Name: Something is going deeply wrong inside China's economy
Uploaded: 2025-07-21T19:08:31.000Z
Duration: 13 min 5 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

Present continuous

Something strange is happening with Chinese economy.

The superlative

On one side, China is the fastest growing economy in the world, and it seems like China is about to overtake the United States and become the largest economy in the world.

Future simple

And some people are hoping that it will replace the dollar as the global reserve currency.

But on the other side, if you look at China's GDP or debt to GDP ratio, it doesn't make sense, it's around 88 percent, and that is way less than the United States debt to GDP ratio at about 120 percent.

China has been growing way faster than the United States.

It achieved in the last 30 years when it took the United States 250 years.

So it only makes sense that China will be filled of debt.

You cannot possibly make that kind of achievement without incurring a lot of debt.

So how is it possible that China did all of that without having a debt to GDP ratio that is significantly bigger than the United States?

But when you dig down into the Chinese economy, you will find out that not everything is as glamorous as it seems.

The debt to GDP ratio that we often talk about is the federal debt.

So you have an entire government, and you have the federal government, and then you have the state and the local governments.

The federal government is the main entity that governs the country.

So in the United States, for example, you have the federal government in Washington, and then you have different states.

And the states, just like the federal government, have the ability to raise China.

But when you look at local governments of China, you will realize that they have a debt ceiling.

The Chinese local governments have a debt ceiling that they cannot possibly surpass.

So if you borrowed a certain amount of money, then good luck, you cannot borrow more than that.

But what if the CCP government on the top of you had set targets at 7% GDP this year?

How are you supposed to achieve those targets if you don't have the means to do that, if you don't have the money to build the roads, the bridges, the schools that will inflate the GDP and will allow China to achieve the figures of 7 or 8% growth annually?

That's why they came up with a brilliant solution.

The local governments in China often create shell companies that they call them local government financial vehicles.

The entire purpose of these corporations isn't to build something different, but rather, because the local state cannot possibly borrow more than it's allowed and it has a debt ceiling, it will create that company to raise money.

So it will issue government bonds or I would say in this case, probably state bonds and will sell them to local banks.

So these corporations over here are raising money from the banks.

The banks will gladly loan them the money because the local government will provide the land that it has as a collateral.

So if you have the land as a collateral, then this loan that you have provided to the state or to this particular corporation that is being backed by the state is kind of guaranteed.

And because the local government or the local state is being backed by the federal government, you can assume safely that these corporations that are backed by the local state are also being backed by the federal government, which means that nobody is going to allow these corporations to go bankrupt, which makes these loans very safe and guaranteed by the government.

And that allowed the local governments to build massive projects all across the country, to build bridges, cities, roads, and everything else.

And every penny that the local government is spending is inflating GDP, which is allowing China to achieve this massive GDP growth.

But without borrowing that much money, the GDP wouldn't grow in the first place.

And because China is incentivized to inflate its GDP, sometimes or pretty often, those local governments are building projects that are not as profitable as they could possibly be.

You see, if you have one bridge and you build an entirely second bridge right beside it, it is going to inflate GDP growth.

But will it make citizens much more productive?

And if these projects are not profitable, they will come back haunting the local government.

You see, anytime that you borrow money to build anything, it must be profitable for it to make economic sense.

Because you have borrowed money to build this project from a bank, and the bank loaned you that money and expects you to pay back that money plus interest.

And if the bridge that you have built is not profitable, then how are you supposed to pay back the bank plus interest that it's incurring, which is going to put you in a very jeopardizing position.

And if you have done that on a massive scale, suddenly you will see yourself in a debt crisis.

China has built probably over a thousand bridges by now.

But are all of these bridges are making people profitable?

If you want to build something in the US or many European countries, it's not difficult, it's not easy to build that because you need to make sure that the bridge you're building or the road that you're building or infrastructure you're building, where you are going to spend 20-50 billion dollars to build it, it must pay off.

And you must present us with a very clear plan of when exactly it's going to pay off.

Yes, a lot of infrastructure products do not pay off instantly because infrastructure projects, especially, for example, the railway, will take 20-30, sometimes up to 50 years to pay back.

But you know that it will pay off if this project is going to increase the productivity of citizens by this much.

But if you don't have a clear plan and it doesn't seem that it will ever pay off, then it's a failed project.

In the short run, it is going to show that the GDP has grown because money was spent and the bridge was built or the train was built.

But in the long run, if you close down that railway, if you close down that subway station, if nobody is going to use that route, then you still must pay back the debt that you have borrowed to build that road, which means that might default on that debt because it was not a profitable project.

It's very difficult to estimate how much these companies have borrowed from the banks, but according to different estimates, it's something between 75 to 140% of the entire GDP.

And what makes it so difficult to find that out is because these corporations are private corporations, and they are not obligated by any law to publish their financial statements to the government, to the public, so we don't know, we can't simply take a look at their balance sheet and look at their liabilities and say, oh, look at that debt, they have this amount of debt.

But based on all the analysis that have been done by the independent researchers, it seems like it's anything between 75% to 140%.

If you take that and you add it up to the total federal debt that the government has, suddenly it's not as glamorous as it seems.

And the total national debt of China is way bigger than anybody expects.

This is the major problem that a lot of states in China has.

All the revenues, all the tax revenues that the states are generating from their taxpayers are being instantly directed into paying the interest payments on the debt that they have borrowed.

Imagine for a moment that all the taxes that you generate directly go into paying off the interest because you have borrowed so much money over the last 30 years.

But if you default on these debts, you will instantly create a domino effect that will be extremely difficult to stop.

The banks have loaned their money to their local government financial vehicle corporations.

These corporations are being backed directly by the state.

So if these corporations will default on their loan, then suddenly banks won't be receiving their interest.

In fact, the banks won't be receiving their loans back.

So these banks will be defaulting massively, which means that these corporations will start defaulting as well.

And all of this burden will be on the state.

When the state finds itself in a position where it can actually save both these corporations and the banks, it will rely on the government because it's accountable and it reports to the federal government, which means that the entire debt that all the states have accumulated will be on the shoulders of the government.

Which is why the real debt to GDP ratio of the government is anything between 220 to 300 percent, which makes it significantly worse than the debt to GDP ratio that the United States has.

Even if you account all the debt to GDP ratio that local states in the United States have, it won't come even close to China.

Because unlike China, the United States does not have these interesting schemes to raise money for the market.

So the states are very careful the way they raise their money, and they also have their different kind of rules.

But in China, even though you have the exact same system, they have actually created a loophole where the states can create corporations and then lease their land to these corporations that they can use as collateral to raise money from the banks.

If the infrastructure projects that these corporations have built are not profitable, they won't be able to pay the bank and if the banks will be defaulted because they are not getting their money back, it will come back haunting the state and if the state defaults, then it will be bailed out by the federal government anyways.

It reminds me a lot of the 2008 financial crisis, even though that it's slightly different, but the scheme is very very similar to everything that happened in the United States back in the early 2000s.

In the early 2000s, they used this system to build houses all across the So the banks provided the mortgages to everybody even if these mortgages were not profitable at all.

So they gave mortgages to everybody who would actually get them.

They created the mortgage-backed securities.

Now, the mortgage-backed securities were created by the banks and then sold to the investors.

When mortgage-backed securities defaulted because they were not profitable at all, the banks went bankrupt and the investors saw their valuations of their mortgage-backed plummet to zero.

And all of this scheme worked because everybody thought that house prices are going to continue rising.

And secondly, all these mortgage-backed securities are being guaranteed by the government because a lot of mortgages were guaranteed by the government.

So everything came back haunting the government which forced the government to print massive amounts of money and bail the entire market out which created massive inflation and devalued the one of the biggest bubbles in history.

Now, there are a lot of possibilities of what could possibly happen to China.

On the one side, it might actually turn into Japan 2.0 and put yourself in a deflationary environment.

You can think of it this way that China has maxed out its credit cards and it no longer can borrow money massively.

Secondly, because you maxed out your entire credit card, now you have to pay a lot of entries on that credit card.

So every penny that you earn must go directly into paying off the entries on that credit card, which limits your growth.

So all you do from now onwards is make money and pay the entries on that debt.

The only way to get out of this crisis is to ensure that all the infrastructure projects that you have built will become profitable, they will start paying off these corporations, these corporations will earn a lot of money for the local states, and the local states will be to pay off all the debts that they have actually incurred over the last 30 years.

Otherwise, it can turn into a domino effect and destroy the entire country and the entire economy.

The Chinese government is most likely aware of this crisis and they are trying to orchestrate a soft landing.

Yes, maybe the Chinese GDP will stop growing as fast as it did in the past, but if it doesn't crash, that is already great news for the Chinese economy.

First of all, it means that China is nowhere close to overtaking the United States.

Despite all the problems that the US is going through, despite all the debt problems that the United States is going through, China is a much worse financial position.

But regardless of what happens in China, it is going to impact the entire world, including the markets in the United States.