China overtakes US to become wealthiest country in the world

China overtakes US to become wealthiest country in the world

China has become wealthiest country in the world.

You heard that correctly.

As per many reports, China has overtaken America to become the World's Richest Country.

You'd think this is something to celebrate for the Chinese government and the Chinese people.

But at the same time, many economic experts point out that China may soon fall into a significant financial crisis.

How did this happen?

And what is this looming economic crisis?

"China has surpassed the United States. To become the wealthiest nation in the entire world. As the global wealth has tripled over the past two decades."

"The collapse of the Chinese property giant, Evergrande, unfolds. The shares of the highly indebted company have fallen 80% this year. Analysts fear that the crisis could spread throughout China's property sector."

"Housing cheapness in China right now is among the worst in the world."

"The problems in China could lead to a 'sudden correction of real estate prices.'"

Firstly, what does it mean to be the wealthiest country?

Friends, you can understand it as 'wealth.'

How do you measure how wealthy a person is?

By evaluating the landholdings of the person, the total value of his properties, the businesses he owns, and the machinery in the companies, the full value of all these is used to calculate the person's real wealth.

This is different from the GDP. You can understand GDP to be the equivalent of a person's annual income.

A country's GDP is the entire value of goods sold in a country in a year. And the value of goods as well as services.

The total market value of all goods and services in a country.

And the GDP can be divided into three main sectors.

When we talk about the GDP, we need to account for the country's population.

Suppose a family earns ₹1,000 per month, and there are two children in the family.

And there's a family earning ₹2,000 per month, but there are ten children in the family.

If the same amount of money is distributed among many people, they will get less per person.

So even though a country's GDP may be high, if the country has a high population, then it isn't admirable.

That's why we calculate the GDP Per Capita, that's mainly the GDP per person.

China has become wealthiest country in the world in terms of wealth. If you add up the wealth of every person in China's population, then it is the wealthiest country in the world.

But if we talk about GDP per capita, China doesn't stand anywhere near the top. If you look at the 2020 GDP Per Capita rank, China was at the 63rd rank.

And the USA was in the 5th position. Even if we talk about overall GDP, the USA is much ahead as the #1 country globally in terms of overall GDP.

At approximately $21 trillion, China comes in second place, at around $15 trillion.

And at present, India is a $3 trillion economy. Despite lagging in both cases, China has overtaken the USA.

In terms of overall national wealth as per McKinsey Report was compiled after analyzing the National Balance sheets of 10 countries.

Some other findings of this report Revealed that the global wealth has tripled in the last two decades.

From $156 trillion to now at $514 trillion.

Exponential growth was seen in China's wealth.

In 2000, about 20 years ago, China's wealth was $7 trillion.

And today, it has become $120 trillion.

An increase of 17 times, During the same period, the total wealth of the USA increased 2x.

Today it is at $90 trillion.

This is the comparison of the overall wealth.

China overtakes US to become wealthiest country in the world 1unsplash image

Read More: World Hardest Lockdown in China

Currently, China is at $120 trillion and the USA at $90 trillion.

You might start to wonder. In the year 2000, the USA was more prosperous than China.

And every year, the annual GDP of the USA has been more than China's. So how did China become more prosperous than the USA?

Even though the USA's GDP has been higher.

The answer to it is exciting.

The GDP growth can be because of many things. Useless things.

Can you imagine a country where people consume many junk food, cold drinks, and burgers?

And the GDP of the country increases because of these.

And after a person consumes so much junk food and becomes unhealthy, he may need to go to the hospital.

He'll get a taxi to go to the hospital.

He'll get treatment in the hospital, and after his treatment, he'll get another taxi to call home.

In the entire scenario, at every point, the country's GDP increases.

Eating junk food increases the GDP of the country.

Riding in a taxi is increasing the GDP of the country.

Even the hospital treatment is increasing the GDP of the country. Because money is exchanged at every point.

Money is being transferred.

But in this scenario, is there any overall increase in the person's wealth?

No.

There will be no total benefit.

Junk food is consumed.

The taxi ride is over.

And after the treatment, there's no more value.

Now compare this to a country where the GDP increases primarily because of constructing new buildings, building new highways, and new construction and new factories being set up.

In the second country, the wealth would also increase Because of increased wealth.

And frankly speaking, this is the difference between the USA and China.

If I have to base this on data and statistics, then look at the comparison between the USA and China.

The contribution of both countries' service sectors and industries to their GDP.

The service sector in China is at 54.5%, and the industries' contribution is at 37.8%.

On the other hand, the service sector of the USA contributes 77.3%.

And only 18.2% of the contribution is from the industries.

I explained this same difference with the example.

Eating junk food, using taxi services, and healthcare services are all services.

They come under the service sector.

And new construction comes under industries.

So the question arises that despite so much 'development.'

Why is China under so much scanner?

Why are experts saying that China may soon face an economic crisis?

To understand this, let's look at the total wealth of China.

Let's see its breakdown.

Globally, 35% of the wealth is in the form of land.

33% in houses and other buildings.

So about a total of 68% of wealth is from real estate.

But for China, this number is at 78%.

If you compare this pie chart with an individual's wealth

then there is nothing unusual here,
this does happen.

Most of a person's wealth is in the form of the property he holds.

His lands, his real estate.

So 60%-70% of a country's wealth in the form of real estate is not unusual.

But what happens when I tell you that you overestimated the value of your property?

You feel that the value of your property should be ₹100 million, but in reality, it is only ₹10 million. Since you aren't selling your house, you won't come to know about this.

When you go to sell it, you'll find out the actual value of your property.

The same thing is starting to happen in China.

A real-estate bubble is being formed in China.

About how bubbles are formed in the stock market.

It means that the actual price of something is low, but the speculative price of it is very high.

It begs the question, why did this happen in China?

The State Capitalism of the Chinese government plays a significant role in it.

The Chinese central government had set targets for the local governments.

For the minimum GDP growth rate in their regions.

So the local governments were under a lot of pressure.

Because it is a dictatorship in China.

The central government strictly sets the standards for performance.

Failing which, the officials lose their posts.

So the local government was under a lot of pressure to bring in a specific GDP growth rate, and they saw that the easiest way to do this is

By more and more buildings and constructions.

And thus inflating the real estate prices.

It was done to such an extent that the construction was so rapid that real estate made 29% of the contribution to the annual GDP of China.

For comparison, real estate's contribution is only 7% of India's annual GDP in India.

The ground reality is that the average citizen could not earn enough in China.

That could enable them to afford to live in these expensive apartments.

Due to this, we see Ghost Towns in China.

Many such apartments and buildings with no one to live in them because no one can afford to live in them.

More than 60 million apartments in China are sitting empty.

Houses with no one living in them.

If you assume that three people live in an apartment, on average, then houses were built for more than 200 million people in China.

More than 50 such towns, these small cities built in China, have been labeled Ghost Towns.

If the apartments are so expensive to live in, why don't the real estate companies lower the prices of the apartments?

So that people can afford to live in them.

The simple reason is that all the real estate companies had taken huge loans from banks. So that they could build these apartments and that these properties could be built.

And if they can't sell them at these prices, they wouldn't be able to repay the loans.

The companies would go into debt And will become bankrupt. This has started happening.

The overall debt of the real estate companies in China has reached $5 trillion.

After the 2008 crisis, the government had bailed-out the sinking companies.

There were even protests on the roads in the USA because of this.

It is exciting to see what the Chinese government did in the response.

Because the Chinese government is often proactive about these things.

So the Xi Jinping government carried out major regulatory crackdowns recently.

To reduce bad loans, they introduced Regulation 3 Red Lines.

Three new conditions have been put forth based on which the companies can now take loans.

For example, one of the conditions is that the company's net debt should not be more than the overall equity of the company.

In October, it was found that of the 30 biggest property companies in China, 20 the companies had crossed the Red Lines.

Apart from this, many big real estate companies are being forced by the government to repay their debt instantly.

And a new team has been formed in China to detect corruption
all the State-run Banks, National Financial Regulators, and the companies are being scrutinized to see a breakdown.

To see the level of corruption in each of them.

This is an exciting point,

Many people imagine that there is no corruption in a country with a dictatorship.

Because they assume that the dictator would severely punish corruption, but this isn't the case.

It is the countries with great democracy that faces lower levels of corruption than compared to dictatorships. Because in dictatorships, people are hesitant to question anything.

There are no independent agencies to check whether there is any corruption.

Many Whistleblowers are oppressed.

There are no reliable, independent media to scrutinize corrupt officials.

That's the reason why we see corruption in countries like China.

Today, the property rates in Shenzhen and Beijing are so high that they are more than 55 times the annual income of the average Chinese citizen.

Suppose your salary is ₹100,000 per month, and you earn ₹1.2 million annually.

The average price of the apartment then would be ₹66 million.

It will take 55 years' worth of your salary to afford an apartment in your city.

And the consequence of this crisis is that people are avoiding having children.

That's why the birth rate in China is falling rapidly.

China removed its one-child policy first.

And introduced the two-child policy.

And now, the two-child policy has also been repealed.

And a three-child policy has been introduced.

The government wants people to have more children.

So that the population doesn't dwindle.

This is because houses have become so expensive that people are wondering why they should have children when they can't afford to raise them well.

The rich people are buying more and more property to invest in That's driving up the prices.

And the inequality is increasing significantly.

It is something that is seen in not only China but also in the USA and India.

For the middle class and poor people, buying homes has become unaffordable.

And the rich people are buying 2 or 3 or 4 or 4 houses as investments.

The Chinese government has started a Common Prosperity Drive to counter this inequality.

In 2017, Xi Jinping famously said homes were for people to live in.

Under this, the government has proposed a new property tax in the next five years, that if people are buying homes to live in, it wouldn't be taxed.

But if someone buys subsequent houses as investments, then high property taxes would be levied on them.

So that real estate prices could get down to a moderate level.

And buying homes could become affordable for people.

According to China's 2008 data, about 70% of people buying homes were first-time buyers. As in, they were buying the homes to live in them.

But according to the 2018 data, only 11% were first-time buyers Almost 90% of people buy houses just as investments.

Many experts criticize the Chinese government's strategy, claiming that more companies would not be able to prosper because of them and the economic growth of the country will slow down. Time will tell how China deals with this crisis.

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