Is the Next China Shock Coming? | William Yu

People know about the crash of real estate in the Chinese market, but many people may not know that China is fueling a significant bubble, a new bubble, that's focused on manufacturing. Today we sit down with UCLA professor and economist William Yu. He's going to tell us what China is working on right now and how it could lead to a major bubble in the near future. So if you go to China nowadays, there were 500 EV automakers before pandemic, 500 plus, and then over the years it reduced to 100 plus, and most of them are not making money. So you say what's going on? Because Chinese government had this goal, so the policy is favor advanced manufacturing. So we got these hundreds of a competitor in the same market, so they are cutting cost through price competition. That's why they are very aggressive in the international market. I'm Siamak, welcome to Market Insider. William, it's great to have you on, welcome. Thank you so much for having me, I'm glad to be here. We want to talk to you about China, and there's a lot of discussion and talks about China economy not doing well, but they're in the middle of creating a new bubble. Can you tell us about this? Yes, that's right. So people already know China has been making a huge real estate bubble over the past 10 or 20 years, and that bubble bust in 2022. So usually when the economy has this kind of a real estate bubble bust, usually they will see their economy went into a deep recession. So in the past three or four decades, we have seen these two very severe cases. One is the United States in 2007-2008, the housing bubble bust, and the other one is Japan, is a real estate bubble bust in the early 90s. And they all went into this very deep, we call it balance sheet recession. And China, for whatever reason, they don't want to let their economy enter in this kind of a long term repairing process after the real estate bubble bust. So they are using all the resources they can to maintain their high economic growth. So right now they are making another bubble right after this real estate bubble, and they are mostly focused on manufacturing, especially advanced manufacturing sector. That's why people are talking about China over the past decade or two, which already had a lot of manufacturing capacity, but they are doing more, they are making more, they are investing more. So they're building plants, they're building manufacturing resources? That's right. So if you look at, say, GDP component in terms of expenditure component, usually we had consumption, household consumption, investment, government spending, and net export. Usually these are four components contributing to the GDP growth. And China's investment share as a GDP has been very high, you know, from all kinds of human economic standard. So it has been above 50% for a long time. And that includes manufacturing, construction, infrastructure, manufacturing investment. So what happens in 2022, the real estate bubble bust, you know, you see, of course, real estate investment is declining. However, if an economy like China's investment is a very big part of it declining, you are going to see the GDP declining as well. But China doesn't want that. They want to have this kind of high growth continue for a long time. So they use all kinds of government resources, policy incentive to encourage this kind of expansion in the manufacturing sector. So that's why usually in this kind of so-called aftermath of the bubble bust, you know, you see a country like Japan used to be like Asian tigers, you know, in the Asian financial crisis. And after 1997, usually you will see the investment share as GDP going down dramatically and GDP growth going down dramatically. That's a very natural situation to repair high debt and overinvestment situation. But we haven't seen that in China. So right now they are making another bubble in the aftermath of this real estate bubble. And what's the impact of that? The long term impact will be very, very negative. For example, Japan, it took almost 20 years for Japan to repair their balance sheet, to reduce this debt through low economic growth over the years. 20 years. It took Japan 20 years. And right now they are in this kind of very healthy situation. So what happened in China is, I think there's a very simple way to explain. If you climb too high, when you fall, injury will be deeper. So what happened in China is they have not learned the lesson from their real estate bubble. They are making another bubble. So right now, the Chinese economy, household corporation are still trying to figure out how to get rid of their real estate bubble debt. They call it deleveraging situation. But at the same time, they are making another bubble. So you can imagine that, right? I would say in a kind of a perfect world, what China should be doing right now is trying to repair their balance sheet from household, from corporation. And then once it's over, their economy will kind of get back to kind of a healthy, balanced growth again. But right now they are not doing that. So what will happen is it will take this very unbalanced economic structure continue to last longer than it should be. It's very bad. Right now, if you look at so-called debt to GDP ratio by a country level, China is number two, almost number two in the world. Number one is Japan. And Japan is still trying to repair this bubble they have been making in the 70s and 80s. And China is approaching this high debt situation. So they have high growth, high investment, over investment, and high debt economy. And they are not trying to fix it. They are making it worse. So that is the Chinese situation right now. Debt to GDP ratio is surpassing the United States over the past several years already. So we are very concerned in the United States. We are very concerned about our high debt. But China, they are not. So you're over 300% or something like that? Yes, it's about 300%, including the government, central government, local government, corporation, household. And banks as well. Does that include banks? No, the ratio doesn't. Because the banks, there is interbank lending. It doesn't include it. It's just pure corporation. But yeah, if the debt is from the banking to the local government, it will be included. So including all of their debt? Yes. And what are they hoping to achieve? So are they trying to take over manufacturing, but they're getting hit by tariffs too? That's right. I had a conversation with my colleague at UC Anderson School. He also understands the situation in China, very bad situation in terms of their economy. Because usually in this kind of balance sheet recession, you're not seeing consumption grow. You're not seeing the investment. So what happened right now is China, on the one hand, they are encouraging advanced manufacturing investment. So they will boost the GDP. If you are throwing the money to this AI center building, semiconductor factory building, you're going to create some kind of economic activity and employment along the way. On the other hand, after this factory finish, they are going to produce product, right? So you will see this production supply increase, and they will contribute to the economy if you can sell it. So right now the situation is China is facing very weak domestic demand. And that is very natural. After the state bubble, nobody had extra money to buy things. So what happened to them is they are exporting this excess capacity to the rest of the world. And United States, I think, is very smart. They already imposed all kinds of guardrails, like a tariff. For example, in 2024, Biden administration just imposed this 100% tariff on Chinese EV cars and some kind of battery. So basically, it's to totally prevent any kind of Chinese imports. And European countries, in recent years, they started to realize the potential problem from Chinese exports. So they are also imposing tariff on EV exports from China. But they are using more moderate measurement. Unlike United States 100% tariff, they are using some kind of so-called countervailing tariff. They did this research, say, OK, this company, you might have this unfair subsidy from the government. So we are going to impose 17%, 27% tariff. So as a result, in the United States, we don't see any Chinese car at all. But in Europe, we are seeing very competitive, very inexpensive EV car entering the European market, like UK, Brazil, Belgium, Germany, and so on and so forth. So eventually, it's going to impact those domestic car producers. Some people will look at these tariffs and say this is not good for the global economy. What are your thoughts on that? Wow, that is a big question. I would say, in the ideal world, indeed, tariff is not good. It's not ideal. But the problem is we are not living in the ideal world. So for example, I can tell you one of the big mistakes people think about tariff, including my colleagues, all kinds of economists, they believe tariff is distortive. And that is true. And then they have all kinds of, when I was teaching undergrad, you know, economics, international trade, you probably had taken some kind of class. And then they also tariff... They always talk about free trade, tariff is bad. Yeah, tariff is bad. But actually, that kind of concept is based on so-called balanced trade. You know, what is balanced trade? It means, as a whole, most countries have balanced trade. They export and then they import. So they don't have a significant, say, trade surplus and trade deficit. But that is not a situation nowadays. For example, I give you one example. Last year, 2025, United States had a trade deficit up to $1.1 or $1.2 trillion against the rest of world trade deficit. On the other hand, China had $1.1 trillion trade surplus against the world. So that is the problem. So ideally, you know, if we all follow this Adam Smith, you know, this kind of free trade, then that would be good. But the reality is, we have this trade imbalance. And if you ask me why we have this trade imbalance, so kind of going back to the situation facing China right now. So I've been saying China has seen this kind of so-called, I call it internal imbalance. So they had this high savings, high investment, low consumption. And we can explain why this is the case. I can say in a simple way, in a nutshell, the Chinese government has this policy goal and mentality to pursue high growth whatsoever. And you say, why are they doing that? Yeah. Because for whatever reason, probably is a kind of a deep agenda by the Chinese Communist Party. They want to be number one in the world. They want to surpass U.S. economy in a shorter time. So they can do whatever they need, try to boost this high economic growth through high investment. So in the beginning, you know, right after 1978 Chinese reform, it was pretty successful. Because at that time, the big environment in China is they had a severe underinvestment. So whatever they invest, government subsidy, it was very productive. But right now, it's not the case. Right now, they already achieved this investment equilibrium. But they are still continuing to do this investment. And the return, you know, in the finance, we know corporations need to do this calculation very carefully. Just like in recent two years, you know, people are very concerned about the U.S. AI data center investment. Are they going to produce the return or not down the road? And we are calculating, we're very careful. You know, everybody's watching. Wall Street, you know, is watching. If you are reckless, you know, the market will punish you. But that never happened in China. Government had this goal, say, let's do it. Let's invest in EV. Let's invest in solar panel. Let's invest in battery. And then they all just jump in. Right now, they are investing in AI data center. They are investing in semiconductor industry. So all those investments, you can see no economic plan, no business calculation. And then overinvestment will result in very low investment return or negative return in the long run. Anyway, going back, what happened in China is they had this goal. They want to boost the GDP growth, but they didn't look at the whole picture. And they are continue doing that. It's a very sad situation. In fact, you know, the government has been talking about this kind concern for a long time. So in their government official meeting, they said, oh, we had this internal imbalance. We need to fix it. More than 10 years ago already, we need to boost our consumption. But at the same time, they are still pursuing high economic growth. They will never work. Is it that it's in their policy that they are not boosting consumption? Or is it that it's not aligned with their goals? You mentioned they want to be number one in the world. That's right. Because, you know, so there's no panacea. So right now, they are in this period from 2026 to 2030. This is so-called fifth five-year plan. You know, usually the West doesn't have this kind of things because economy is a market economy. Basically, it's not like there's a central government guiding the economy. The GDP growth will be like this. But China is still doing that. So their goal is like a 5% growth. You know, it used to be 8%. It used to be 10% whatsoever. So when you had this kind of... So, you know, if you ask me, how do I know one day the Chinese government's concept mentality totally change? Is it they totally abolish this kind of five-year plan? As long as you had this plan, all the government level, they know that they had this plan. So they will have a way to try to or pressure try to achieve this government policy goal. As long as you have that, explicitly and implicitly, the government resources will move from household sector to the corporate sector. Because usually this goal has to be achieved by investment, by manufacture sector, by this production. So it's corporation sector. So if you are in the category of this kind of policy advanced industry, yeah, you can get free money, free land, you know, subsidy from government very easily and produce the things without any kind of consequence at all. But the money, the resources is just a limited amount. And if you government use this money to this corporation investment production, what happens is it kind of call out the household income and then household consumption. So that is the situation facing China right now. So even government has been saying we need to boost household consumption. But at the same time, you are diverting all the resources to corporation investment and production is not going to work. I think they still don't understand that. And you have a unique way of looking at the numbers that are coming out of China because you don't trust them. Can you tell us what you see and how real is these numbers? So they set the goals at 5% a year. Are they meeting that? That's right. Yeah, it's kind of interesting because over the years I noticed if you look at the Chinese GDP growth data from the Chinese government over the past 20 years, you notice that it's very smooth, you know, even like they are slowing down after the global financial crisis. But this slowdown is very smooth. Like one year is 8.5%, next year is 8%, next year is 7.5%. It's so smooth. So it's kind of weird. And then even like a former premier of China, they didn't trust their own statistics. So over the past several years, I developed this very simple model. So basically, I look at four or five variables, and those variables are less likely to be manipulated by the Chinese government because those variables are related to the war. For example, I look at energy consumption, CO2 emission, international trade, export and import in China, and also housing price. All those kinds of variables are more transparent. So I look at those variables, and then I collect the similar variables across major top 20, 25 economies in the world. And I build this model regression, linear regression model to look at the relationship between these, I call it four variables and their GDP growth. And I find they are highly correlated. It's not causation, it's just correlation, all right, these four variables. And then I use, and I got this kind of model parameter coefficient, and then I applied it into China. So I just kind of put away the Chinese government GDP growth. I just look at these four input annual growth rate in China. And then I use, if these four inputs growth rate are like this, how does that, based on other 20 developing countries, how does that translate to GDP growth? And then I do that, and then I show, wow, interesting. If you believe my model, actually Chinese GDP growth were more volatile, not like a smooth. And then, not just that, we noticed that Chinese official data in terms of their GDP growth were overestimated by about two percentage point on average a year. On average per year? Yeah. For example, so over the past three years, 2023, 2024, 2025, Chinese number of GDP growth is like 5.2%, 5%, 5%. So it's kind of interesting. 2024 is 5%. 2025 is 5%, exactly, almost exactly the identical number. And this year, this first quarter, again, is 5%, which is just like their government goal, right? So it's kind of pretty amazing. This largest economy, they just follow this 5%. But my number, my four inputs number, actually Chinese GDP growth were just 2% or 3%. Yeah. So it kind of has this kind of pattern to kind of smooth out their GDP growth to overstate their economic growth. So you mentioned the Chinese government is actually investing a lot into manufacturing now. They're diverting the capital to manufacturing, creating a new bubble. You also mentioned that if there is no ROI in the investment, there's going to be losses and resources not used well. Who pays for all of this? How does that work? Eventually, the whole sector in China need to pay for it. Like average Chinese people end up paying for it because they... Yes. Let me give you an example. If you ask any Chinese, they know this war. In English translation is called involution. I'm not sure if you heard of this war. In Chinese war... I haven't heard of it, no. It's called neijuan. What does it mean? It means it's a very internal competitive. So if you go to China nowadays, you see, for example, there were 500 EV automakers before pandemic. 500. 500 plus. And then over the years, it reduced to 100 plus. And most of them are not making money. So you say, what's going on? As I told you, because Chinese government had this goal. So the policy is favor this advanced manufacturing. So a lot of people, business people, are trying to take advantage of this government favor. They can get a subsidy or whatsoever. They can get a free loan, but they are not making money. So we got these hundreds of competitors in the same market. So they are cutting, cut through price competition. So very few make money. So that's why they are very aggressive in the international market. Because for the international consumer, the Chinese car is very cheap. So this involution is kind of widespread in China. So for example, like in the United States, we had this Uber driver, right? You can deliver a passenger, you can deliver food. In China, we had even more. They actually, some studies say, actually, they had like four times of capacity people doing this kind of delivery, these ride-sharing things. Because again, the Chinese government's policy is favor production, favor investment. I told you, Chinese investment share as a GDP is 40%, 4-0. We had never seen a country like that. And it has been like this for 20 years. And what's the normal ratio? Like in the United States, it's 18%, 1-8. And then people are crazy. This is too high. AI investment is a bubble. 18% is less than half of the Chinese level. So resources are towarding this kind of investment and production. So households do not have enough income, right? And then there are a lot of competition. So corporation, they are in this upper hand, right? Because everybody is competing with each other. Yeah, they can cut a wage whatsoever. This high Chinese economic growth, like over the decades, over 10%, eventually, they are not really equally shared by the Chinese people. So they are still working very hard, but earning very minimum income and wage. You probably heard this term. I don't know if you had heard of that. It's called 996. Have you heard of that? 996? No, no, no. Yeah. 996 is a term. In the tech sector in China, you need to work from 9 a.m. to 9 p.m. Six days a week. So if you go to interview, 996. You need to know that. So there's no life. There's no leisure life, no time to consume. Because the whole country is very distorted by this kind of very unrealistic goal, trying to push high growth for a long time, and without considering the economic reality. So the situation is, households do not get enough resources and income, and they need to work harder. To earn more. More hours to earn this kind of income. So it's kind of a vicious cycle facing China today. So what are they hoping to achieve? When they're doubling down on the manufacturing, they're putting all this money into manufacturing. Are they hoping to gain the global market? And then from there, they think that's going to do it for them, and they're going to get out of the real estate bubble that just burst? Yes, exactly. This is their goal. So if you look at the post-war economic growth in the war, in the earlier states, the United States is an example. Since the industrial revolution, it was the United Kingdom first, and then the United States, European countries, and then Japan. And after World War II, we see Japan's Germany recovering very fast from the war. And then you see these Asian tigers. And then you see China, and nowadays Vietnam, India. And one thing for their amazing economic growth is they focus on the manufacturing sector. Because the manufacturing sector is a very good way to let working class, to let middle class, to expand their income in a very short period of time. Because the nature of the manufacturing sector is high productivity. Because you had a machine, and then you push the button, it can produce the product and sell it to the world. So the manufacturing sector is very important if you, a country, want to climb up the so-called supply chain value chain. And China knows that. And it has enjoyed the benefit of climbing out of the manufacturing sector. So right now they are aiming at this so-called advanced manufacturing sector. So the direction is correct. But the problem for China is they just overdo it by a large scale. So the people cannot enjoy the middle class, and they don't get to become consumers. They overdo the investments because they have the goals to bypass the US. That's why they can't. Exactly. And what do you think will happen from here? Do you have any predictions or any thoughts? Where would things go for the Chinese economy? So as we said in the beginning, right now they are making another bubble in the manufacturing sector, in AI. So you can see in the next few years, right now the United States is in the leading position in terms of building this AI capacity, AI data center, GPU center. And China doesn't want that. China doesn't, for sure, they want to catch up. So you can predict China is going to invest a lot of money on this data center. I think they are already doing that. But the problem is they don't have the equipment I see cheap. So probably they will try to figure out a way to to do this on their own. I think it's very sad because that is not healthy, there's not balance. And eventually the bubble, by definition, the bubble will burst in one day. Even like in the United States, this is very natural. But China is in a totally different scale. Because of the huge debt to GDP. The scale of their overinvestment is unprecedented in human history. So right now they are putting themselves into another bubble. It's very sad because they are still trying to get out of this real estate bubble they create. And they are making another one. In the long run it's not good. The only thing they are trying to maintain the Chinese economy balance is this export. They are exporting their capacity to the world, to Asia, to Europe, to Latin America. I don't know. As I told you, some countries, they already had this precautious way to prevent this Chinese import. People are talking about this so-called China shock. We had China shock 1.0, which destroyed a lot of United States manufacturing in the early 2000s. And we are seeing this China shock 2.0 coming. And for some countries, if they are not reacting to that, they're going to see their domestic manufacturing totally destroyed by China. So maybe for some countries they say, I don't care, we don't need the manufacturing sector, then it's fine. But otherwise, I would say it's a very imbalanced situation inside China, outside China. And if this bubble burst in a few years, how would it look like for China? Would there be a currency issue? Would there be default on debt? What does that look like on the other end of the bubble? Yeah, I would say a lot of people have said, because of this high debt situation in China, maybe we will be seeing some kind of financial crisis in China. I don't think so. Because what happens, over the year, China has built this very competitive manufacturing capacity, meaning they can export to the rest of the world, as we just talked about. At the same time, China accumulates a lot of foreign currency. And this kind of thing, probably this advantage will continue. So as long as China has foreign currency, mostly U.S. dollars. Right now, they are trying to buy some gold, but mostly U.S. dollars. They had a way to maintain their stability of currency and prevent some kind of a financial crisis like South Korea or Thailand saw in 1997, 1998. So I'm not concerned about that. It will be more like Japan. It's more of imploding situation. So it will go to zero growth for many years. Yeah, zero growth. Because if they don't have money, the Chinese central bank will just print money. So they can always increase their debt level. But in terms of currency, in terms of financial system, the Chinese government has all kinds of ways to prevent financial crisis. For example, in 2008, the U.S. had this bank robbery. The Chinese government can say, no more withdrawals from the people, from the bank. Then you cannot withdraw. No withdrawals, no bank robberies. So they had this kind of way to control the economy. Now, what do you recommend with what you've seen? Do you have any thoughts for investors or people that are looking into or have investment in China or trading with China? I would say, as I say, Chinese economy is very, in fact, I have been talking about this for more than 10 years. I have been warning this Chinese bubble, real estate bubble for a long time. If you listen to me, you probably will not incur this kind of loss if you had money investing in China. So I would say, just try to keep your distance from anything related to China. You don't want to have this investment relationship with China. One thing I haven't talked about is over the past 30 years, we have seen a lot of cases, foreign companies doing this FDI investment in China because the Chinese government sending out this subsidy, the land is free, factory they will provide, whatever. So even Elon Musk kind of got into this trap. Elon Musk invested their EV technology in China in 2017, 2018. But eventually, you are going to develop your biggest competitor down the road. And China is very good at that. Chinese people are very smart. And then they had this huge market and they had a government. So I would say, just be careful. So if you build something there, it might end up become your competition. Yes. People that you hire, they might go start. And you might not survive, like the EV situation. That's right. Like Japan's high-speed rail, all kinds of things. So I would say investor business relationship, just keep your distance from China. It's a totally different animal. So you need to be very careful about that. And then in terms of financial investment, you can see, like the United States over the years, S&P 500, they had this kind of very decent growth annually, like 10%, 20% growth. But if you look at the Shanghai stock index, they barely changed. Over the past 20 years, they barely changed. So you can see something is going on, something is wrong in the Chinese economy. So you didn't see this kind of return from the stock market. And unfortunately, it used to be Chinese people, investors, got a lot of return from real estate. But right now, the real estate bubble has passed. Well, UCLA Professor William Yu, it was great to have you on Market Insider. Please come back and give us an update in a few months. Sure, for sure. Thank you very much. What do you think of this conversation with Professor William Yu? Do you think that this manufacturing bubble that China is working on could impact American businesses? Make sure to tell us in the comments. I'm Siamak. This is Market Insider. We'll see you next time.