Summary
➡ China’s growth is hindered by restrictions on advanced semiconductor imports and over-reliance on investment to drive GDP, often leading to wasteful investments in unnecessary infrastructure. These issues, coupled with declining demographics, corruption, and extreme income inequality, pose a significant risk not only to China’s economic landscape but also pose a global financial threat. The potential collapse of shadow bank Zongrong could signal a larger financial crisis to come, affecting markets in the US, Europe, and Japan.
Transcript
And it’s a 500 billion dollar hole that could cause more damage in the US and Japan than China itself. So in this video, I’ll break down how this all got set up, how China grew so fast, the fallacy that fell into as they developed. I’m going to break down the size of this new pin prick, threatening the largest debt bubble in history, and how, just maybe, they let it all happen and why.
So let’s go. All right, welcome back. If you’re new to the channel, my name is Mark Moss. I make these videos to change the way you think about money, because almost everything you’ve learned is wrong. Almost everything you see read. It’s all misleading. It’s all missing information. It’s missing it’s lacking context. But don’t worry. We make these complex subjects easy to understand. And actionable. Now we’re talking about a pin prick that can potentially unravel the largest asset bubble, the everything bubble that we’re in today.
And we’re talking about it being over in China. Now, China’s facing all types of problems. China’s facing a new financial crisis that might make all the other potential threats look tiny. And this involves the collapse of a shadow bank called Zhang International Trust, which is a shadow bank with many investment schemes, and which for years was viewed as one of the top financial groups in China. But now it appears to be nothing more than a massive fraud like FTX, only much, much bigger.
And it has a potential total loss of $500 billion. But I’m getting ahead of myself. Let’s go back in the story and trace how we got here. All right, now, the story of China’s explosive growth from farmers to cities over the last 50 years, from 1978 to about 2008, has been the global example of China’s rise to challenge the United States. During this time, China’s GDP exploded from less than 150,000,000,000 in 1978 to over 3 trillion in 2008.
This puts China’s average annual growth rate over 10% per year during this period. And at the same time, over 600 million people were able to go from horrible poverty living in the country, on the farms and into cities, and at least earning a somewhat stable living, even if it was a very low income living and it was an increased standard of living from what they had. Now, between 2000 and 2008, China became the factory to the world.
As you know, manufacturing almost everything from the most basic of things like clothing, textiles all the way to the most high tech things like high tech cars, computers and things like that. Now, this growth and the shift from the country to the cities kind of caught the whole world by surprise, as most economists thought a move like this would have been impossible. But you’re able to move an economy from the low income to the middle income and get the ball rolling, like this jump start.
They thought once the middle income status was reached, then the path to becoming high income was just a matter of time. This is what economists called the takeoff theory. But as time has now shown us, that theory seems to have been wrong and as a matter of fact, potentially dead wrong. And in fact, what we have now seen over and over is it’s actually relatively easy to move an economy from the low income to the middle income.
All you need is a bunch of really cheap labor, a little bit of urban infrastructure, some very basic education, and, of course, you need some foreign capital. And boom. With all those ingredients, you can turn an economy into a manufacturing powerhouse. We’ve seen it over and over and over. But the catch is that this manufacturing is mostly assembly based. It’s the technical work. It’s the assembly. It’s the labor.
Now, if you’re a Marxist, you think that labor is the value, right? And the workers are the ones making the money. But if you’re a business owner, you know differently. You know that the labor is only one small piece of the equation. So, for example, the iPhone like this, which is predominantly made in China. In fact, about 90% of these iPhones are made in China. But the assembly, the part that’s done in China, the assembly value added by the Chinese workers is only valued at about 6% of the sales price.
So what about the other 94%, you ask? Where does that value come from? Well, turns out the other 94% of the value added comes from the United States. The invention, the patents. It comes from Japan with their gorilla glass. It comes from South Korea and their semiconductors and 26 other countries that supply critical components and parts. Now, of course, yes, sure, China assembles the phones, but they did not invent them.
They didn’t create them. They didn’t create the high tech inputs. They didn’t provide the value. Now, when it comes to jumpstarting an economy, you have a few levels to get across. So, typically, a low income country is considered to have about $5,000 of annual income per capita. Not a lot. The middle income countries begin at about $10,000 per year per capita, and the high income countries begin around 20,000 annual per capita income.
And, of course, they have no ceiling. It’s unlimited, right? And for all the talk we hear about China being the second largest economy in the world, which it is, what does that really mean? The second largest economy in the world. On an aggregate basis, sure, it’s the second largest, but you have to realize that the United States has about 330,000,000, while China has 1. 4 billion. So when we calculate on a per capita basis, it actually drops from the number two position all the way down to number 77 in global rankings, and it goes right between Equatorial Guinea and Botswana.
Now, on a per capita basis, US. Income is six times greater than China. So so much for China taking over the world, at least for now. So the challenge isn’t to go from a low to a middle income country. The real challenge for China or any other country that’s doing this is how to break out of the middle income trap and reach the high income status. And this is the most difficult part.
It’s extremely hard to do. In fact, the only countries that have been able to make this leap so far is Japan, South Korea, Hong Kong, Taiwan and Singapore. The list of countries stuck in the middle income track, along with China, it’s a long one. Malaysia, india, turkey, thailand, brazil, mexico, argentina, russia, chile, and others. They all provide massive amounts of cheap technical labor, but it’s not the higher level inputs that’s needed for real wealth.
So how could a country make it from middle income to high income status? Well, if you’re a capitalist, you already know you have to create massive amounts of value. So for China and these other countries, the way out of the middle income trap is to develop their own high technological intellectual property that can then be applied by themselves or licensed out to other middle income countries, which will basically pay other licensing fees for the technology they need to grow.
It’s the only way you must deliver more value now. Only when you develop your own technology are you able to move to higher value added in your manufacturing, and you can earn fees from others. So the key to forecasting Chinese growth in the years ahead is therefore in technology, which is why the Biden administration has been sending China back to the Dark Ages by restricting their access to microchips.
We’ve talked about this in other videos in the past. We’ll link it up here and in the show notes down below. It’s also a big reason why the fight over Taiwan is happening right now. So the question is, can China develop its own technology ahead of other advanced economy competitors and create the high value added industries that come with it? So far, the outlook here hasn’t been very good for China.
Even though they’ve taken all the IP from all the companies that work in China, they still have shown very little or no capacity to invent or produce in areas such as advanced semiconductors, high capacity aircraft, medical diagnostics, nuclear. Reactors, 3d printing, AI, water purification and virtual reality projects that China does have on display that are advanced, such as the bullet trains that run almost 200 miles an hour.
They’re done with technology that’s licensed from Germany or France or with stolen IP and technology. China’s produced major technological advances, but it’s done so in nonsustainable ways, including massive amounts of excessive debt and theft of intellectual property. China’s done little innovation on its own. The stolen technology channel is being shut down by bans on, like I said, the advanced semiconductor exports to China, sanctions on the use of 5G systems from Huawei.
Even China’s ability to import high tech semiconductor manufacturing equipment as a path to developing their own semiconductors has been cut off through export bans from the US. And the Netherlands. The second hurdle to growth in China is its over reliance on investment to drive GDP. Now, a country’s GDP account consists of consumption plus investment plus government spending, plus the differences of exports minus imports. So investment can be a really good way to drive an economy forward, assuming a big assumption that the investment is carefully chosen and the returns on the investment exceed any financing costs, like an actual real investment.
But this has not been the case in China. Now, most developed economies are at about 50% to 70% of total growth, with investment being around 25%. In China, consumption is only 25% of GDP, while investment is 45%. So massive amounts almost double the amount of investments. Net exports are a large percentage of that. But the problem is, while that might sound good, china’s investing double the amount into their GDP.
The problem is that much of that investment is completely wasted. It consists of large white elephant infrastructure projects, such as the Nanjing South train station made with high marble walls and 128 escalators that are mostly empty. They’ve also constructed entire ghost cities you’ve heard about one after the other, almost to the horizon, also mostly empty. This infrastructure binge is financed with debt that’s now both unpayable and now it acts as a drag on real growth in other sectors of the economy.
China’s trapped its infrastructure and debt. Debt end with no way out. And there are many other headwinds to Chinese growth in addition to the middle income trap and now the debt trap. These include declining demographics. We’ve talked about this. They have an aging population. Decades of a one child policy has put them into a dangerous demographic trap. They have a geopolitical problem, corruption, extreme income inequality, and the rise of President Xi as the next Mao Zedong, right? But there’s something much bigger, much more dangerous that’s going on.
And this includes a much bigger danger to us as well, because it includes the risk of a complete financial panic and new corporate failures that make the notorious Evergrande situation collapse look tiny. Now, China is not only slowing right now, but it may be on the brink of a financial and economic collapse that will reverberate around the world. And that’s because what happens in China doesn’t stay in China.
It’s critical to understand that what’s happening in China today is more than a slowdown, it’s more than a credit crunch. It’s much closer to a full scale financial collapse. Now, I know what you’re thinking. The Chinese government can just intervene with massive fiscal stimulus, right? Yeah, they can. But that simply increases the already massive debt burden, kicking the proverbial can down the road. But a bigger question, and maybe a better question is do they even want to? What are the ODS that President Xi just lets the system break down, knowing that most of the losses will actually fall on the US investors and Japanese banks? If President Xi takes the approach, the damage will not be confined to China.
In fact, it would quickly spread to Europe, Japan, and the United States. The damage in the US may be greater than the damage over in China. Sort of a strange kind of net benefit to China. Now, this comes at a time when the US. Europe and Japan are facing their own headwinds. We have a banking cris, reduced commercial lending, declining manufacturing, contracting, world trade. And this is despite consumers remaining somewhat strong, at least for the moment.
So a Chinese collapse would be a force multiplier that might throw the world into a global financial panic. In fact, as I said, China’s facing the new financial crisis that may make the others look small. And as I said at the intro, it involves the collapse of a shadow bank called Zhang International Trust. Now, Zongdong is not a pure play property developer like evergrande was, nor is it a bank.
Instead, it’s what we call a shadow bank. Now, with some property development activities, but many other investment types of schemes as well. Now, for years, Zhang grung relied on its reputation as one of the top financial groups in China. Yet it’s now been revealed that assets taken in as wealth management products were just transferred to corporate headquarters and used for various speculations not connected to any specific wealth management goals.
Now, in this respect, Zongrong resembles, as I said, this notorious FTX crypto fraud in which they took billions of dollars of customer funds and then diverted them to their own type of speculation and spent all the money. Now, above all, Zongrong is non, transparent and very lightly regulated, which has resulted in a complete lack of accountability. As the firm fails, it’s become impossible for regulators to respond appropriately, since they really have no idea what’s going on inside the company.
Chinese authorities have established a task force to study possible contagion. Of course, the contagion has already started, which shows how behind the curve regulators are. Now, I can’t say with certainty how large the losses from Zhang Rong will be, although a total loss of up to 500 billion could be on the books, taking into account shareholder equity, wealth management products, and direct accounts. Now, could President Xi and the CCP decide to let it collapse.
If so, Chinese stock markets could fall by as much as 50% or more as a result. But the damage could be even worse in the US. Europe and Japan. Now, this is one of at least a dozen Black Swan events that we can see on the horizon. The question is, will this come to our shore? And are you prepared? Let me know in the comments down below what you think about this potential pin prick of this everything bubble that we’re in.
And if you’re prepared in the comments down below, of course, as always, give me a thumbs up if you liked the video. If don’t, you can give me a thumbs down. That’s okay, but at least tell me why. And no, I wasn’t paid by China or the US. To make this video, as I’m sure you’re going to leave in the comments down below. It’s ridiculous. That’s what I got today.
To your success. I’m out. .
Author
