The two Ponzis will slow down the Chinese economy and curb its global influence. China will have to find a new economic model to grow.
Glitzy real estate and high profile BRI that were China’s shining beacons, are now debt-fuelled twin Ponzis. In their heydays, both were symbols of China’s growth, wealth and increasing influence in global affairs. As China registers its lowest and slowest growth in recent times (which might actually be in the contraction zone), both these Ponzi schemes threaten to pull it down further. A Ponzi scheme works as long as it is accelerating and its circle/chain is widening. The collapse starts when its input feed freezes. As long as China’s economy grew at an astronomical rate, it was all hunky dory. When the economy slowed, the incoming cash streams fell way short of the increasing arc of cash requirements to sustain these Ponzi schemes.
PROPERTY, THE FIRST PONZI
The property sector is about 30% of China’s GDP and a major driver of its economy. In China, owning a house is a symbol of prosperity, security and wealth. Every Chinese aspires to own a house(s). This resulted in a housing boom, with four players in the arena—the buyer, the developer, the local bank and the local government. In China, property is transacted on a pre-sale model. The buyer places a deposit with the developer, after taking a loan against his savings/estimated earnings from a bank. He begins paying a mortgage on a house that has…
