China topped and overtaken the U.S. for the lead spot worldwide with global wealth tripled over the last two decades as per a report by the research arm of consultants McKinsey & Co. that examines the national balance sheets of ten countries representing more than 60% of world income.
Jan Mischke, a partner at the McKinsey Global Institute in Zurich, said in an interview that “We are now wealthier than we have ever been.”
Global net worth worldwide rose to $514 trillion in 2020, from $156 trillion in 2000, according to the study. China accounted for almost one-third of the increase. Its wealth drastically reached $120 trillion from a mere $7 trillion in 2000, the year before it joined the World Trade Organization, speeding its economic ascent. The U.S. held back by more muted increases in property prices, saw its net worth more than double over the period, to $90 trillion.
More than two-thirds of the wealth is held by the richest 10% of households, and their share has been increasing, in world’s two biggest economies as per the report.
68% of global net worth is stored in real estate computed by McKinsey. The balance is held in such things as infrastructure, machinery, and equipment and, to a much lesser extent, intangibles like intellectual property and patents. Financial assets are not counted in the global wealth calculations because they are effectively offset by liabilities: A corporate bond held by an individual investor, for instance, represents an I.O.U. by that company.
The drastic 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.
“Net worth via price increases above and beyond inflation is questionable in so many ways,” Mischke added. “It comes with all kinds of side effects.”
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.
The ideal solution 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.
Source: NDTV, CNBCTV 18