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.