Chinese population has declined for the first time in decades. It is a big deal because it marks the end of this era of rapid growth and of cheap labor. China's ghost cities, or residential buildings without tenants or construction that never finished, have become visual metaphors for the ongoing crisis. Demand disappeared. There was lack of trust among buyers, and that's ultimately what led to a decline in demand and therefore the downward adjustment of prices as well. Since the end of 2022, China's urban youth unemployment rate has risen to 21%. This is the age category from people 16 to 24, about 96 million people, the statistics bureau said. 6 million of those are still looking for jobs. The second largest economy in the world is in trouble. China is facing a growing list of problems real estate, semiconductor bans and labor market gyrations. The world's second most populous country also has a major youth unemployment problem. Really quite disconcerting was the youth unemployment figure. It hit a fresh record of 20.8% for May. That's up from 20.4% the prior month. This is the age category from people 16 to 24, about 96 million people, the statistics bureau said. 6 million of those are still looking for jobs. Since the end of 2022, China's urban youth unemployment rate has risen to 21%. The issue was getting so much attention that China decided to stop publishing the data altogether. China's youth employment rate now ranks with several G7 countries that have notorious problems with getting younger workers into the labor market, like Spain and Italy. India, the world's most populated country, has also been dealing with a youth employment problem. But China has prided itself on putting its hundreds of millions of younger, well-educated citizens to work, and the most recent data set a record for the highest youth unemployment rate ever in China. Experts point to several reasons for the slow pace of hiring for recent graduates, and China's youth. At a labor market transformation could have impacted the recent youth unemployment rate in China, and also the way the Chinese government has been regulating some of the sectors that I studied, including the high tech sector, could have really serious impacts on the employment situation today. My understanding is there just aren't the same level of jobs that require a college degree. So there's this imbalance in terms of supply and demand, and then that that's made even worse because of the Covid and the entire economic slowdown. So what's happening in China? Why are younger workers not working? Because of the overall economic slowdown, businesses don't want to hire as many people, especially not young people, because you have to train them and you don't know if they'll stay around. You don't even know if your business is going to be around. China's economy, along with other parts of the world, is struggling to find growth. A lot of Chinese wealth is tied to real estate, and as the housing sector grew and grew in the late 20th and early 21st centuries, homeowners saw a big increase in their net worth. That all reversed during China's zero Covid policy, investment in real estate began to plummet from 8.3% year over year growth in 2018 to a sharp decline of 8.4% in 2022. Policies from Beijing forced property developers like Evergrande to default on their debts and eventually file for bankruptcy. Shares of Guangdong based Evergrande began trading again on August 28th after a 17 month halt. The stock plummeted 78% in the day. Consumer confidence has been declining since the beginning of the year because people realize that the post-Covid recovery isn't as strong as many of them had hoped for. One area of particular weakness is the service sector. Investment actually completed by the tertiary industry, what China's National Bureau of Statistics calls the service industry, has tapered off in the last six months compared to a year ago. Even imports and exports to and from the country are down in most sectors, including a 23% drop in exports to the United States and a 21% drop in exports to the European Union in July compared to last year, all while imports of crude oil dropped 21% in July from a year ago. Just a year to date, the country's imports have fallen 7.6% from last year. Some of the problems in China may be deflationary, but, you know, if China is experiencing deflation, that doesn't change the fact that consumers aren't really spending, consumers aren't spending in China. And they're not spending abroad either. As a result of pressures on the economy and limited spending, the Chinese government decided to cut interest rates in a very different move than the rest of the developed world. For Chinese government, it really wants to contain any of the market volatility, especially during the economic downturn. And from the beginning of this year, there were a lot of speculations in the market over any big change in the macroeconomic data. So it's in a way becoming the self-fulfilling prophecy because the government is so worried that there might be too much attention for certain type of data, then they do not wish to disclose too much of it. And as a result, there are more speculation and more fear in the market. A lot of the young people right now, their parents lived through China's big economic boom in the last couple of decades. So a lot of the parents have made a lot of money. And, you know, the kids, even if they're not fully employed or employed at all, it doesn't mean that they're financially affected. They might still be living very comfortable lives just because of how affluent their families have become. One study, conducted by a Yale University researcher determined just how much household wealth increased between 2010 and 2012, in China. The data showed between those two years, housing assets grew 51% in value. And then what happens in China was in the last 10, 15 years, the housing market skyrocketed. And then the value of the, say, second, first tier cities property, especially first tier city. My experience research mostly in Shanghai. It went sixfold. Tenfold. That's how people are sitting on this wealth. And these are those young people's parents generation. And in the U.S. we talk about, oh, the baby boomers. They got everything. China's overall urban unemployment rate has remained relatively steady all year, hovering around 5.2%. The 25 to 59 year old population has seen steady employment as well, with that number hovering around 4% since March. That's leading some to call younger demographic groups, quote, professional children, even. If they're not fully employed or employed at all. It doesn't mean that they're financially affected. They might still be living very comfortable lives just because of how affluent their families have become. And so that also contributes to hey, maybe I can just take some time off and lie flat. I don't think young people are buying it because they were not lazy. Like I said, they study really hard, they compete really hard, and then they are competing for jobs like hundreds of people applying for one position. I recently heard another way to characterize the situation in doing sit ups. It's sort of expressing this idea that whatever sector you try to make your way in, whether it's coffee or real estate or tourism, it's extremely competitive because everyone's trying to get their slice of the same pie. So if you're doing sit ups, you're taking breaks between lying flat and also participating in this intense rat race. One way this sitting up phenomenon has played out is via the country's national civil service exam in March 2023, more than 7.7 million people took the civil service exam in China, the first step toward getting a government job. Thing is, there were only 200,000 open civil service positions. Certainly the internet platform companies like Alibaba, Tencent, they also saw massive growth in the last two decades that had driven significant demand for young people as well, and with different regulations in the last couple of years, we've seen that these industries have been clamped down on by by the government or at least restricted in a way that, you know, they're not hiring necessarily at the pace they used to, if not laying off jobs. China's policy towards some of its largest technology companies took a significant shift during Covid 19, when Xi Jinping began his third terms in office in 2020, regulators suspended what would have been at the time the world's largest IPO on record from Alibaba's Ant Group on Shanghai and Hong Kong exchanges, due to, "significant issues such as the changes in the financial technology regulatory environment." So before 2015 is the continuing growth of wage across different sectors, including labor intensive manufacturing like labor intensive or services. But the situation began to change in the mid 2010s. So basically the job moved from the manufacturing sector to the low skilled service sector. But the problem is that the low skill service sector don't really solve the problem because they generated very bad jobs. Chinese President Xi Jinping has urged the youth to eat bitterness, a more traditional Chinese phrase which means to persevere through hardship without complaint or even to suffer. China's policy focus has been more and more on the long term, and that's why we have seen a lot of stress on economic security. And that means way more investment into the kind of technology that will be meaningful in the long term, but not so much for the short term. Artificial intelligence will be one of such example. Just by putting more money into AI, it has a potential to replace even more workers, especially young workers, in the near future. So it's not necessarily good for job creation, but it's very important for China's long term growth. On the other hand, though, it actually does look like the economic malaise that China is experiencing may be contributing to its apparently increasing willingness to come to the table and engage in diplomatic exchanges with the United States. You look at their import numbers, you look at their export numbers all again, read negative. And we invest in other parts of Asia, Australia, South Korea, Japan. But at this point, I think it's prudent for folks like us and your viewers to start to rethink how they're going to deploy capital in China. Many young people used to graduate and maybe go into real estate education, after school tutoring, internet technology companies, coding jobs, even government positions. And those are really not necessarily where the future of China is going to be heavily focused on. The Chinese youth, for they tend to pursue graduate degrees as a strategy to deal with labor market difficulty. So the problem is that they are becoming more and more educated. But the problem is that you just delaying postponing the problems, but you are not solving the problem. You are getting more and more degree that don't really give you any return. China has always been known for its massive population size. It's home to 1.41 billion people. That means nearly one out of every five human beings on Earth lives in China. But now that number is shrinking. For the first time since 1961. China's population has declined for the first time in more than 60 years. According to numbers released Tuesday by China's National Bureau of Statistics, the population in 2022 was just over 1.4 billion, a drop of 850,000 from a year prior. So the recent news that Chinese population has declined for the first time in decades, in many ways is a big deal because it marks the end of this era of rapid growth and of cheap labor. If the labor costs in China are no longer cheaper than other countries, China will lose its comparative advantage in manufacturing goods for the rest of the world. Consequently, the prices of your iPhones, the prices of your cars, and many of these things are going to rise. And so the global consumer is going to feel what's happening. So what's happening in the bedrooms in China is actually affecting what's happening in the rest of the world. China has been implemented this one child policy for 35 years, from 1980 to 2015. The reason for this is back in 1980, the Chinese government observed or predicted that in the future, China's population growth rate will be so high, and then there will be the famine problem. Then the agricultural production will not meet the people's wants and needs. Many couples therefore chose to only have a son when restricted to just a one child household. So consequently, after 30 something years, what you do have is a huge situation of missing women and surplus bachelors. Something like 30 million surplus men who cannot find brides. That obviously has a lot of consequences for how do you make future babies for China, right? No women. That's a big problem. It costs the population to become too male, too old, and too few. Reasons why the younger generation decided not to respond to the policy changes. Number one is the sheer cost of living. Just an ordinary city, if you buy a property, you're looking at 30 years of commitment to pay off your mortgage. So this is a huge burden. In rural China, things are slightly different because housing is cheap. However, education is a problem, and if you want to send your kids to secondary schools or universities, you must leave your village. You can imagine then boarding costs all the fees. This all build up. Although the government relaxed this one child policy to even three child policy. But still we did not observe much effect out of it. One reason is Covid recently, especially for the year 2022, because 2022 was China still implemented, this very stringent zero Covid policy. So most of the people live in a very, extremely inconvenient life, and many people got laid off because of this long time no show at work. That's why the birth rate in the year 2022 is very low. So from the domestic perspective, the real estate market, which was booming for the last 30 years, your first generation of homeowners coming in is now stalled, partly as a result of Covid, but also partly as a result of a housing crisis, and also partly because of the population growth slowing down. That's a long term economic outlook that it's not helpful. Aging is catching up in China. It actually affects the quality of population and they are not as productive as young generation. The aging population can make the government spend a lot of money on the welfare expenditure. They pay more money for the Social Security, Medicaid, Medicare and etc. and also population shrinks. That means tax payers shrinks. So lower amount of tax payers indicate a lower tax revenue and then higher government expenditure. So the government budget deficit will be the result. Especially the last 25 years, China has embedded itself into global supply chains. And so we felt that very acutely out of the Covid pandemic, particularly as vaccines were rolled out and consumer spending boomed, there were bottlenecks at ports, there were semiconductor chip shortages as inputs to automobiles. And so the integrated success of globalization has now become a threat to the resilience of global supply chains. Now, China. Had for a long time been a manufacturing-based economy. So the source of cheap labor was very helpful to grow. And that's why very many of the world's factories relocated there. That's why it became the world's manufacturing floor. That's why your iPhones and your your cars and your solar panels are all made in China. And that's why we've all paid relatively cheaper costs for it. Unlimited supply of cheap labor from rural China is the engine of China's exports. Now, if you switch that off, China's cheap labor-based manufacturers will soon kind of decline. And this will cause some kind of famine in goods. Certain things you can get very cheaply, not anymore. Cheap goods made in China. That party's over. India is poised to dominate the global economy for the rest of this century. Why? Because its population will overtake China this year, in 2023, and in the next few years, its working age population will become the largest in the world. Now, India still has demographics so that it will continue to grow and add population in the subsequent decades. Indians are young. The average age is under 30. It's really a vibrant, young, educated workforce. I won't be surprised in the next decade. India will be the workshop of the world. Population is only going to be one dimension of this. We have to think about infrastructure, about gender roles, gender equality, about the nature of the economy. And in that sense, of course, there are still fundamental differences between China and India. And I think in many ways, India still has a lot of ground to gain. Just because you have plenty of young workers doesn't mean you have the roads, or the factories, or the financing or the logistics to take advantage of all those things and really make it come together. So yeah, that's not that expectation at all. This population decline in this process of aging is almost irreversible. We can try to slow it down a little bit through increasing fertility rates, but that's not really the solution to anything, because of course, babies don't work, babies don't pay tax. And so we need to do is tackle some of the challenges of today. And that will require things like reforming the pension system, making sure that their health and social welfare systems are more adequate, but then also ensuring that China can do more with a smaller population involve increasing productivity, maybe reforming the education system, and so on. Suppose if the labor supply reaches a critically low point, the Chinese government might consider importing cheaper labors from other countries to lower the cost of production and to maintain its comparative advantage of its domestic products. And this will bring about even more benefits to other countries with cheaper labor. Foreign companies, foreign governments are aware that things are going in one direction in China at the moment. A lot of companies are going to rethink their whole business model, whether they would place any manufacturing or resourcing outside of China, whether they would be looking at other sources of consumption growth. The damage has been done. Nothing you can do about it. You just have to to minimize the damage in the future. China's real estate industry is collapsing in slow motion. These ghost cities or residential buildings without tenants or construction that never finished, have become visual metaphors for the ongoing crisis. That kind of really undermined the confidence among home buyers, because they were now worried that developers might not deliver the apartment that they had put a down payment on for. And so you then got essentially a confidence crisis among consumers who weren't able to trust developers to deliver the department they had paid for, at least in part. And so demand disappeared. There was lack of trust among buyers. And that's ultimately what led to a decline in demand and therefore the downward adjustment of prices as well. One of the issues for the property sector has been its rapid expansion. And in China's financial world, there haven't been as many regulatory constraints as you might have seen in other parts of the world that are more developed. The total value of commercial real estate sales from things like offices and shopping centers skyrocketed in February 2021, with the month over month increase of 133%. That same value on those sales has now fallen negative to -1.5% from July to August of this year. Part of the problem this summer, in late July and early August, was that the pace of the sales decline was accelerating. While you had Country Garden run into these default worries. From Evergrande's default and eventual bankruptcy filing to Country Garden's debt restructuring, ripple effects are making waves throughout the entire economy and the Chinese stock market. The Hang Seng Mainland Properties Index illustrates this tough time rather clearly, a steep decline since the sector's peak in January 2020. This all comes as China's overall economy struggles with its post-Covid recovery. Wall Street analysts are now cutting their forecasts for China. Barclays, for example, cut its estimate for China's 2023 GDP from an astronomical 9% to 4.5%. Official Chinese statistics state the real estate sector only accounts for 6% to 7% of the country's overall GDP, but estimates from economists like Ken Rogoff suggest all real estate inputs and supply chains make up a whopping 30% of China's overall GDP. So what's going on with China's housing sector, and does it mean trouble for the U.S. and the global economy? Back in 2014, the country's sizzling housing market began to cool, with fewer sales, falling prices and slowing development. Compared with the situation back in 2014. The situation is quite different because back in 2014, we don't have this kind of issues of developers. At the time we just had a slowdown, not a huge wave of default of private developers, and we don't have a huge group of austerity households which already have a high leverage, lower-income expectation. This time around, developers began to look to offshore international debt markets and local governments to finance new projects, anticipating continued growth. They really saw huge growth in the last two decades, and part of that was because they could buy land from local governments and then sell those properties that they built on the land to people in China. And there was a lot of financing involved with that. As these companies began to grow and grow with no constriction in sight, that's when several auditors parted ways with the big real estate companies in China, sparking fears of underlying concerns. It's a result of very deliberate policy by the government to prick the property bubble that was forming over the last decade or so, so the government stepped in and essentially curbed financing to developers, tightened the screw and household borrowing, for example, in order to rein in property prices. But in some sense, they got a bit more than they bargained for, because now we are here about a year and a half later and the property market is actually quite depressed. Evergrande is one of the notable property developers that defaulted on its offshore debt payments in late 2021, meaning it failed to repay bills and even miss the grace period window to repay. Country Garden was another of the privately-owned Chinese property developers to catch investors' attention after signaling pressure on their ability to pay down debt. On October 18th, the company missed a $15 million payment. The company now rests with $11 billion in offshore bonds, and even mentioned it expects to be unable to meet all of its off shore debt obligations. So one strategy the government adopted in order to rein in the frothy housing market was really to curb the financing access of developers. Developers would borrow money in the market, would then build apartments and sell these to consumers. And so by essentially cutting off developers from funding or at least restricting their access to funding, developers suddenly realized they don't have enough money to actually complete the projects they're working on. In total, 26 property developers encountered distress events in 2022, according to S&P Global Ratings. S&P Global Ratings counts distressed events as those where the developer reportedly restructured or outright failed to pay any of its offshore or domestic obligations. However, these defaults subsided in 2023 as several of these companies were able to push back their maturities to late 2024. China's shrinking real estate sector over the coming years really have a huge impact on heavy industry, on the commodity markets globally, because there's going to be less steel demand, there's going to be less cement being used, less glass, for example, that impacts within China, heavy industrial areas that really produce these raw materials. And so that's not something that will grow very fast. And therefore, China in some sense has its own rust belt in the northeast, a term we're familiar with from the U.S.S, for example, where as the economy shifted away to different sectors, you left behind with kind of empty factories and kind of declining employment, and China has the equivalent. All of this is spilling over into the global economy. The International Monetary Fund just cut its global growth forecast for 2024, and called out China's real estate crisis as a big reason why, in addition to citing rising inflation and interest rates, the IMF described China's real estate crisis as a major problem facing policymakers going into 2024. The IMF said diminished consumer confidence and investment in China posed a "significant risk for the global economy. Since real estate was one of the biggest parts of China's economy, real estate developers were growing significantly. I mean, it made a lot of investment sense at one point to buy these bonds, but that growth and that reliance on debt obviously proves unsustainable. I mean, it's something that people have warned about on China's economy for decades. And at some point, the government has started to think about how they could reduce the level of debt in their system. This led to the central government's decision to institute a three red lines rule for property developers. This rule puts a cap on the ratios of debt to cash, debt to assets, and debt to equity that these companies can hold. From anecdotes that I've heard, this policy was implemented pretty stringently in that everyone was so scared of giving any financing to the real estate developers that they were almost, it sounded like, cut off. This three red lines policy was so steep it doubled China's default rate to 4.4% in 2021. Then the following year, it doubled again to 8.2%, according to S&P Global Ratings. I think China's government would try to let those private developers to negotiate with creditors and to get those things done, to try to stabilize it, instead of trying to leverage on central government to bail them out. Fast forward to just a couple months ago, the central bank and government officials moved to boost home sales by lowering the minimum down payment for first-time home buyers to 20%, and 30% for second-time purchasers. Officials also began encouraging lenders to lower rates on existing mortgages, all in an effort to boost property sales. All these are really aimed at juicing home sales, raising demand for apartments. And on both of these strategies, the government has only been partially successful so far. We're still early days, but we're not really yet seeing a V-shaped recovery in housing demand. It's really been a bit of a slog in recent months to get consumer confidence back into the market and stabilize home demand. But there's a key difference between private sector developers and state-owned developers. The private sector developers really funded themselves a little bit more out of the international market. That is, they went to global investors and issued bonds to fund their expansion, whereas the state-led developers really funded themselves more domestically. This exact phenomenon played out in 2021 and 2022, as the privately owned enterprises or developers default amount surged 35.4 billion, while their state owned counterparts fell to 190 million. In a very rapid difference. It's not to say that state-led developers are entirely off the hook. They too have faced, of course, increasing pressures due to declining demand. And they, too, are facing it, facing a more difficult time to raise funding, although not quite on the par of what private sector developers experience over the past 18 months or so. The amount in offshore defaults for China's property sector soared to a record rate in the last ten years, from 4 billion in defaults in 2015 to $54 billion in 2022. And the rate at which companies defaulted tripled, according to the S&P Global Ratings. You see that bifurcation in how the property developers are doing. Like, for example, again, Evergrande, they were more exposed to the lower tier cities and not as much to the higher tier cities. It's pretty similar to, let's say, the United States. New York's property market will almost always hold its value. It might go down, but after the pandemic, it comes back and more expensive than ever. It's just because more people are always going to the large cities for the job opportunities, and also the education and health care services that they can get in the large cities. Cities and localities in China differ in their policy responses to the struggling property sector. For example, China's central authorities announced that city-level governments could decide on their own the eligibility criteria for first-time home buyers. These kind of policies differ based on where you are in China. As of now, only Shanghai is still maintaining its momentum, while for other tier three city, or tier two or even tier one city already slowed the momentum. So that means that the effectiveness of this policy is quite different. And maybe it's just it's just not going to be that kind of boom that we, booming economy, booming growth that we've seen in the last couple decades. Also, people have expected you know, China's growth overall is going to slow. But does that mean it's going to collapse and fall into a deep recession? I think there's a lot of space in between that scenario and what's happening right now. I think no one right now would expect, like the property market will immediately stabilize. I think the market has a better understanding of that the property market may not stabilize that soon. I think the key question back to when it will start to stabilize or when it will bottom out. I think that's something that people are debating. As I mentioned, Like I may be a little bit bearish. Like I don't think the situation will stabilize in 2024 due to supply issues. It's important to recognize that there is a longer-term challenge here, and that is we essentially have too large a construction sector in China. We have two large a real estate sector because underlying demand for apartments is declining. We have slowing slowing urbanization, declining demographics, that its population is aging. We've already rebuilt most of the Chinese housing stock to modern standards of the last two decades. And so China going forward doesn't need the amount of construction activity, the size of these developers, the overall real estate activity, because there's just structurally declining demand. And it's just that there's some times we just don't have enough information, which is the scary part in of itself. And that's been China's problem, this lack of transparency. But with the data we have, some people are pointing to China's past track record on economic policy. It's just more I think what we don't know. But there are growing uncertainties.