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August 2017 Edition of Power Politics is updated.  Happy Diwali to all our subscribers and Distributors       August 2017 Edition of Power Politics is updated.   Happy Diwali to all our subscribers and Distributors       
Issue:August' 2017


Dragonomics in distress

Malladi Rama Rao

The transit elevated bus on a road test in Qinhuangdao China's 'straddling bus' dream has ended. The state-run China News Service (CNS), which broke the news in mid- June, was economical on details. The widely-hyped giant vehicle is now covered in dust in the city of Qinhuangdao in Hebei province. Workers have since dismantled the test site for the Transit Elevated Bus (TEB), a futuristic hollow-bellied bus-train hybrid which stands two metres above the road.
Well, in any other country, the TEB saga would not have met with such an abrupt 'no obituary' end. But Communist China is different. And it can afford to regulate news and can even speak –up news. All through the widely hyped test runs last year there was no mention of source of funds for the project. It is only recently, the state-run Global Times, in an editorial comment mentioned that the funding source was peer-to-peer (P2P) investment platforms. China's regulators have recently cracked down on these online services, viewing them as public-private partnerships.
Read this Global Times disclosure in conjunction with my report for Hyderabad - based think tank, Center for Asia Africa Policy Research, (Caapr), titled 'China's Hard sell – Moody's Worries'. The China watchers will be forced to look beyond the diplomatic jig and factor in the economy, which is what matters in today's globalised village. Structural flaws in the Chinese economy are mounting debts, shadow banking, Ponzi schemes and zombie companies besides multiple uninsured wealth management instruments.
As Caapr report says, China frustrates the world when it comes to data on economy. The jobless rate may be three times the official estimate. Urban unemployment figures are also flawed since this number reflects only those registered with China's labour authorities. The Fathom Consulting's China Underemployment Indicator has tripled to 12.9 per cent since 2012 even while the official jobless rate has hovered near 4 per cent for five years.
Of the 70 or so economic indicators produced by various Chinese government agencies, three are particularly untrustworthy – the figures for the jobless rate, fixed asset investment and personal income, the South China Morning Post report (SCMP) reported on June 16th quoting a research note published by China International Capital Corporation (CICC).
No surprise, a leading Wall Street bond investor once called China a "mystery meat" for its lack of transparency and reliable indicators. Chinese authorities are not unaware of the flipside of their Dragon economy. The anti-graft watchdog, the Central Commission for Discipline Inspection, has recently said that Inner Mongolia and Jilin had been cooking some of their figures.
National data on gross domestic product, consumer price index (CPI) and housing prices has also been seen as suspect. So is the headline GDP number, which as SCMP report says, has been suspiciously steady in the last couple of quarters. But these figures are not as unreliable as the ones for fixed asset investment (FAI), and joblessness. While on FAI, which is known as one of the main drivers of China's economic growth for decades, CICC report says FAI data had been abused by local government officials, who wanted to show growth to enhance their career prospects. "Last year, national FAI accounted for more than 80 per cent of China's GDP, and 11 provinces reported investment figures that were higher than the local GDP, according to the bank".
The observations of China's statistics bureau chief deserve attention and even appreciation.Visiting some of the biggest technology companies in Beijing's backyard some time in March 2016, Ning Jizhe lamented that systematic ways have not been created to collect and classify data on the new economy. "It is a challenge to accurately track new industries and business models", he reportedly said in a meeting with Beijing's mayor and top Communist Party officials. This is in contrast with the assertions of his predecessor Wang Baoan, that the GDP data were "genuine and credible".
Put simply, China's national statistics bureau has not kept up with developments in the new economy. It has since begun to put correctives in place to offer a better growth data by year end. Like in India, in China the old economy is in stagnant mode while the new economy is on growth path. Now cut to Moody's downgrading of China's debt rating and the IMF worries over credit boom in China. The downgrade was from Aa3 to A1, the first such downgrade since 1989.As Nick Beams writes on the World Wide Socialism Web Site, the Moody's action has underscored the dilemmas facing the Xi Jinping regime which is trying to maintain economic growth on the one hand and comply with the demands of international financial capital to reduce its debt levels on the other. China's reaction was predictable. "Moody's had overestimated the difficulties faced by China's economy and underestimated the government's ability to deepen reforms," said the finance and foreign ministries. The credit rating agency has stuck to its stand nevertheless. It said economy-wide debt, which includes that of state-owned enterprises, would continue to rise, notwithstanding reforms to the financial system, as the growth potential of the Chinese economy slowed. It also cautioned that China government's direct debt burden would rise to about 45 per cent of the economy by 2020 from a level of 40 per cent in 2018.

A casual perusal of the Global Times pages shows that Chinese economy is hit by one too many financial crimes.

Xi Jinping The International Monetary Fund (IMF) is also worried over credit boom in China, which, it says, can be "dangerous" for the world's second largest economy. "…China also has notable vulnerabilities. Credit in relation to China's economy has more than doubled in less than a decade, to over 200 per cent. Credit booms this big can be dangerous", said Tobias Adrian, Financial Counsellor and Director, International Monetary Fund (IMF) Monetary and Capital Markets Department.
"The longer booms last and th dangerous they become", he added while releasing the 2017 Global Financial Stability Report in early June. The IMF appears to think that the Chinese economy has adequate buffers to weather any sort of change in global financial conditions.
A casual perusal of the Global Times pages shows that Chinese economy is hit by one too many financial crimes. Some days there are more than a couple of reports about such frauds. President Xi Jinping has ordered a crackdown on the financial sector.
The detention of billionaires Xiao Jianhua and Wu Xiaohui sacking of China Insurance Regulatory CommissionChairman, Xiang Junbo, and Yang Jiacai, assistant chairman of the China Banking Regulatory Commission (CBRC) are some of the high points of the clean-up ops. It is possible some more, in fact, many more heads may roll in the days ahead exposing the chinks in Xi Jinping's armour as he pushes ahead vigorously with his OBOR initiative.
It will patently be unfair to presume that the OBOR dream will end up as another 'straddling bus' dream. But it may lead to more costs for the recipient nations with soft loans converted into high interest bearing commercial loans. Bangladesh has just been told of this danger.
The Hasina government had signed $25 billion deals with China for nearly two and a half dozen projects during President Xi Jinping's visit to Dhaka in October last year. Some of these projects now form part of OBOR. A detailed list outlining how much would be treated as soft loans, how much as commercial credit and how much to be contributed by the Bangladesh government would be sent to Dhaka shortly, Chinese officials said. Well, it is unfair to expect a free lunch under Dragonomics, more so since the Dragon is under distress at home.