Why China Can’t Fix the Real Estate Ponzi Scheme
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So that stimulus is not going well. Wait, what stimulus? Well, so last year, China, you know, there's this big announcement about stimulus and they poured something like the equivalent of $780 billion worth of stimulus into the Chinese real estate market. The idea was to fix all the problems and China's real estate market would be healthy again after many years of...

You know a bunch of different sort of crisis seismic crises the Evergrande one being probably the biggest Basically the collapse of that real estate market So the solution to state intervention in the economy was just more state intervention to the yeah well the idea is that you know, there's a lot of developments that were unfinished and so if you if you pour money into those developments that are unfinished and then they can get finished and

then you heal those things. Are those ones that were already paid for or not? Well, the problem is that a lot of these developers, they would promise to build a project. They would pre-sell the units to Chinese citizens. And that money would supposedly be used to build the developments. And on top of that, those companies were getting bank loans from

to build. But there had been so much overpromising

And this is the case with Evergrande as well as others, that the developers were using the money that Chinese people were paying that they thought was, oh, my $100,000 I'm paying for this condo is to build the building that my condo is in. But in fact, Evergrande was using it to finish construction projects that had been promised previously to other people in other developments, right?

That they still didn't have the money to complete so it was basically a Ponzi scheme where it was a Ponzi scheme Yeah, and then you had like Chinese people who had bought a house that does not exist and they were paying mortgage rights for it so

And then, you know, well, what do you do? If you're not living in the place, you just walk away from it. You put down your down payment and you've paid some of the mortgage payments, but then eventually you realize like this is never happening. So you just walk away. And then this becomes a crisis because it lowers the value of all the properties if lots of people are walking away, right? Because it tells the market,

that there's weak demand, prices fall. And when prices fall, then developers can't sell new units or can't sell them for as much and therefore can't afford to finish the developments they're already working on. I mean, there's a lot of problems with Chinese real estate. Like it's not actually a good investment in China because even if you own an apartment, the market is so screwed up, like you can't actually really sell it easily.

Right. It's not liquid, I guess. So, yeah, there's very little turnover. So in the U.S., if you own a unit and you price it, you know, according to the market, you should be able to sell it within a year easily, often within a few months. But in China, you just may not be able to find a buyer at all.

I mean, essentially, real estate was used as a place for people to park their money. Right. It was the only way outside the stock market. It was like the only way that the middle class of China could invest. Yeah. And then, unfortunately, that also spooled out to real estate companies starting to

make their own unregulated financial products. - Yeah. - So then you had real estate companies then creating things that you could invest in, right?

Right. It was where they promised you. Now you're not even buying an apartment or anything. You're buying something the equivalent of like a share in a development that you don't actually get a piece of. And then you're they're promising like 20 percent returns, like something 15 percent returns. Yes. Crazy. Someone promising 15 percent returns. That shouldn't be a red flag of any kind. Well, they're full of red flags in China.

Oh, you got a little bit of coffee. You know, I have some seed oil that could probably fix that right up. Yeah, so buy some but I will GDP it's like was it a third of the GD Real estate was about a third of the GDP right something like that is big it's junk Yeah, so so that's a huge problem and I don't know I want to get back to the stimulus. Yeah, so in 2024 they've poured an enormous amount of money

into the stimulus, but the problem is it's not working. And I have some notes about this, which I wanted to just, yeah. So basically the housing completions, which is the number of new units that have been completed, you know, and can be used. Housing completions in 2024 fell by 27% from the previous year.

So that's an enormous dip. That means that despite all the stimulus, units just weren't being completed. And on top of that, total developer financing declined 17% year on year. So that's the amount of money- You gotta provide context for these numbers, because remember, I was spelling boobies on my calculator in math school. Yeah, okay. In math school. So the development financing is basically like how much money these developers are getting from the banks, right?

and other sources, but mostly probably from banks to get financing to complete these things. 'Cause the way the stimulus works is it's typically not a handout from the central government. It's the central government telling banks, including local banks to make these loans and the government backs the loans or the government buys the loans the way that in the US you have Fannie Mae and Freddie Mac guaranteeing loans.

So basically, the central government's pouring hundreds of billions of dollars into this, telling the banks to go make these loans. But the developers are – they're –

even when they're taking the money, they're often not using that money to finish the projects they promised to finish. They're using it to, to like make like back pay for people who haven't been paid in like two years or they're using it for other things. And it's not actually finishing the units. And so like you'd have to,

you'd have to provide incredible increase in that amount of stimulus in order to just finish the things that have been promised. But I don't see how that can happen because not only would you need an enormous amount more stimulus, but there's also no guarantee that that's gonna even get the, like if the stimulus isn't working now, it's not gonna work if you increase it because there's so much corruption in that system.

I just don't see how doing more of the same thing is going to change the result. I think some of the problems with the stimulus is the banks are wary of lending to some of the most troubled property developers. Right, as they should be. Which they should be. But then you can't really shore up the weakest parts of the industry, right? Like if the property developers that are having the most trouble completing the

their projects are not getting money because they're the biggest risk, then you're not really helping. Fortunately, the banks have to listen to the government. Well, no, I mean, the government is, there's some strict requirements for what kind of

like developers that the banks can lend to like the the developers can't have any like outstanding like huge legal issues or They can't be like having that escrow problem where they have you know, I am completed stuff that they still haven't paid for and so then if you say you can't lend to places like that then essentially what's

the people who have been getting the stimulus money have been state-owned companies right so it's the state paying itself right or loaning money to itself but the state-owned companies are the most stable right already so so but basically it's a whole racket too because people individuals who are connected with the government at various levels are the ones who are getting the stimulus money

- The private firms can't get the money, essentially. - Right, and so it also means that like your average Chinese citizen who put their life savings into a condo that has not been built yet is not gonna get their money back and they're also not gonna get their condo because there's just like, and even if the government tried to just do that, there's no way to do that. There's no way to finance it because where's the central government getting money from? Anyway, it's from taxpayers, right?

largely. So like, there's just not gonna be enough money in that system to reimburse people. So at the end of the day, the average Chinese middle-class person is gonna lose. There's just no way they're gonna win against this massive corrupt system that has cheated them out of their money, that has cheated them out of their housing, and that is so corrupt at its core that even a government stimulus package

aimed probably to resolve it so that people don't protest, is just not going to get the money into the right hands.

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