Are you going to trust these gonifs?
From: John McCarthy 11/29/2008 9:22:59 PM
of 90992
Nine Perplexing Phenomena About China’s Economy By Wang Jingwen
Epoch Times Staff
China’s official media is recently reveling in eulogizing the government for the “successful experiences from 30 years of reform and opening up.”
However, judging from what’s happening in the real estate market, stock market, financial and manufacturing sectors, many Chinese economists abroad believe China’s economy has fallen into a decline and will soon collapse, resulting in a subsequent collapse of its political system.
I would not venture to present a panoramic view of China’s economic situation (which is impossible for one article anyway).
Instead, I will simply list nine visible phenomena in China’s economy, mostly paradoxical and unheard of in other economic systems, hoping to shed some light on an extremely complicated subject.
No. 1: Soaring GDP vs. Plunging Stock Market
The stock market is usually considered a barometer of economy, yet this does not hold true in China.
Recently, the Chinese government announced that the nation’s GDP of the first three quarters of the year rose 9.9 percent—the lowest percentage increase of the past six years.
While the economy seems to be growing, the stock market is continually slumping. After a few years of dramatic bubble growth since 2005 following a long bear market, the Chinese stock market took a sudden plunge last October and has not yet recovered.
The Shanghai Composite Index fell from 6,400 to 1,600, a decrease of over 70 percent.
Nobody can tell for sure if GDP or stock market performance better reflects the true picture of Chinese economy.
No. 2: Inefficiency vs. Fast Growth
In 2003, a Finance magazine article referred to China’s economy as a huge paradox.
On the one hand, China has the world’s fastest growing economy; on the other hand, China has the most inefficient economy in terms of the rate of non-performing loans. From the perspective of traditional economics, such a scenario makes no sense.
In March 2004, official statistics indicated that the non-performing loans in the four major state-owned banks had reached RMB 18,900 Billion (US$2,780 Billion), accounting for 19 percent of total loan amount.
Yet Standard & Poor estimated the actual rate is as high as 45 percent.
In other words, almost half of Chinese people’s total savings in these banks has disappeared.
No. 3: High Unemployment Rate vs. High GDP Growth
According to official government statistics, among college students graduating in 2006, more than half could not find a job within six months since graduation. 2007 grads face an even worse situation.
For example, 1,600 people recently applied for a junior level accounting position, and 1,000 college students applied for a shop assistant position.
Compared with college grads, laid-off workers and peasants who have lost their land are facing even greater employment challenges. If the economy in China is growing so quickly, how can the unemployment rate be so high?
In the United States, when the GDP increases by 4 percent, the unemployment rate would decrease to below 4 percent.
However, when China’s GDP increased by 10 percent this year, the unemployment rate for college students was as high as 50 percent. This unusual phenomenon indicates that China’s GDP data is not reliable, and that the nation’s economic structure is not healthy.
No. 4: Luxury of Governmental Officials’ vs. Poor Living Conditions of Ordinary People
When talking about China’s high unemployment in the midst of high GDP growth, Yale University’s Professor Chen Zhiwu pointed out that though China claimed a 10.4 percent GDP growth in 2007, only 6.4 percent can be felt by ordinary Chinese people.
The real situation may be even worse. So how can China boast such a large GDP growth, while the general public does not see an improvement in their living standard?
People may not be short of meat and powdered milk, but the food they eat is often contaminated. Earlier this year, powdered milk made in China was found to be contaminated with melamine, which has led to several cases of kidney stones in infants across the country. At least four infants have died as a result.
According to research, the open-door policy the Chinese regime launched three decades ago is beneficial to only a small part of the society, mostly high-level officials and social elites. As for ordinary Chinese people, live is becoming even harder.
In April 2006, the Chinese Communist Party’s (CCP) two main bureaus for discipline inspection released a report on the family assets and wages of local government employees and civil servants.
The report found that the leadership of local CCP committees and the high-ranking officials have become the privileged strata of Chinese society.
These governmental officials were found to have an average annual income of about 8 to 25 times that of people living in urban areas, and 25 to 85 times that of farmers and peasants.
In 2006, the World Bank reported that 0.4 percent of the Chinese population dominated 70 percent of nation’s wealth. China was ranked first in terms of wealth concentration, with the worst wealth polarization found anywhere in the world.
According to United Nations’ statistics, over 300 million Chinese people live on one dollar or less a day—six times as many as stated by Chinese authorities.
Following the implementation of China’s open-door policy the nation’s economy has grown nine-fold, yet the general public has seen little benefit, as most of the nation’s wealth remains concentrated at the top.
No. 5: Currency Appreciation vs. Inflation
Ostensibly, the appreciation of China’s currency may lead to stronger purchasing power. But rapid inflation has made life increasingly difficult for the average Chinese family.
Take pork price for example: the price jumped from 4 yuan (US$0.59) per pound (600 grams) to 14 yuan (US$2.05) per pound in no time.
This increased difficulty is perhaps most apparent with Chinese farmers. Steep hikes in grain prices should mean that Chinese farmers can earn more revenue and increase agricultural production.
However, with a constant increase in seed prices and chemical fertilizers, farmers can never get ahead.
In China, there is a price differential between industrial and agricultural products, and it is a major problem for farmers in China.
It impacts not only the living standard of farmers but also the economic value of cultivated land, resulting in the direct and indirect loss of cultivated land resources.
So who benefits from this system? Most notably the government, as crop procurement prices are kept low no matter what the cost of grain. Not only are farmers hurt by low grain prices, but they are hurt by high crop prices as well. It is indeed a very strange phenomenon that indicates an unhealthy economy.
As a result, poverty-stricken farm villages, poor farmers and China’s volatile agricultural industry have become three major problems for the country, posing a tremendous impact on the Chinese economy.
No. 6: Unaffordable Housing Prices vs. Panic Buying
With skyrocketing housing prices, many Chinese people still cannot afford housing. But people are still lining up to purchase homes because they are afraid the price may rise even higher.
Several schemes have cropped up to take advantage of this largely unregulated housing market.
Last year one man sought to purchase a housing unit for 500,000 yuan ($73,260), and then sold it back to himself for 800,000 yuan (US$117,220) a few months later.
Next, he borrowed 640,000 yuan ($93,775) from a bank and used a down payment of 160,000 yuan ($23,440). Through this scheme, he had earned 300,000 yuan ($43,960). After deducting the down payment 160,000 yuan ($23,440) and a small amount of tax from the earnings, he actually gained about 140,000 yuan ($20,510), and yet this individual still owns the housing unit.
The only money he needs to pay is the interest for the mortgage loan of 640,000 yuan ($93,775). Even if no one is actually purchasing the housing unit, he does not need to worry since the worst scenario is to let the bank claim the unit, and he could still walk away with 140,000 yuan ($20,510).
So how do people get away with such a blatant scheme? With the bank’s assistance, of course.
Such schemes need to give kickbacks to bank officials in order to make good on their fraudulent investment.
No. 7: World's Highest Deposit Rate and Corrupt Officials Grafting Money
Weak domestic demand has stagnated China’s economic development.
Consumption accounts for only 35 percent of China’s GDP,
while real estate contributes more than 50 percent.
This contrasts sharply to the picture seen with the developed countries in the West, such as Europe and the U.S., in which consumption accounts for more than 70 percent, and real estate only less than 20 percent.
According to 2005 statistics, the national deposit rates for the U.S., Japan and the European Union were respectively 4 percent, 11.5 percent and 11.1 percent, while in China, the average rate was more than 40 percent.
This high savings rate stems from an unhealthy social security system, under which Chinese people have to save up to cover their retirement and health insurance, which should have been taken care of by the government.
Another queer fact about China’s deposit is that it has been higher than the country’s total wage payment amount since the 1990s.
For example, in 2001 and 2002, the annual savings deposits surpassed the total wage payment by more than 300 million yuan. The difference is due to corrupt officials speeding up the grafting process.
No. 8: Overheated Development vs. Stagnation
China has seen a remarkable period of economic growth, leading to increased production that could readily meet consumer demand.
In recent years, the central government has implemented macro-control policies to curb problems resulting from an overheated economy.
However, Lang Xianping, a Hong Kong economics professor, pointed out the duality in China’s economy. While real estate and capital construction projects contribute the most to the country’s GDP and the overheated economic development, he said, the manufacturing industry is stagnating.
According to Lang, raising interest rates will not prevent the development of the real estate industry bubble, but will instead curb the development of domestic manufacturing industry due to a lack of loans.
When many entrepreneurs took advantage of governmental policy and added money to the stock market, it had increased the real estate bubble, but also brought about obstacles to the development of manufacturing industries.
Chinese manufacturing falls at the lowest end of supply chain, and makes very little in the goods it produces.
For example, A Barbie doll made in Guangdong Province only costs one dollar to produce, 60 percent of which is the price of raw materials and 35 percent for labor and processing fees. However, the retail price of such a doll is $9.99 at a U.S. Wal-Mart.
Factors such as product design, materials procurement, storage and transportation, processing orders, wholesale and retail are all controlled by foreign factors, so Chinese enterprises cannot earn much profit no matter how much effort they make.
No. 9: Fast Economic Growth vs. Increasing Anti-Governmental Revolts
Chinese economist He Qinglian said that China's economic growth model shapes a pattern of resistance in Chinese society.
In recent years, most riots against the Chinese government fall into four categories: protesting land acquisition, protesting forced eviction, protesting pollution, and general outrage against unfair treatment.
These directly corresponding to the four areas experiencing the fastest economic growth: the stock market, real estate, finance and resource-based enterprises.
China's stock market is used by the government to collect money for itself. People pay into the dilapidated state-owned banks and enterprises, but often lose on their investment and savings. As people have begun to understand how much they’ve been cheated, the stock market has accumulated a great deal of resentment across the country.
China's real estate market is very unique.
The government acts as both buyer and seller, collecting lands from farmers for very little and then selling them back to real estate merchants at very high prices.
At present, more than 80 million Chinese farmers have lost their land to these governmental deals and have been landless, unemployed and homeless. As a result of this high profit land grab, an increasing number of revolts against the government have taken place all over China.
Gloomy Winter Approaching
A lopsided economy with so many abnormal phenomena tends to be short-lived. Since last year, early symptoms of economic crisis have been emerging with no change of course in sight. For example, in the first half of this year alone over 60,000 small-and medium-sized enterprises filed bankruptcy, laying off over 20 million workers.
Things are not going well in real estate either.
According to reports, investments in China’s real estate market increase at a year-to-year ratio of 30.9 percent, while the actual sale of homes decreased by a wide margin with a year-to-year ratio of 10.8 percent.
Meanwhile, stock bubble has already burst. The Shanghai Composite Index tumbled 70 percent recently, down from 6124 on October 16 last year. China’s stock market wiped out 24 trillion yuan in a total market cap, equal to one entire year’s Chinese GDP. At least 97 percent of stock market investors lost more than half of their money, 2 percent broke even and only less 1 percent actually gained a profit in 2007.
Also, since China has realized its economy growth by overusing natural resources, the possible environmental disaster and resource shortage will be another heavy blow on its economic development.
A Moody’s Review finds that China’s economy is now recessing from its fast growing past. If the growth rate of this economy decreases to 8 percent—below the lowest threshold needed for job creation to sustain growth—it could be an economic nightmare, like the negative growth rates seen recently in Europe and the U.S.
The Chinese economy, facing a global financial crisis and domestic issues, is full of conflict and seems unable to move forward. Many suggest that much could be improved if China decides to back the rural land reform. Intending to stimulate the domestic demand and ease the economic crisis, the reform would allow farmers to lease or trade their land-use rights, and in the process would mobilize 20 trillion yuan in rural house and land assets. But so far the government has postponed the idea.
What is the solution to fixing China’s economy? There is of course no easy answer.
Faced with a sluggish housing and stock market, severe problems in the financial and manufacturing sectors, dwindling resources, plus increasing environmental pollution and inflation, China’s economy faces a host of formidable challenges.
Add to this a government focused more on its own greed than the prosperity of the people, and the future of the Chinese economy becomes one of little hope. Once known as an economic miracle, China now heads for an economic catastrophe.
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