CHINA – AN INEVITABLE ECONOMIC DISASTER
Is China really the "Economic Superpower" it claims to be. Research and data tells us clearly China is a paper dragon and is heading for an impending economic disaster of catastrophic proportions.
Off late China has been in the news for all the wrong reasons. Keeping aside the massive propaganda which the Chinese Communist Party (CCP) has launched globally to shore up its image after it deliberately misled the world and spread the deadly Wuhan Coronavirus, there is a bigger looming problem which the world needs to brace for.
The Chinese economy is not the “Superpower” it has been touted as.
Without a doubt China has made immense progress starting with Deng Xiaoping during the 1978-79 “Boluan Fanzheng” period. As Chairman Deng opened the Chinese economy to a unique brand of state-controlled capitalism. With exception to a small hiccup from 1989 to 1992 due to the Tiananmen Square genocide, China has done very well with its economic growth.
Or so it may seem.
All is not well in the Chinese economy. There are three primary issues which makes the Chinese economy extremely brittle and fragile.
FAKING OF ECONOMIC DATA
There are two rules one must follow when it comes to dealing with China.
Rule No.1: Any data coming out of China is suspect
Rule No.2: Look beyond the smokescreens which the Chinese Communist Party puts up
You can look at the data which the CCP has put out regarding the Wuhan Coronavirus as a good measure of how the CCP works with data.
For years economists, analysts and politicians across the globe have looked at China’s declared economic numbers with scepticism. Specifically, from 2008 onwards, experts have been constantly pointing out that the official data on the Chinese economy, which never added up.
In 2019, a comprehensive Forensic Examination of China’s National Accounts was presented by Chang-Tai Hsieh (University of Chicago) and Wei Chen, Xilu Chen and Zheng (Michael) Song (Chinese University of Hong Kong). This detailed Forensic study comprehensively concluded that the Chinese Communist Party has been inflating China’s GDP figure by an average of two percentage points. On its own two percentage points false inflation of the Chinese GDP from 2008 onwards would translate to a false inflation of at least $4.5 Trillion in absolute money terms.
You may ask why I mentioned the culprit here as the Chinese Communist Party and not the Chinese Government for falsely inflating this data. The moot point being, the Chinese Communist Party (CCP) is the Chinese Government. The closed insider system in China makes it amazingly easy for the CCP to manipulate all forms of economic data.
Since the CCP is the Government, the Auditor and the Chinese banking system. One may argue about some of the Chinese Banks being “independent”, but it is important to note, “private” banks and “private” enterprises in China are all owned and operated by key CCP members.
It is particularly important for us to understand why the CCP inflates China’s economic data. The CCP strongly believes that in order to prevent an outright revolt by the Chinese people, it is extremely important to make the Chinese people believe that the CCP’s form of governance is the best in the world. Inflating figures and “creating wealth” at any cost is the only way the CCP can keep the Chinese people “happy”.
Also, the internal party dynamics of the CCP is such that only the best performing local & regional heads, who meet the annual economic targets set up by the CCP, get recognized and promoted to bigger positions in the CCP. Those local & regional heads who do not meet their targets are cast aside and sent of to “punishment” postings in China’s far flung regions or regions where there is serious trouble.
The data falsification begins at the local government level and moves right across to the regional level and then to the central level at Beijing. Everyone in the CCP knows about it, but to them this issue just does not exist.
The impact of this falsification / inflation of the Chinese economic data from 2008 means that China is not as rich or that it has been doing as well as it has led the world to believe. There are serious issues within the Chinese economy which is now coming out in the open.
GROWTH AT ANY COST
Think of a scenario, you are a business owner and in order to grow your business you need capital. What do you do? But of course, you take a loan / debt from an external entity who has the capital to lend. And this is done after both parties have done their due diligence. This is called the Outsider System, where you get money from outside your sphere of influence. This is how most of the world operates.
Now think of another scenario, you are a business owner and to grow your business you need money. Only this time you also happen to own a money printing press and you are also the absolute dictator of your area. So, in order to get money to grow your business, you simply switch on the printing press and print as much money as you need. Secured in the knowledge no one can challenge your authority. And you can print money on the sly, without telling your neighbours. This in a nutshell is the Chinese Insider system.
So essentially, the Chinese Communist Party, has been printing loads of money to make the Chinese economy grow. To put this into perspective, the CCP has been creating Four Yuan of Debt for One Yuan of GDP growth.
Increasing debt without a concurrent economic gain has inevitably led to the economic downfall. Out of 43 countries that experienced an increase of credit-to-GDP of more than 30 percent in five years, 38 of those countries faced a financial disaster. Those statistics do not bode well for China.
1989 Tiananmen Square pro-democracy protests were a watershed moment for the CCP. The CCP moved its private militia, the PLA to crush all dissent with brutality the world had never witnessed before. CCP was able to retain power, just barely. However, the CCP realized that to keep the Chinese people from rebelling and ousting it, they needed to make the Chinese people rich.
From 1992 to 2008, China opened itself as the factory of the world and grew at an astounding pace. The Chinese people were doing much better than before, but they were nowhere near as wealthy as western countries. During this period, the CCP had managed to keep the Chinese people satiated.
In 2008, the world was hit with a massive recession arising out of the USA sub-prime loan crisis. Demand for goods from China fell sharply. Chinese economy was totally dependent on exporting goods to the entire world.
The CCP very quickly understood that to make the Chinese people wealthy, just depending on an export-oriented economy would not generate remarkably high GDPs. The CCP had to stimulate the domestic market. China had to grow from being an export nation to a nation of consumers. And the Chinese people were more than eager to stimulate the economy with increased consumerism.
China also happened to be the nation with one of the highest savings rates. Chinese people saved almost 50% of their earnings. This was an astounding figure by any standard. The key to stimulating the domestic consumption was massive spending on the local infrastructure and real estate. This could only be done by creating money out of nothing. This is where the CCP with its Insider system, created enormous amounts of money (debt) which was then given out to local Governments, Chinese Companies and Chinese people as loans.
From 1992 to 2020 the Chinese Debt to GDP ratio ballooned from a modest 50% to a dangerous 300%. During the boom period from 2008 to 2017, the CCP actively encouraged widespread home buying and mortgage debts from the Chinese people.
Currently 59% of an average Chinese person’s debt is towards residential loans.
But herein lies the crazy dragon in the Chinese Banks, who have lent this money to the Chinese people. This push from the CCP to force a fast GDP growth rate by stimulating domestic consumption, has led to massive bad debts and sub-prime lending.
To understand this, we must revisit the internal culture within the CCP. I have explained this above, in order to grow and become big within the CCP, the members resort to all means available to them.
The up-country local government heads in order to achieve their growth targets found an easy method. They took massive loans from China’s state-owned banks. These loans were used to buy farmlands from rural Chinese people. To keep these rural Chinese people happy, generous compensations were offered. The CCP gained support amongst such rural people as they were suddenly in possession of lots of cash. And these rural people were offered employment in the Chinese sweat factories. People had money and job, the CCP gained support from these people and the local governments got land to develop into new cities.
These local governments then put up the infrastructure in these newly acquired land and sold these land parcels to Chinese real estate development companies, which are owned by CCP members. These Chinese real estate development companies then took loans from Chinese state-owned banks to build substandard quality apartment blocks, houses, shopping malls and commercial buildings. The real estate companies then sold these substandard properties to Chinese retail investors. The Chinese people took loans from Chinese state-owned banks to buy these properties.
The plan worked perfectly. China went into a massive construction spree. Hundreds of new cities came up across China at an astounding pace. This was the Chinese miracle. China consumed more cement in a few years than which was used by the entire world in the last hundred years. CCP told the world that they intended to move 500 million rural people into these new cities. China and the CCP got their mega GDP growth rates (some of which came from falsified economic data).
Now the crazy dragon in the details. Most of the Chinese people who bought apartments, homes, shops and offices in these new cities, had bought them as investments. CCP’s paper dragon economic growth encouraged widespread home buying and mortgage debts as property prices soared. 80% of the homes purchased in these new cities were 2nd and 3rd homes to the Chinese people. Therefore, these new cities lie mostly deserted. These are the famous Ghost Cities of China.
With the onset of the economic slowdown and the many trade wars which the CCP is now battling, the Chinese economy has gone into a full recession mode. People who bought properties during the economic boom are now facing monthly mortgage payments that equal up to half of their monthly income. Household budgets are stretching to the breaking point.
Ghost cities and the paper dragon economy are the legacy of the Chinese Communist Party’s growth at any cost policy.
CHINESE BANKS ARE GOING BURST
There are tell-tale signs that China and its banks are going burst. China’s tax revenue growth has dropped. In 2018, tax revenues grew by 6.2 per cent. In 2019 the growth was less than 4%. China’s budget deficit is growing. It touched almost five per cent in 2019. But we all know how China falsifies its economic data. Therefore, these reported parameters by the CCP are likely to be far worse.
Another significant indicator of troubles with the Chinese can be gauged by declining Chinese predatory loans to other nations. In 2016, China gave 46 loans worth well over $1 billion dollars all of it went for overseas investment projects. In 2018, China only funded 28 projects of the same scale.
Late last year China imposed limits on businesses and individuals in the Hebei province for withdrawing large amounts of cash without prior approval. People are required to give one-day notice to withdraw more than 100,000 yuan with a “valid reason”. Chinese businesses in Hebei now must report transactions of over 500,000 yuan. Of course, these requests can be denied if the reason is not found “satisfactory”. The CCP now has decided to expand this policy to Zhejiang and Shenzhen regions later this year.
Few important points to highlight about Chinese banks:
We can only look at indicators and do forensic study of China’s economic numbers to gauge the extent of China’s paper dragon economy. A CLSA study indicates around 2.5 trillion yuan ($353.1 billion) of new non-performing loans will be generated in China’s banking system within the next 12-months. Signs of troubles are abounding in China. There is massive idle capacity in all industries due the world shutting down because of the Wuhan Coronavirus pandemic.
China’s Central Bank, the People’s Bank of China(“PBOC”) has been injecting loads of cash into the Chinese banking system to try to provide some stability, which is only a temporary fix for a problem which is deep rooted. The data from Chinese banks and the CCP is untrustworthy to say the least. There is no reliable way to understand how well-equipped Chinese banks are to face any bad debt crisis. CLSA study indicates, Chinese banks would need new capital equal to more than 15% of China’s GDP.
Another critical issue the Chinese banking system is facing is the drop in their net earnings. This is due to the rising NPAs and the artificially low lending interest rates which the CCP has forced the Chinese banks to adopt. The CCP desperately needs to keep the lending interest rates lower, as they want more individuals and institutions to take these cheap loans to roll back into infrastructure and real estate. For the CCP, this continued flow into infrastructure and real estate is critical to buffer the Chinese GDP growth numbers.
If the CCP does increase interest rates, higher mortgage payments could present genuine problems for homeowners, even though it would help curtail the spiralling debt problem and lavish consumer spending. Currently 59% of the debt of Chinese citizen is towards real estate ownership. This is not an easy dichotomy for the CCP to handle, and it will certainly put it in a lose-lose situation.
China has grown from an export nation to a nation of consumers, all of whom are eager to stimulate the economy with increased spending. Like many other countries, China is going down a road of unsustainable spending. This may mean that China’s boom may see a dramatic fall, and consumers may be saddled with debts they have no way of repaying.
Verified news percolating out of China confirms the gravity of the crisis in the Chinese economy. In the last 18-months, 10 major Chinese banks have been given bailouts by the CCP. Baoshang Bank, Bank of Jinzhou, Hangfeng Bank, etc. are just some of the prominent Chinese banks in the recent past who have be restructured, bailed out or have been nationalized by the Chinese state banks. Analysts who are tracking China silently concede that there are hundreds of such Chinese Banks and NBFCs which are at the brink of collapse.
Chinese banks are not deeply interconnected to the global banking system. This was a deliberate strategy by the CPP to keep them way from probing eyes of the world so that they could run their Insider System of fiscal policies.
Although, the Chinese banks going bust should not directly affect the world banking system. But Chinese have loaned enormous sums to countries with dubious economies and these countries are equally likely to implode along with China.
The CCP has lent around $1.5 trillion to 150 countries in the form of direct loans, making China the world’s biggest lender, bigger than the World Bank or the IMF. These loans were doled out by the CCP to nations with weak economies, poor governance and who have high natural resource deposits, as part of the CCPs plan to create dominion states for China via debt traps.
China has lent money to some of the worst rated countries. Already some these countries have asked for restructuring of loans, deferring payments and write-offs. When we factor in the global slow down due to the Wuhan Coronavirus pandemic, these nations under the Chinese debt burden will feel severe stress for repayments.
This scenario does not bode well for China and the CCP. If there are defaults in repayments from these sub-prime nations, it will add further stress to the already crumbling Chinese banks and economy. This will have a cascading effect on China and on these countries, bringing down their complete economies.
It is inevitable that the Chinese economy will implode on itself. The question is when. And there will be repercussions felt on a global scale. The CCP cannot be trusted, the world has seen the deceit of CCP related to the Wuhan Coronavirus pandemic. Therefore, it is imperative that the world community prepare for this impending disaster.
When the Chinese economy does come crashing down due to the state of the Chinese Banks, there will be issues of unforeseen proportions which the world will have to deal with.
We are already seeing the belligerence of the CCP and the PLA across all the Chinese borders. The CCP has gone on an overdrive with propaganda of nationalism and is hard selling the “foreign hand” for all the issues in China. The imposition of the new Security Law in Hong Kong is a step to impose the Chinese Insider-system of economics. Hong Kong is sitting on US$ 400 billion reserves. This is money the CCP can desperately do with to buy some more time from an inevitable economic implosion.
And we have not even mentioned about the Chinese Shadow Economy. But I will leave that for my next post.
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