Not Just the Sock Market - Entire Chinese Economy is Rigged
Commentary: China -- Smoke, mirrors and accounting
Friday, 23 March 2001 17:33 (ET)
Commentary: China -- Smoke, mirrors and accounting
By MARTIN HUTCHINSON, UPI Business and Economics Editor
WASHINGTON, March 23 (UPI) -- It long has been a mystery how China manages
to sustain growth rates of 7, 8 and even 10 percent per annum at a time when
other Asian countries are deep in recession.
Following UPI's recent article on the bad debt by Chinese banks, it is a
mystery no longer: They don't achieve such growth rates. They cook the
books.
Ever since Nikita Khrushchev promised to bury the West economically in
1961, and observers forecast that the Soviet gross domestic product would
outstrip that of the United States by 1980, skeptics have questioned the
reality of GDP figures emanating from centrally planned economies, where
there is no price mechanism to ensure that factories produce what people
actually want and make a profit doing so.
Now, it has been revealed that in China, too, apparent economic growth is
in reality stagnation.
First, a caveat: It is, of course, the case that Chinese growth in the
early post-Mao years was largely genuine. The evidence of it was easy to see
in the decline in the number of rural Chinese starving to death. But this
was merely recovery from self-inflicted disaster.
In the last decade -- roughly since the Tienanmen Square massacre of 1989
-- it has been a different story. Chinese bank bad debts totaling $170
billion, or 17.2 percent of GDP -- have been transferred to thinly
capitalized management companies, and replaced in the books of the banks by
the debt of the management companies, guaranteed by the state. The
management companies then exchange the corporate debt for equity, and the
defaulting borrowers continue in operation.
By this means, the banks report no loss, the state reports no additional
debt, because indirect debt guaranteed by the state is not included in
official figures, and the debtor companies clean up their balance sheets and
resume operation.
In other words, 17.2 percent of GDP has just been dropped down an
accounting black hole.
According to analysts, there is more bad debt of between 25 and 50 percent
of GDP waiting to be given the black hole treatment in its turn.
This explains where the growth rates go. If 42-67 percent of gross
domestic product in bad debt has been accrued in a decade, then gross
domestic product growth rates in that decade have been overstated by roughly
4-6 percent per annum.
There is more.
In the last several years, around 4 percent per annum of China's GDP has
been poured into the country in the form of direct investment from the West.
Of course, building factories and buying products in China has itself
increased Chinese GDP by an approximately equivalent amount. That money has
produced no apparent return for the investors, other than those from Japan
or overseas Chinese communities.
Hence, adding the two together, Chinese growth rates over the last decade
have been overstated by 8-10 percent per annum.
In other words, China's real indigenous growth rate is between zero and
minus-2 percent of GDP. All that has been happening is that huge amounts of
wealth have been transferred from foreign investors and foreign banks.
To whom? To the senior party elite, of course. And to a limited extent to
a thin layer of young, well-connected urban bourgeois, who drink café latte
and surf the Internet. Meanwhile, the vast bulk of China's population has
lost the social safety net of village Maoism and gained very little in
return since the end of the 1980s decade of rural growth.
Of course, there's a certain amount of infrastructure -- such as the
famous highway from Beijing to Shanghai that is traveled only by party
functionaries, foreigners and the occasional bicycle.
The picture is exceptionally murky, but from what one can tell, China is
an economic and military disaster waiting to happen.
Consider: There are, in essence, only two facts we really know about
Chinese economic performance. First, the West invests $40-45 billion in the
country each and every year, for very little apparent economic return. The
money will be lost forever when the accounting merry-go-round stops, as it
must.
Second, China has built a very substantial arsenal of nuclear missiles,
aimed at Taiwan, the United States, and any other country which may provoke
a temper-tantrum by Beijing's leadership.
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