Chinese economy debt-ridden,
and living on borrowed time
Malladi Rama Rao
Xi Jinping and Liu He
In the run-up to heralding
the Chinese New Year of
Dog on 16th February,
there was little room for
cheer for the Chinese
leadership and their statecontrolled
economy. At Davos,
the Mecca of world's finance and
capital, President Xi Jinping's top
economic aide, Liu He, failed to
inspire, and whatever he
promised in terms of reform
sounded like hackneyed rhetoric.
This was in sharp contrast to the
reception President Jinping
received a year ago at the very
same venue, the World Economic
Forum.
Liu did tout China's economic
success registered in the past one
year and promised to open up
Communist China may
not believe in God but
its citizens do believe
in the Goddess of
wealth. Pyramid
schemes are growing
disguised as rebates,
online games, charity
or poverty relief.
Speculation is ripe in
the housing sector,
which, according to
New York Times, is a
casino today.
and reform China's markets
"beyond expectations" in 2018.
Yet he failed to impress; it was
largely his own fault. He avoided
any reference to the deep
tensions between China's rhetoric
in support of free trade and
globalisation and its highly
interventionist industrial policy
system and policies, according to
Washington based Scott Kennedy,
who directs a project on Chinese
business and political economy at
the Centre for Strategic and
International Studies.
Another contributory factor for
the tepid response Liu received
was the reality check that showed
China in poor light. The gross
domestic product (GDP) may have
registered a 6.9 per cent growth in 2017 and exceeded 80 trillion
yuan ($12.5 trillion) for the first
time since 2010.
Scott Kennedy
Important macro-economic
data also shows a robust trend
but the growth has come at a high
price: "rising borrowing that has
triggered downgrades of China's
sovereign debt rating by credit
rating agencies; severe pollution
of China's air, water and soil; and
persistent social problems
associated with lack of job
opportunities in the countryside
that have forced tens of millions
of workers to move to cities
leaving their families at home
towns.
Poverty and pollution have
emerged as the main threats to
the Chinese economy, and from
investors point of view, risk to
investment in China has come to
compound matters.
On his part, President Xi Jinping
is fully aware of the malaise. At
the19thNational Congress of the
Communist Party of China held
last October, he declared that the
country should no longer
emphasize maximizing economic
growth at almost any cost. He also
signalled his resolve to address
some of these chronic problems.
Xinhua news agency has stuck
an optimistic note nevertheless
on January 19. It said China's
economy could hit its sweet spot
in 2018 but conceded that the
growth rate is partly credited to
cyclical factors and an improved
global economy.
The old economy -- heavy
industries and property sectors
are slowing. The new economy --
services and part of the
manufacturing sector such as
high- tech--is not yet strong
enough to overwhelm the old
economy. Analysts believe the
Chinese economy is going
through a phase of "creative
destruction" as lively new sectors
coexist with still-dominant old
sectors, Xinhua report published
in Global Times said.
Liu did tout China's
economic success
registered in the past
one year and promised
to open up and reform
China's markets
"beyond expectations"
in 2018. Yet he failed
to impress; it was
largely his own fault.
He avoided any
reference to the deep
tensions between
China's rhetoric in
support of free trade
and globalisation and
its highly
interventionist
industrial policy
system and policies,
according to
Washington based
Scott Kennedy, who
directs a project on
Chinese business and
political economy at
the Centre for
Strategic and
International Studies.
Official data shows that just
four cities, Shanghai, Beijing,
Shenzhen and Guangzhou
generated nearly an eighth of the
country's economic output ( $
1.56 trillion in all) last year. This
clearly shows that the Jinping
regime is not spreading out
resources and is depending on
the big four for growth. It is not a
healthy trend since China lives in
its villages and semi-urban
pockets.
Communist China may not
believe in God but its citizens do
believe in the Goddess of wealth.
Pyramid schemes are growing
disguised as rebates, online
games, charity or poverty relief.
Speculation is ripe in the housing
sector, which according to New
York Times, is a casino today.
"Housing is also the source of
some of the country's biggest
booms and busts. Local investors
— many of whom do not trust the
country's stock markets and are
forbidden by Beijing to move
most of their wealth abroad —
simply throw money at housing.
Real estate broker fees, often as
low as 1 per cent, are a small
fraction of the typical 6 per cent
in the United States," Keith
Bradasher wrote in a recent
dispatch to The New York Times
from Beijing.
It is difficult to believe that the
Chinese President and his brains
trusts are not aware of the
turbulence that is round the
corner as a consequence. Or the
reality that vast numbers of
apartments in many cities lie
empty, "either because the buyers
have no intention of moving in or
renting out, or because
speculators built homes that
nobody wants".Real estate makes
up nearly three-quarters of the
assets of Chinese households.
At the party Congress,
President Jinping gave a stirring
call against real estate
speculation. "Houses are built to
be inhabited, not for speculation,"
he told the party faithful but his
appeal has no visible impact as
yet. The buying spree is prompted
by the state in a manner of
speaking. Local government
services like admission to good
schools are assured for owners of
apartments in Shanghai, for
instance.
Household debt, mainly in the
form of mortgage loans,
is growing as a result. At the
end of June last year, its ratio
to gross domestic product
was 46.5 per cent, up from
37.3 per cent at the same point in
2015 and 18.6 per cent in
2008.The value of medium- and
long-term loans to households
rose to 5.3 trillion yuan ($823.27
billion) in 2017, accounting for 39
per cent of all new loans
according to data released by
China's apex bank.
Chinese numbers, whether
related to GDP or jobless, are
always suspect- "implausibly
smooth and steady" as an
American daily says while on the
health of the
world's second-largest economy.
Problem is despite all the talk
of liberalisation and opening up,
the Chinese economy is still
largely behind a bamboo curtain.
From reports in local and Hong
Kong media, it is clear that doubts
over Chinese official data are
justified.
Over the past several months,
many Chinese local governments
have admitted that they have
faked economic data. Nikkei
Asian Review attributes this rush
of confessions to "Central
government subsidies for coming
clean".
Official data shows that
just four cities, Shanghai,
Beijing, Shenzhen and
Guangzhou generated
nearly an eighth of the
country's economic
output ( $ 1.56 trillion in
all) last year. This clearly
shows that the Jinping
regime is not spreading
out resources and is
depending on the big
four for growth. It is not a
healthy trend since China
lives in its villages and
semi-urban pockets.
There are few takers for
this optimism.
Certainly, the rating
agencies are not
convinced. Otherwise,
Moody's and S&P would
not have downgraded
China's sovereign credit
rating !
A growing number of Chinese
local governments are owning
up to having faked economic
data and
are moving to correct their
doctored numbers, responding
to a major shift in Beijing's
economic policy toward the
quality of growth, it says.
Future thus may become rosy
for number crunching. But what
about today ? Can we take the
Chinese growth data on face
value? My answer is a resounding
no!Consider these facts. Liaoning,
the northeastern Chinese
province bordering North Korea,
reported an unusual 2.5 per cent
drop in gross domestic product
last year; it admitted cooking its
books between 2011 and 2014
through transaction items,
forgery, tax refunds and taxation
calendar adjustments;
these admission followed probe
against Wang Min, the provincial
party boss.
Wangcheng district in
Changsha, the capital of the
central province of Hunan, faked
the ownership transfer of local
government buildings to increase
local fees revenue by 1.2 billion
yuan ($181 million). Six counties
in Jilin province listed 110 million
yuan in project funding and
hospital revenue as revenue from
administrative fees.
On Dec 8, 2017, China's
National Audit Office (NAO) said
five city or county governments in
Jiangxi, Shaanxi, Gansu, Hunan
and Hainan provinces had
incurred 6.4 billion yuan of debt
through financial guarantees – a
practice that has been banned by
the country's Finance Managers.
The Chinese authorities
estimate the local government
debt at around 16.47 trillion
Yuans($2.56 trillion). "The
problem is controllable and these
debts can be repaid by existing
assets", says the Central
government in Beijing.
There are few takers for this
optimism. Certainly, the rating
agencies are not convinced.
Otherwise, Moody's and S&P
would not have downgraded
China's sovereign credit rating!
A clear warning that debtridden
China is living on
borrowed time!