China Just Reached a Breaking Point

Nearly everybody who has clicked on this video will have at some point heard about the concept of China's stunning rise. This idea is everywhere. This is going to be China's century. The country is growing rapidly. Their economy specifically is growing rapidly. They are growing in technological prowess and power. And they are supposed to at some point surpass even the United States. Maybe perhaps they will even replace the United States in the global economic system.

As a young man growing up, I saw countless documentaries on this exact subject. And frankly, it terrified me. But I don't think nearly as many people have heard the updated facts, which is that at this point, many experts now agree that not only is China's rise over, but their decline has already begun. And right now is an extremely fascinating moment because several different global events that China has no control over are affecting China big time and they actually threaten to push China over the line to be the straw that breaks the camel's back.

There's of course the war in Ukraine and how that impacts China. There's also the trade war between the United States and China. And more recently, there is, of course, the war in Iran and the closure of the straight of Hormuz, which is very bad news for China in particular because they have a massive industrial-based economy and very little energy that they can actually get on their own on their own soil. China has actually never looked weaker, or at least in my lifetime, China has never looked weaker. But I think a lot of people are still catching up to this. And frankly, for a lot of people, this will be completely surprising to hear.

Now, there are so many different aspects to China's decline, and in this video, we'll touch on most of the major ones. But it's important to understand something at the forefront, which is that each of these factors would be crippling for China on their own. But it's much worse for China than that, because they are not facing these factors on their own. Instead, these factors are all coalescing all at the same time, making it harder for China to recover to each of the individual factors and just making the decline much faster overall. And on top of that, we now have the geopolitical situation which China almost certainly did not predict, at least not at this scale, not all of this, all at the same time. And that is just accelerating things even faster. And it's entirely possible that the decline of China could happen faster than even the most wo experts are predicting. The people who are the least optimistic for China might still be too optimistic. And if that sounds like something that could never happen, just look at what has happened to Russia since they started their war against Ukraine as one correlary. Think about where Russia existed in most people's mental space about 5 years ago. And think about how most people think of Russia today and how quickly they have declined and how thoroughly they have declined. It could actually be worse for China, especially if China is foolish enough to start a massive war like Russia did. Now, I don't know if they are, but that would certainly make things worse.

So, let's look at all these different factors, and we're going to try to be as quick as possible here. And to start, I just want to give you an overall picture of how bad things really are for China with a stat that I think most people will find easy to understand. And that stat has to do with China's debt. And we need to compare that to something. Most people watching this video will be from Western countries. And that means you will have heard about the magnitude of the US debt problem. This is talked about all the time. I myself have made several videos on this. It's not a secret. And a lot of people feel that that debt problem is unsolvable without some major technological revolution. I have more thoughts on this. I'll get into it in other videos. Though the po the thing I want to point out for this video, though, is that China's debt problem is at minimum three times worse than the United States debt problem is. And that is not only worse just on a pure comparison standpoint, it's also worse because China does not have nearly the same mechanisms that the United States does to lower the impact of a massive debt. The United States is a reserve currency and for the time being that gives them a lot of advantages that makes their debt at least for the current moment not catastrophic. For China they don't have any of those same levers. They don't have anybody who wants to use the Chinese currency, at least not like the US currency. And this becomes a major problem.

Now, if you look at China's federal debt and you research it right now, you'll say, "Paul, you're lying. China's debt to GDP is actually lower than the United States debt to GDP." And that's exactly what China wants you to think because they fabricate the numbers so that you only look at the federal debt number. But in reality in China, most of their debt is hidden in other areas. It's hidden in regional debts. It's hidden in the debts of state-owned companies. All things that ultimately do come back to the Chinese government. Maybe I'll do a more thorough analysis a little bit later in this video. But the point is, China is a country that is already in massive debt. And right now the world is moving away from the types of goods and services that China provides because the world frankly is terrified of China's rise. In that sense, for better or worse, rightly or wrongly, China is a victim of its own success. And that means there are very few levers for China to pull to actually help them overcome this crisis.

You know what I've noticed? A lot of people watching my videos have done everything right when it comes to retirement. They've worked for decades, saved consistently, built something up over time. But when it comes to protecting what they've built, I know that a lot of people have been thinking about making some moves for a while and they just haven't done it yet. I constantly see in my comments that many of you, my viewers, perceive several risks either from inflation, market volatility, you name it. Often related to what's happening around our world, it seems like new wars are now happening all the time. There is massive economic disruption, delobalization, and a host of other things to potentially be worried about. When seeing these trends, I know that many people are making the decision to start adjusting their portfolios rather than just watching what happens. And for many people, I know that a place they're looking is physical gold, not as speculation on where the price of gold might go, but as structural diversification. I wanted to learn more about this myself, and that's why I started working with Augusta Precious Metals, the sponsor of today's video. They keep things pretty simple. They'll walk you through how you can purchase physical gold in an IRA and help you figure out if that makes sense for your situation. No pressure. If you've been thinking about this but haven't actually looked into it yet, it's a good time to learn more before you forget. To get started, just go to paullovesgold.com or text paul to 3502 to get Augusta's helpful guide. They'll walk you through everything, answer your questions, and you can decide if it makes sense for you. Once again, that is paulloves.com or text paul to 35052.

Now, looking at China, their debt is not their only problem. Not by far. But their debt only accentuates the other problems and makes it harder for China to respond to them. In fact, you could look at it like this. The reason China has such a high debt in the first place is because they were trying to respond to their other problems, but their response did not work. And so now they still have their other problems, but they also have a massive debt on top of those other problems, making things much harder to recover from.

China's overall problem is most likely their demographic decline. We're familiar with the concept that China currently has a population at least officially of about 1 and a half billion people, a little bit less than that. But by the end of the century, that population is expected to decline to official levels of perhaps 500 or 600 million people. And those official levels are probably exaggerated. The real the reality is probably much worse than the government will officially say. This is a huge problem to have a country's population cut in half or cut to nearly a third for so many different reasons. But it's a problem because you start to create a society where you have more people who are dependent on the workers than you have workers and you get sort of outnumbered. Imagine if you as a worker have one or two people who you have to support who don't have a job and that's every single worker. it becomes extremely hard to sustain and at some point China will have a very elderly population with very few young people to provide for them and that is not how you get ahead. That is just going to make you get further and further behind. It is a big issue and of course it does go back to China's one child policy which we're all familiar with at this point where a few decades ago China made it illegal for their citizens to have more than one child. And the reason China did this was because they were afraid of massive overpopulation. It turns out those fears were likely unfounded. Population only grows to a certain level. That's not the topic of this video, though. China was so afraid of overpopulation that they guaranteed a crisis in the other direction. And now China is actively working to reverse that. China has taken away their one child policy, but they haven't removed the one child culture. And that puts the government in sort of a panic. It turns out that just because you tell people they can have children doesn't mean that in a generation they're going to go back and start having children again overnight.

There's several different factors here. First, there is just the fact that China rewired their culture with the one child policy. They have a whole generation of people who grew up without siblings, who grew up as the only child who got all of the attention from their parents. And for their own children, they don't really know how to imagine a different future. In fact, it's probably quite stressful for the average Chinese person to imagine having two or three or four children in their household, things that are somewhat normal, for example, in the United States or in Europe or in Africa, basically anywhere else on the planet.

There's also a problem here though where Chinese people don't want to have children sometimes even at all because they personally perceive themselves in a state of decline. When they look at their own lives, things are getting worse, not better. Contrary to the headlines we often see coming out of China and when things are going downhill, the average person doesn't want to bring a child into that world. They don't want the burden of a child because things are just getting worse. person adding a child to that mix will only make it even worse than that if you're not on a trajectory upwards. But they also don't want to bring a child into a world that will be worse than the world they had was. And that is a very real psychological phenomenon. And it takes place all across the world. But it's especially a bad problem for China.

What we see then is these coalesing trends of massively declining population alongside massively increasing debt. And you don't have to be a genius to figure out that this is making the Chinese debt per person per citizen exponentially worse basically every single day. They have a higher debt burden and far less people to actually work to relieve that debt burden. That is a structural trap and there's basically no escaping it. And what's even worse for China is when you understand that these trends are actually the inverse of what allowed China to rise in the first place.

So when we look at China's rise, a lot of people treat it as if it's something that's inevitable and that will always continue. But in reality, China's rise can be attributed to a couple of different factors, which were China's massive debt spending and China's massively increasing population. And again, those are going in the opposite direction now. For a while, China's rise truly was stunning. They had a long period where their economy grew at a rate of more than 10% per year. And a lot of people looked at that as if it were somewhat inevitable and also unstoppable. We're used to a growth model where things keep going up and up and up and up and up and up. In reality, that almost never happens. And that's especially the case in China. The reason they grew so quickly was because they had so much growth to do. They basically started at the bottom of the barrel which meant that any improvements would have massive impacts on their society. So China was able to industrialize rather quickly and as they industrialized they genuinely did lift a huge portion of their people out of poverty in a lot of cases in a lot in many senses. It was an economic miracle and it truly was impressive. Nobody is denying that. But you have to understand again what made that rise possible.

A huge thing that China had when they began to rise was this massive population that was increasing so quickly. Basically, because Chinese land has always been so fertile, you can produce rice extremely well in China. It's a it's a relatively good climate. It just supports a large population quite well, even if that population mostly lives in poverty. That gave China an advantage over the western world, the industrialized world at that point, because they had a huge number of people who were hungry for any kind of wages, even if they were extremely low wages. And that's what allowed China to become a manufacturing superpower compared to the United States when you have people who are willing to work for a dollar an hour or or actually far less than that compared to people who will only work for $15 or $20 an hour to start. you obviously have an advantage as an economy. This is why things in China could be produced so quickly. And for a long time, there were no limits to that growth because they had so much of the population that still wanted these basic entry-level jobs just to have some level of existence. That's a good thing when your population is increasing. But once your population starts decreasing, that advantage goes away. And at this point, China is no longer the cheap labor capital of the world. In fact, in many cases, when you consider all factors, when you consider energy costs and labor costs, it's actually now cheaper to produce literally in the United States, one of the most expensive labor markets in the world than it is in China. So, China has essentially lost their structural advantage. Now, they're still intertwined with the rest of the world. They still have trade relationships. They are still doing pretty well in terms of trade, but the structural advantage is gone, meaning that they are now positioned in a place where they could decline if something major happens, like a war or a trade war.

Now, on top of this, to fund all this industrial growth, China obviously did it with debt, which is great when you still have the ability to take on more debt to continue contributing to that growth. with the assumption being even though we're in debt now, that debt is going to create prosperity that overwhelms the debt. And for China, that was true for a period of time. But China got somewhat addicted to debt. And it wasn't just going towards productive projects. It actually began to become part of Chinese culture. This assumption of unlimited growth. People always talk about the United States making that assumption. China made that assumption far worse. And it got to the point where the debt no longer was being productive in China and it was no longer creating prosperity that could actually pay for the debt. And this is where China really got themselves in a hole. And now they're at the point where they are using debt to keep people employed. So there's no revolt in China so that people can keep the level of prosperity that they're used to. But that debt is increasingly going to unproductive projects. You can see this in two different areas. Uh one of which is the international scene and one of which is China's domestic real estate crisis.

Let's briefly talk about the international scene. So because China got so used to this idea of economic growth from investment because it transformed their society so much, I think there was an implicit assumption that China could do the same thing in other countries and that when they did it, these countries would be in China's sphere of the world. China could basically build a modern empire similar to what the United States has and make themselves an alternative reserve currency to the United States if they brought all these struggling economies up with them. So, China has what is their famous new belt and road initiative, the new Silk Road, where they go into poor countries without infrastructure and they give them massive loans to fund the production of that infrastructure. Sounds great in theory. It's been going on for long enough now that the world realizes a lot of these projects are unprofitable. And in fact, the vast majority of these projects, it's now recognized by the Chinese government itself that they will never actually pay for themselves. There's a lot of reasons for this. When you look at some countries, sometimes there is a reason that they're not as prosperous as others. It's not always their fault. It could just be the geography that makes business ventures not as successful there as they are in other parts of the world. It could come down to the corrupt nature of the governments in certain countries which you know remove the incentives that allow an economy and a society to actually grow in prosperity. Whatever the reasons, China put a lot of money into projects where they're not getting the return. They're not getting the return financially, which also means they're not getting the return they expected to get geopolitically. Basically, China gutted their own economy to build unprofitable infrastructure and other economies. That is not a recipe for success, even if a lot of countries have benefited from that. That's the first problem.

But then there's the Chinese real estate problem. And this is, you know, probably their worst problem. And a lot of people know about this. China has this huge real estate bubble where actually if you go across China there are literal empty cities everywhere or sections of large cities that sit empty. They're called ghost cities. People can go there. You can find videos of this on YouTube of just skyscraper after skyscraper after skyscraper that was built and invested in, but that nobody needs because China's population is decreasing, not increasing. And so the demand and the actual need for real estate is going down. The reason this happened has to do with how China thought they would make their society rise, which is that in China, it's very hard to invest in things outside of the Chinese economy. In the United States, if we want to invest, we can invest uh in whatever company we choose to. It could be an international company, it could be a company in our own country. And this allows capital to flow towards productive enterprises. In China, they wanted to guide the growth at a state level. And so there's very limited stocks that you could invest in. And it's complicated, but there's a lot of reasons that Chinese people don't want to invest in stocks. They don't see it as a viable option. Chinese people are also afraid of their savings going away for obvious reasons. And they're a very frugal society. And so what happened in China is people figured out that the only thing they could really invest their personal savings in was real estate. And real estate is expensive to invest in. I mean, everybody knows this. A lot of people watching this video, you may struggle to buy your own house, let alone an extra house. So the only way for the Chinese people to do this was to gather together into these conglomerates, these groups, work together to buy the real estate. Now, this was working great for a while. Uh, a lot of prosperity seemed to be being produced and prices went up and up and up and up, but it was somewhat, not somewhat, it was basically a Ponzi scheme, a pyramid scheme where the growth is being funded by the expectation of more growth, not by the fundamental economics of what's actually being produced. The net result of all of this then is that Chinese people have invested all of their savings and assets that are no longer worth the price that they were purchased for. And it's hard for the Chinese people to recover any of that cost because these buildings were purchased again through conglomerates rather than by individuals. It's very hard to get a group of people to agree to sell an asset for less than they purchased it for, especially when they have this expectation of just meteoric rise. And a lot of people just don't have the economic education to understand why that's never coming back. So essentially, all of Chinese capital is tied up in empty buildings. They don't have capital anymore to contribute to the industrial infrastructure that allowed them to rise more in the first place. That's a problem in and of itself. It shows you that China is going to stagnate in a best case scenario because they're not going to be able to put any more money towards anything that's productive.

That's where things right now get especially bad when we look at the trade wars and the actual wars that China is facing. Of course, when we look at the United States putting massive tariffs on China, that removes a lot of the demand for Chinese industry, the profitable thing that was successful in Chinese society. That becomes more unprofitable in that direction. At the same time, you have this war in Iran and the straight of four moves being closed. A lot of that energy was ultimately going to China, which increases their energy prices really high. And China is more vulnerable to this than most countries because China doesn't have a lot of energy production on their own soil. There's a reason China has built up such large energy reserves compared to the United States. It's not necessarily because they're wiser or smarter. It's because they literally need those reserves. Where the United States, for example, we have enough domestic capacity to produce energy more than we need even without reserves. So, China's industry, they are losing demand for their products. At the same time, it's getting much more expensive to produce those products due to increased energy prices. And again, you don't have to be a genius to figure out where those trends coalesce. You do reach the point where it's very hard to turn a profit, very hard to keep jobs without government subsidies. But whether the government is going into debt to pay for it or the company's going into debt, you're ultimately paying people for work that's not productive. That makes the debt problem even worse.

We see then that China is caught in a structural trap, a self-feeding trap that gets worse with each iteration. China, the Communist Party, part of their claim to fame, their claim to power, is this idea of being able to create a minimum level of prosperity for all of the people. The idea that we can keep everybody fully employed. If they do not do that, the people will quickly lose this fantasy idea they have with the Chinese Communist Party. And within a fairly short period of time, you know, maybe decades, might seem long from our perspective, but short from a, you know, a historical perspective, these people could realize, we don't need this form of government anymore. We want something else. Because that is the Chinese communist's biggest fear. They are are incentivized to just keep ramping up the debt as much as they can to keep people employed in projects even if those projects are unproductive. and the hole just gets bigger and bigger and deeper and deeper over time.

Now, when it comes to fixing this problem, China really does not have any good options. Their overall problems again are population decline and rising debt. And these are both a problem for the same reason. They ultimately create a fracturing in people's idea of the Communist Party. And that could ultimately lead to a different system of power. So, that's what China is trying to fix. They're trying to fix the underlying incentives for people to have a political movement more than they're trying to fix the demographic problem or the economic problem. Those things are means to an end, not the end in and of itself. And when you understand that, you realize why it's so hard for China to get out of this trap.

So, traditionally, there is a way to solve population collapse. And the way to solve population collapse is to allow immigrants to come into your country to fill some of these jobs that are no longer going to be filled by people who are born in your country. This is attractive because industrial countries typically have lower birth rates than non-industrial countries. China has a level of prosperity that is a lot better than a lot of people, for example, in Africa or even in some Middle Eastern countries or even in South American countries experience. So theoretically, it could be possible for people to want to come into China and fix their problems. There's a reason China won't turn to immigration as a solution, though, and that's because China is very intent on being a closed society without so many outside ideas coming in and influencing the people. Because again, the demographic problem, uh, fixing that is a means to an end. But if you fix that by bringing in people that are going to eventually potentially make people more disloyal to the Chinese Communist Party, well, there's no point for the government to pursue that as a solution. And so they have to basically double down on their population collapse. They have to find another solution to that.

When you look at the full landscape, um, China's in this trap of a declining power and historically declining powers go to war. Nobody goes quietly. Nobody goes slowly. They go out with a bang. An act of desperation to reverse their decline. And a lot of people look at China and they say, "Well, this is scary because China might attack Taiwan." That might be their act of desperation. I personally don't think so. Taiwan is a target that wouldn't fix any of China's problems if they were to successfully take it. Because taking Taiwan is something that is going to cost hundreds of thousands, if not millions of young Chinese men's lives, which is only going to accentuate the population decline. And if they take Taiwan, there's actually not much to gain economically from it. There's, of course, the Taiwan Semiconductor Manufacturing Corporation, but that will be essentially destroyed if China goes to take Taiwan. facilities will be destroyed, but also the intellectual the the labor that makes those facilities possible. Those people probably aren't going to want to work for China. They're probably going to flee the country of Taiwan. So, Taiwan isn't going to fix China's problems. Really, nothing can.

But, there is one target that could potentially fix China's problems, and that target is Russia. Why is that the case? Well, right above China's northeastern border is a resourcerrich region that is not very heavily defended. And when you think about the costs for China militarily in terms of lives, but also money in order to forcibly take that territory from Russia or to force Russia to concede that territory to them, far lower than would be necessary to take Taiwan. If China could take all of this territory, they at least have a potential to fix their problems. They could fix their debt problem by just having valuable resources that they could just take out of the ground. And they could have access to energy that at least partially helps their industrial problem of dependence on, you know, the these very vulnerable supply chains that cause their energy prices to spike and make their industry uh unprofitable. So, those are fixes there. But also just the idea of having all of this open land that their people can move to and settle that might help incentivize Chinese people to actually want to have more children. For example, this happened in the United States when we opened up the frontier and we were able to give free plots of land to people, a lot of land in exchange for them working that land. It was extremely successful. These people had a lot of children. It's one of the reasons the US population grew so quickly after we finally kind of got going as a country. So this is a potential solution for China. And there's a lot of other reasons to think that China might do this. There's historical reasons. But we realize here that these historical reasons, these historical grievances, and the incentive structures, they all align for China to start thinking in that direction over the next several decades if they haven't already.

Now, this video has been long enough. So, if that is a fascinating topic for you, I do have several videos that talk about that specific topic at length, I promise you it is far more compelling and far more interesting than you might think. With that in mind, thank you for watching this video. If you enjoyed this content and found it valuable, like the video, subscribe to the channel. It's free and it helps me out a lot. And please do consider becoming a YouTube channel member or a patron to support my work. I do have some channel member and patron exclusive content that I'm planning very soon and I'm going to try to make that a more regular part of my rhythm to give something back to those of you who support my work. Before you go, don't forget to check out Augusta Precious Metals free gold IRA guide which you can get by going to paul lovesgold.com or texting paul to 35052. It's a great opportunity to learn more about this and how it works and whether or not it's the right fit for your situation. So before you forget, just go to paullovesgold.com or again text paul to 35052.