You know what happens when you do exactly what the Chinese government tells you to do? You get sentenced to life in prison. That just happened to Evergrande’s former chairman, and it tells you everything you need to know about China’s failing real estate system.
Hey everybody. Peter Zeihan here, coming to you from Colorado. The news today is that the Chinese government just sentenced the former chairman of the real estate company Evergrande to life imprisonment. Because that’s what happens when you do exactly what the government tells you to do, when it doesn’t work out. Very, very short version of the history. There aren’t a lot of investment options for Chinese citizens. Foreign investment is sharply restricted because the Chinese know that their own system provides very, very, very poor returns. And if they opened their accounts to the world that the money would just flow out in the tens of trillions. And at home, everything is driven by throughput and employment rather than profitability. So if you invest in a specific company, your chances of actually getting a return are minimal because those companies are able to access subsidized loans from the government at negative real interest rates. And if you’re an investor, you get a negative real return. So local governments had for the last 20 years, basically encouraged property companies to come in and buy land from them, which is where they got over half of their income; the state governments, local governments got over half their income. And then take money from individual citizens to build condos. And the result, because we had widespread urbanization going in China at the same time, remember, this is the same time the Chinese are going through their industrialization pulse. The thought was that this would just go on forever. So prices would rise, you’d build more homes, there would be more demand, blah, blah, blah. And on and on and on and on. There are two problems with that theory.
Number one, eventually you created more housing than China needed by a factor of 4 or 5 by some measures. And then second, nobody was being born. The Chinese demographic bust probably started, data’s a little sketchy, but probably started back in the early 90s. That’s when we now know, according to official Chinese statistics, that the Chinese birth rate dropped below the American birth rate 35 years ago. Anyway, nobody gets born for 35 years. All of a sudden, the demand for the housing goes down. And eventually this bubble popped in the early 20s, which is when Evergrande went bust with something like $300 billion of losses, which even by Chinese standards, that’s a pretty big number. Anyway, people who invested in Evergrande directly or indirectly by having Evergrande build them an apartment basically lost their shirts. And now we’ve had this complete collapse in the system. New construction in China is down by 75% in just the last five years since this went down. And that’s data as of the end of 2025, which is the most recent we have best estimates, is that there’s going to be another 20% collapse this year. And to put it from the point of view of the individuals, the people who are buying these homes, to give you an idea of how screwed they are. In inflation index terms, and keep in mind the Chinese doctor their data so their inflation does not look as bad as it is according to the official statistics. Homes today are worth less than they were at the start of the boom in 2005. So in the United States, when we had the adjustment with the great financial crisis in 2007 to 2009, and home prices dropped back to like 2005 levels, and we all kind of lost our mind. Can you imagine a 20 to 25 year loss in appreciation and the impact that has on the mindset of the average Chinese? Now, this hasn’t translated into a stock route because the Chinese regulate that on one hand. But more importantly, the Chinese citizens know that investing in the stock market in China is a fool’s errand. Again, Chinese companies have access to below market prices, below inflation prices, real negative prices for loans. So any investment there honestly is a fool’s errand. And if you happen to invest in Chinese equities, I also have a bridge that I would like to sell you that I think you’ll really, really like.
Anyway, bottom line is that the Chinese government is now trying to get this money somewhere else. We have something like 22 trillion US equivalent in deposit accounts. It’s just Chinese citizens who don’t know what to do with their money, because they don’t want to put in the stock market. They now know that housing is a trap. So it’s just sitting in a deposit account in their local bank. And so the Chinese state has reduced deposit rates to below 1%. So this money isn’t really earning anything. And they’re trying to force the Chinese citizens to invest in the stock markets. But the Chinese citizens at the moment are smart enough to realize that that is a fool’s errand. The only other possible way for it to go would be out of the country and go somewhere else where it could be more productive and be, you know, safer. But the Chinese keep that locked down. So I always find it very amusing of the people who want to get their money into China to make money, when the people who are in China are desperate for any way to get the money out. Anyway, that’s it for now. See you next time.
