799 --> 00:21:53.619 foundational assumption that land prices will 00:21:53.619 --> 00:21:55.960 keep going up forever. And what about the politicians, 00:21:56.279 --> 00:21:59.500 the city mayors? Where do they fit in? Their 00:21:59.500 --> 00:22:01.380 promotion within the Communist Party depends 00:22:01.380 --> 00:22:04.500 almost entirely on hitting GDP growth targets 00:22:04.500 --> 00:22:06.920 and what's the easiest way to generate massive 00:22:06.920 --> 00:22:11.380 GDP. So if you want to get promoted from a provincial 00:22:11.380 --> 00:22:15.059 city to a job in Beijing, you sell land, you 00:22:15.059 --> 00:22:17.500 build a massive new district, you juice the GDP 00:22:17.500 --> 00:22:20.140 numbers for a few years, and you move up the 00:22:20.140 --> 00:22:22.819 ladder. long before the bill for all that debt 00:22:22.819 --> 00:22:25.319 comes due. It's a giant game of musical chairs. 00:22:25.599 --> 00:22:28.640 Precisely. And in August 2020, Beijing decided 00:22:28.640 --> 00:22:31.259 the music had to stop. The three red lines. The 00:22:31.259 --> 00:22:33.099 three red lines. This was not an accident. This 00:22:33.099 --> 00:22:35.000 was not a market crash in the Western sense. 00:22:35.279 --> 00:22:38.599 This was a deliberate policy decision by the 00:22:38.599 --> 00:22:41.359 central government in Beijing to finally defuse 00:22:41.359 --> 00:22:43.789 the bomb. They looked at the balance sheets of 00:22:43.789 --> 00:22:46.029 developers like Evergrande, who had hundreds 00:22:46.029 --> 00:22:48.329 of billions of dollars in debt, and said, this 00:22:48.329 --> 00:22:50.710 is a systemic risk to our entire country. So 00:22:50.710 --> 00:22:52.529 what did they actually do? What were the red 00:22:52.529 --> 00:22:55.430 lines? In August 2020, they issued three strict 00:22:55.430 --> 00:22:58.190 rules. If a developer wanted to borrow more money 00:22:58.190 --> 00:23:00.930 from any bank, they had to meet three specific 00:23:00.930 --> 00:23:02.990 financial health metrics. There were basically 00:23:02.990 --> 00:23:05.369 limits on their debt -to -cash ratio, their debt 00:23:05.369 --> 00:23:07.390 -to -assets ratio, and their debt -to -equity 00:23:07.390 --> 00:23:10.049 ratio. And Evergrande. They failed all three. 00:23:10.960 --> 00:23:13.059 Miserably. So they were cut off. The banks were 00:23:13.059 --> 00:23:15.880 ordered to turn off the credit tap. Completely 00:23:15.880 --> 00:23:18.200 cut off. And you have to understand, the business 00:23:18.200 --> 00:23:21.140 model for Evergrande and many others was in some 00:23:21.140 --> 00:23:23.819 ways like a Ponzi scheme. They needed to take 00:23:23.819 --> 00:23:26.660 out new loans just to pay the interest on their 00:23:26.660 --> 00:23:29.599 old loans and to start new projects. When that 00:23:29.599 --> 00:23:32.059 liquidity tap was turned off, they suffocated 00:23:32.059 --> 00:23:34.500 almost instantly. And this brings us to the most 00:23:34.500 --> 00:23:37.240 tragic part of the collapse. The victims who 00:23:37.240 --> 00:23:39.500 weren't bondholders or shareholders, but the 00:23:39.500 --> 00:23:42.740 regular home buyers. The pre -sale model. This 00:23:42.740 --> 00:23:44.880 is where the technical details really, really 00:23:44.880 --> 00:23:48.210 matter. In the West, if you buy a condo that 00:23:48.210 --> 00:23:50.490 isn't built yet, you typically put down a deposit, 00:23:50.690 --> 00:23:53.549 maybe 10%, 20 % if it's a luxury building. You 00:23:53.549 --> 00:23:55.170 pay the rest when the building is finished and 00:23:55.170 --> 00:23:57.789 you move in. Right. That seems logical. In China, 00:23:57.849 --> 00:24:00.509 the standard practice was to pay 100 % of the 00:24:00.509 --> 00:24:03.269 purchase price up front. You take out a 30 -year 00:24:03.269 --> 00:24:05.269 mortgage for the full amount before the ground 00:24:05.269 --> 00:24:06.950 is even broken. Wait, hold on. Let me get this 00:24:06.950 --> 00:24:08.769 straight. I'm paying a full mortgage principal 00:24:08.769 --> 00:24:11.509 and interest every month for an apartment that 00:24:11.509 --> 00:24:14.380 is just a drawing on a piece of paper. Yes, the 00:24:14.380 --> 00:24:17.200 developer takes your money and supposedly uses 00:24:17.200 --> 00:24:19.920 that money to build your house. But in reality, 00:24:20.019 --> 00:24:22.359 what they often did was use your money to go 00:24:22.359 --> 00:24:24.940 buy more land to start the next project to keep 00:24:24.940 --> 00:24:27.599 the Ponzi scheme spinning ever faster. So when 00:24:27.599 --> 00:24:29.880 the three red lines hit and the developer's cash 00:24:29.880 --> 00:24:32.619 flow dried up, the construction stopped. All 00:24:32.619 --> 00:24:35.440 across China, cranes just went still. And you 00:24:35.440 --> 00:24:38.150 now have... millions of people, regular middle 00:24:38.150 --> 00:24:41.509 -class families, paying mortgages on rotting 00:24:41.509 --> 00:24:43.769 concrete skeletons that might never be finished. 00:24:43.970 --> 00:24:46.529 That is horrifying. I can't even imagine. You're 00:24:46.529 --> 00:24:49.069 trapped. You can't live in it. You can't sell 00:24:49.069 --> 00:24:51.650 it. But the state -owned bank still wants its 00:24:51.650 --> 00:24:53.990 monthly payment. And that's what triggered the 00:24:53.990 --> 00:24:57.559 mortgage boycotts in 2022. It was a rare, widespread 00:24:57.559 --> 00:25:00.400 act of civil disobedience. Groups of homebuyers 00:25:00.400 --> 00:25:03.000 and hundreds of projects across the country banded 00:25:03.000 --> 00:25:05.640 together online and said, we are stopping payments. 00:25:05.779 --> 00:25:07.799 If you don't build the house, we don't pay the 00:25:07.799 --> 00:25:09.960 loan. Which is a direct threat to the stability 00:25:09.960 --> 00:25:12.519 of the entire banking system. It terrified the 00:25:12.519 --> 00:25:14.779 government. Social stability is the number one 00:25:14.779 --> 00:25:18.000 priority. If millions of people start defaulting 00:25:18.000 --> 00:25:20.099 on their loans to the big state banks, the banks 00:25:20.099 --> 00:25:22.960 could collapse. That's a true systemic crisis. 00:25:23.559 --> 00:25:27.460 So where are we now? It's 2024 or 2026 as we 00:25:27.460 --> 00:25:29.759 record this retrospective. The dust is still 00:25:29.759 --> 00:25:32.640 settling. What is the state of the market? The 00:25:32.640 --> 00:25:35.250 sector has shrunk dramatically. Real estate and 00:25:35.250 --> 00:25:37.710 related industries used to be, by some estimates, 00:25:37.910 --> 00:25:40.609 a quarter, 24 percent or 25 percent of China's 00:25:40.609 --> 00:25:43.849 entire GDP. Now it's dragging significantly lower, 00:25:43.950 --> 00:25:47.210 maybe 19 percent or even less. That is a massive 00:25:47.210 --> 00:25:50.089 gaping hole in the economy that nothing has yet 00:25:50.089 --> 00:25:51.750 been able to fill. And the wealth effect you 00:25:51.750 --> 00:25:53.450 mentioned earlier. It's gone into reverse. It's 00:25:53.450 --> 00:25:56.029 a negative wealth effect. People feel poor. If 00:25:56.029 --> 00:25:58.410 your apartment, which is 60 percent of your family's 00:25:58.410 --> 00:26:00.329 net worth, has lost 20 percent or 30 percent 00:26:00.329 --> 00:26:02.470 of its value in the last two years, you aren't 00:26:02.470 --> 00:26:03.759 going to buy a new car. You aren't going to go 00:26:03.759 --> 00:26:05.660 on a fancy vacation. You're going to save every 00:26:05.660 --> 00:26:08.400 penny you can. Consumption is very weak. Is the 00:26:08.400 --> 00:26:10.259 government bailing them out? Are they coming 00:26:10.259 --> 00:26:13.119 in with another huge stimulus? It's a very cautious, 00:26:13.240 --> 00:26:16.220 very targeted bailout. Xi Jinping has the same 00:26:16.220 --> 00:26:20.740 as mantra. Houses are for living, not for speculation. 00:26:21.500 --> 00:26:23.900 And unlike in the past, they're actually sticking 00:26:23.900 --> 00:26:26.200 to that. They are not flooding the market with 00:26:26.200 --> 00:26:29.359 cheap cash like they did in 2008 or 2015. So 00:26:29.359 --> 00:26:32.420 no bazooka stimulus this time? No. They're doing 00:26:32.420 --> 00:26:34.579 very specific things. There's a white list of 00:26:34.579 --> 00:26:36.420 certain development projects that they've deemed 00:26:36.420 --> 00:26:40.019 worthy of saving. They're telling banks to lend 00:26:40.019 --> 00:26:42.539 to those projects, but only so they can get the 00:26:42.539 --> 00:26:44.599 homes finished and give the keys to the people 00:26:44.599 --> 00:26:47.059 who already paid. It's about preventing riots, 00:26:47.319 --> 00:26:50.450 not reinflating the bubble. They are lowering 00:26:50.450 --> 00:26:52.250 mortgage rates and down payments a bit, right? 00:26:52.410 --> 00:26:54.710 Yes. They're trying to entice new buyers back 00:26:54.710 --> 00:26:57.309 into the market, but it's a slow grind. They're 00:26:57.309 --> 00:26:59.150 trying to let the air out of the bubble without 00:26:59.150 --> 00:27:01.450 popping it completely and causing a full -blown 00:27:01.450 --> 00:27:03.789 financial collapse. It's an incredibly painful 00:27:03.789 --> 00:27:06.250 multi -year process. And what about the local 00:27:06.250 --> 00:27:08.250 governments, the ones who are addicted to selling 00:27:08.250 --> 00:27:11.279 land? They are in a deep crisis. Developers aren't 00:27:11.279 --> 00:27:13.500 buying land anymore because they're bankrupt 00:27:13.500 --> 00:27:16.839 or scared. So local government revenue has absolutely 00:27:16.839 --> 00:27:18.980 plummeted. We're seeing these bizarre reports 00:27:18.980 --> 00:27:21.599 of LGFEs buying their own government's land, 00:27:21.740 --> 00:27:24.220 literally moving money from one government pocket 00:27:24.220 --> 00:27:26.319 to another just to make the numbers look like 00:27:26.319 --> 00:27:27.940 the market is still moving. That's just fake 00:27:27.940 --> 00:27:29.779 revenue. It's an accounting trick. It's an act 00:27:29.779 --> 00:27:32.319 of desperation. Yeah. But the biggest damage, 00:27:32.380 --> 00:27:35.539 I think, is psychological. The iron law of Chinese 00:27:35.539 --> 00:27:38.559 real estate, the unshakable belief that prices 00:27:38.559 --> 00:27:41.740 always go up, is broken. Once you shatter that 00:27:41.740 --> 00:27:44.940 faith, it is incredibly hard to rebuild it. People 00:27:44.940 --> 00:27:46.960 are now looking at housing as a risky asset, 00:27:47.160 --> 00:27:49.460 not a safe haven. That's a fundamental shift. 00:27:49.880 --> 00:27:53.079 So as we wrap up this deep dive, how do we synthesize 00:27:53.079 --> 00:27:54.740 this whole incredible story? It feels like a 00:27:54.740 --> 00:27:57.279 story of just immense ambition that flew too 00:27:57.279 --> 00:27:59.450 close to the sun. I think that's a good way to 00:27:59.450 --> 00:28:01.950 put it. It really is the story of modern China 00:28:01.950 --> 00:28:05.869 in a microcosm. It's a story of incredible, breathtaking 00:28:05.869 --> 00:28:08.349 transformation. We have to give credit where 00:28:08.349 --> 00:28:11.410 it's due. This system urbanized a country at 00:28:11.410 --> 00:28:14.509 a speed never before seen in human history. It 00:28:14.509 --> 00:28:17.029 raised the urbanization rate from 18 % in 1978 00:28:17.029 --> 00:28:21.170 to over 64 % today. They built world -class infrastructure. 00:28:21.880 --> 00:28:24.160 The ghost cities did eventually house millions 00:28:24.160 --> 00:28:26.160 and millions of people. But the bill has arrived. 00:28:26.220 --> 00:28:28.779 The model is unsustainable. The bill has absolutely 00:28:28.779 --> 00:28:32.220 arrived. The model of growth at any cost of building 00:28:32.220 --> 00:28:34.940 just to hit a GDP target, regardless of real 00:28:34.940 --> 00:28:37.640 demand or financial risk, has hit a hard wall. 00:28:37.839 --> 00:28:39.579 You know, there was a point in the research that 00:28:39.579 --> 00:28:41.220 really, really stuck with me. It wasn't about 00:28:41.220 --> 00:28:43.200 the economics. It was about the physical quality 00:28:43.200 --> 00:28:45.759 of the construction. Ah, yes. The so -called 00:28:45.759 --> 00:28:48.940 tofu drag construction. Right. But not just the 00:28:48.940 --> 00:28:51.500 shoddy stuff. It was the idea of planned obsolescence. 00:28:51.720 --> 00:28:53.579 Some of the architects quoted in the sources 00:28:53.579 --> 00:28:55.779 say that many residential towers in China are 00:28:55.779 --> 00:28:58.500 designed and built to last maybe 20 or 30 years. 00:28:58.759 --> 00:29:01.119 That's right. In Europe, you build a cathedral 00:29:01.119 --> 00:29:04.319 or a stone house to last for centuries. In the 00:29:04.319 --> 00:29:06.799 boom years of China, you built it to get it sold 00:29:06.799 --> 00:29:10.019 and to hit this year's GDP target. Long -term 00:29:10.019 --> 00:29:12.930 quality was a secondary concern. And he's the 00:29:12.930 --> 00:29:15.230 provocative thought I want to leave you, the 00:29:15.230 --> 00:29:17.750 listener, with. In our current global economic 00:29:17.750 --> 00:29:20.789 system, if you build a tower, that activity adds 00:29:20.789 --> 00:29:24.109 to GDP. 20 years later, if that tower is crumbling, 00:29:24.210 --> 00:29:26.450 you have to tear it down. The demolition also 00:29:26.450 --> 00:29:29.130 adds to GDP. And then if you build a new one 00:29:29.130 --> 00:29:31.710 in its place, that adds to GDP again. It's the 00:29:31.710 --> 00:29:34.009 broken window fallacy on a macroeconomic scale. 00:29:34.190 --> 00:29:36.329 You're just churning activity for the sake of 00:29:36.329 --> 00:29:39.109 a number. Exactly. So if a huge chunk of this 00:29:39.109 --> 00:29:42.480 miracle growth was based on... churning concrete 00:29:42.480 --> 00:29:44.339 building things that are destined to be rubble 00:29:44.339 --> 00:29:46.279 in a single generation, how much that wealth 00:29:46.279 --> 00:29:49.440 was actually real. It forces us to ask, what 00:29:49.440 --> 00:29:51.960 is the purpose of an economy? Is it to generate 00:29:51.960 --> 00:29:53.880 a number on a spreadsheet that makes politicians 00:29:53.880 --> 00:29:56.460 look good? Or is it to create lasting, durable 00:29:56.460 --> 00:29:59.619 value for human beings? Is the ghost city a bug 00:29:59.619 --> 00:30:02.339 in the system, a mistake? Or is it actually a 00:30:02.339 --> 00:30:05.240 feature, the perfect symbol of an economy that 00:30:05.240 --> 00:30:08.049 became obsessed with the wrong metrics? That 00:30:08.049 --> 00:30:11.309 is the multi -trillion dollar question that China 00:30:11.309 --> 00:30:13.329 and maybe the rest of the world is going to have 00:30:13.329 --> 00:30:15.569 to grapple with for the next decade. Something 00:30:15.569 --> 00:30:18.009 to chew on. That's it for this deep dive. Thanks 00:30:18.009 --> 00:30:18.390 for listening.