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What has happened?

  • China is now world’s richest nation, a report in Bloomberg said as the global wealth tripled over the last two decades and China leading the way and overtaking the United States for the top spot.
  • The research arm of consultants working in McKinsey & Co. analyzed the balance sheets of ten different countries that, combined, comprise 60% of the world’s total income.
  • The world’s net worth rose to an unprecedented $514 trillion in 2020, from an earlier net worth of $156 trillion in 2000, with China taking the largest single share: nearly one-third of the world’s income.
  • “We are now wealthier than we have ever been,” Jan Mischke, a partner at the McKinsey Global Institute in Zurich, said in an interview.

Richest 10%

  • According to a new global financial data from McKinsey & Co., initially reported by Bloomberg, China’s wealth launched to $120 trillion, from its previous $7 trillion in 2000 —
  • An unspeakably colossal growth from its days before joining the World Trade Organization, which accelerated its rise to power.
  • The U.S., meanwhile, has experienced muted increases in property prices, but nearly doubled its net worth over the same period, to $90 trillion.
  • China and the U.S. are the largest economies in the world, but the lion’s share of the world’s wealth is held by the richest 10% of households.
  • And they’re only getting richer, according to the report.
  • The McKinsey report also said 68% of the global net worth is tied up in real estate,
  • But it also included machinery, infrastructure, equipment, and, although comprising a much smaller portion, intangible goods like patents and intellectual property.

concerns

  • The steep rise in net worth over the past two decades has outstripped the increase in global gross domestic product and has been fueled by ballooning property prices pumped up by declining interest rates, according to McKinsey.
  • It found that asset prices are almost 50% above their long-run average relative to income.
  • That raises questions about the sustainability of the wealth boom.
  • Surging real-estate values can make home ownership unaffordable for many people and increase the risk of a financial crisis – Like the one that hit the U.S. in 2008 after a housing bubble burst.
  • China could potentially run into similar trouble over the debt of property developers like China Evergrande Group.

Evergrande crisis

  • The Evergrande Group has recently been struggling with over $300 billion in liabilities.
  • The company, which is the most indebted of China’s private homebuilders, has ignited fears worldwide of a global financial crisis.
  • Recently, another Chinese real estate company, Fantasia Holdings, failed to repay a loan worth $205.7 million, according to news reports.

conclusion

  • The ideal resolution would be for the world’s wealth to find its way into more productive investments that expand global GDP, according to the report.
  • The nightmare scenario would be a collapse in asset prices that could erase as much as one-third of global wealth, bringing it more in line with world income.

Q) Factors that lead to worsening conditions in financial markets include?

  1. Declining interest rates
  2. Unanticipated increases in the price level
  3. The deterioration in banksʹ balance sheets
  4. Increases in bond prices

 

 

 

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