How does it compare the US collapse in 08? How do the causes& impacts compare?
In: Economics
USA: Because of relaxed laws, banks started giving out a lot more loans for people to buy houses, sometimes even to people that might not be able to pay back those loans. Instead of collecting on the debt themselves, they would sell off the right to collect that debt at a fixed, discounted price, which finance and investment companies would buy as an investment. When interest rates started going up, and people started being unable to pay their debt, lots of loans failed, leading to large companies losing lots of money, people losing homes, and homes selling for less than the value of homes, and having an effect across the economy. A number of major banks fail, others need to be bailed out by the government, and banks no longer able to give out loans reduces the amount of money in the economy, affecting businesses which need to borrow money, while at the same time housing prices fall. This causes a major slowdown in the economy as less money means less businesses hiring means less jobs means less people buying things means businesses make less money.
China: For a long time, a big part of the economy was driven by housing construction, fueled by cheap loans from state-owned banks. Companies would borrow money cheaply, buy land from local or provincial governments, and build lots of housing that they would sell to Chinese citizens. Chinese didn’t have many investment opportunities, but they saw buying houses as a good investment, because housing prices keep going up over time, right? For a long time, this was good, provinces got paid, lots of workers got employed, this drove a lot of jobs, construction companies made a lot of money, the economy grew, and the majority of Chinese families could own a home.
The Chinese (central) government started to notice that the amount of money borrowed was reaching very worrying amounts, and that there was far more construction than reasonable. Developers were sometimes selling properties that they hadn’t even built yet, and were planning to build with borrowed money. The government worried that if it reached a tipping point where it became unsustainable to keep growing, it would all collapse at once and cause an economic crisis. At the same time, the government would rather state-owned banks start lending money to what it considers to be more vital industries aligned to national goals, such as green energy, electric vehicles, and semiconductor manufacturing. The government thinks it’s better to have the popping an economic bubble before it gets too big and would have caused a worse crisis if it was left uncontrolled and left to collapse on its own.
So the Chinese government started putting into place more and more restrictive measures (called “The Five Red Lines”) that started tightening the regulations around lending to housing developers. This started slowing down housing development, and increasing restrictions eventually pushed some of the biggest property developers into bankruptcy, and this in turn led to a slowdown in economic growth since the real estate construction sector was a huge part of the economy. Failure of major construction companies means that people who spent their life savings buying a house that hasn’t been built yet lost all their money, lots of construction jobs stop, and those companies stop buying raw materials like steel, concrete, lumber, and other stuff which also creates lots of jobs. This slows down the economy.
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