China's Economy: a cycle
of arson and firefighting (two)
Written by He Qinglian on
September 29, 2011
(translated
by krizcpec)
First, in response to financial crisis, China's central bank has taken a moderately loose monetary policy and expanded the money supply, effectively supporting the real economy;
Second, since the beginning of this year China has adjusted timely its monetary policy and implemented a prudent monetary policy, namely monetary tightening.
To put it simply, it
meant that within two to three years, China's Central Bank first
followed instructions to issue excessive money and blow the economic
bubble, then drastically tightened money supply, and squeezed the
bubble that it itself had blew out of proportion—that was the main
reason China's central bank governor got awarded.
How much was issued?
Since 2009 the central government had invested four to five trillion yuan of funds in the market; to stimulate the economy, local governments had also used extensively the financing platform to borrow nearly 14.4 trillion yuan, roughly half of which was said to have entered housing and stock markets, thus these two economic bubbles of China could continue to expand.
And the second point was
about the central bank's having to grit its teeth and tightened the
money supply. In the first half of this year, the People's Bank of
China raised six times the statutory deposit reserve ratio.
This tightening measure
aimed to squeeze the real property bubble which had been made to
expand with every possible means in the past few years. The attempt
to achieve this goal bankrupted many China's SMEs which liquidity had
dried up. The yet-to-be-fully-unfolded trend of business owners
running away from debts that is happening in Xiamen, Fujian and
Wenzhou, Zhejiang is a product of tightening money supply and the
rupture of the capital chain.
There are no better points to illustrate the role the Chinese government has played in the fourth round of economic overheating than these two reasons of Zhou's being awarded. The first one: the government had done its job by stimulating the economy, that is, “arson”; the second: it had succeeded in squeezing the bubble, in other words, “firefighting”. Either way, it had done something. What a prize to be received for these! I must point out though that for various reasons, Zhou Xiaochuan as the governor of the central bank has no authority over China's monetary policy. The central bank under his leadership is at most a tool of the Politburo and the State Council.
There are no better points to illustrate the role the Chinese government has played in the fourth round of economic overheating than these two reasons of Zhou's being awarded. The first one: the government had done its job by stimulating the economy, that is, “arson”; the second: it had succeeded in squeezing the bubble, in other words, “firefighting”. Either way, it had done something. What a prize to be received for these! I must point out though that for various reasons, Zhou Xiaochuan as the governor of the central bank has no authority over China's monetary policy. The central bank under his leadership is at most a tool of the Politburo and the State Council.
I began this article with the reasons of Zhou's being awarded only because it outlines so vividly the absurdity behind China's economic trend in recent years.
If at the times when the second and third rounds of economic overheating took place, China's economy was driven by three carriages: domestic demand, foreign trade and investment—with the latter two hit by overheating. That was not the case for the fourth round of economic overheating.
The fourth round of economic overheating, triggered almost entirely by the staggering over-investment from the government, inherited nearly all the problems of the third of overheating, and doubly magnified them: local governments over-dependence on land revenue; the two major problems with resource-based industries—blood-stained GDP and high degree of environmental pollution; and gave rise to an economy that is highly externally dependent, troubled by gross inadequate domestic demand, and developed serious imbalance in industrial structure.
The only visible major achievement was the surge in government revenue, which of course was accompanied by the proliferation of social resistant incidents, which had increased to 180000 cases last year.
The traps laid by the fourth round of economic overheating are unprecedented both in number and depth.
The trap of high
inflation
According to official data, the broad money supply in 2009 was 60.6 trillion yuan, 1.8 times of the GDP, or a surplus of 27.1 trillion yuan compared to the GDP figure. And in just the first three quarters of 2010 forty-three trillion yuan was issued in excess.
The two speeches by
Premier Wen Jiabao—the one delivered during the annual meetings of
NPC and CPPCC this year that stated the need to "eliminate the
monetary base of the rise in housing and commodity prices", and
the other during the State Council executive meeting on April 13 that
stressed it is necessary "to eliminate the monetary factors that
drove up inflation"—have formally acknowledged that excessive
amount of currency was issued.
The trap of quality
and safety of public works
In the fourth round of
economic overheating, the Government invested in construction of
rail, highway and infrastructure. Rail construction, the most
ambitious of all projects and received the largest share of
investment, has been plagued by corruption scandals and operational
incidents. The Wenzhou train crash incident that happened on July 23
this year exposed serious security concerns with China's high-speed
rail, the “independently innovated product” that China put
together the technologies that were grabbed from other countries.
Not only has the high-speed rail ceased to be high-speed after that, the country's dream to export its own high-speed rail technology has also gone bust.
The trap of local
debts
In
order to borrow massively from banks, all levels of local governments
set up their own “local financing platform”. How much then did banks
across the country lend to “local financing platforms” within the
two years that the central bank implemented the “loose monetary
policy”?
According
to the China
Regional Financial Performance Report 2010
(2010中国区域金融运行报告) published
by the central bank, there were altogether more than 10,000 financing
platforms of local government (at provincial, city and county levels) by
the end of 2010; the loans from banking system totaled 47.92 trillion
yuan, of which 30% was loaned to local financing platform, that was
about $ 14.4 trillion yuan. A third of this 14.4 trillion yuan was
from China development bank, the remainder from state-owned
commercial banks as well as city commercial banks. Now it has been
confirmed that two to three trillion of these loans are at risk of
default.
In addition to the three
above-mentioned traps that were laid by the loose monetary policy,
monetary tightening dug another—the trap of private lending, a
crisis that is still unfolding.
In
the face of huge inflation pressure and the trap of local debts, the
central bank has no option but to tighten money supply. Under the big
picture of the central bank’s continual monetary tightening, both
the scale of private lending and its interest rates are both driven
close to madness. Even areas that are less economically developed
have begun crazy lending. Such a phenomenon invaded the capital
market on a massive scale, and eventually brewed into a Chinese-style
credit crisis.
At
present this rupture of the capital chain triggered the phenomenon of
borrowers running away from debts and default in vast areas,
provinces like Zhejiang, Jiangsu, Fujian, Henan and Inner Mongolia
are among the high risk zones.
According
to Wenzhou
private lending market survey (温州民间借贷市场调查),
of the current 110 billion yuan private lending funds in Wenzhou, 35%
have been used in general manufacturing and 20% in real estate
investment or speculation.
Engulfed
in the trap of private lending, SMEs collapsed in succession.
Financing difficulty prompted SMEs to turn to private lenders for
loans, which entailed high interest charges that ate
deeply into corporate profits and is becoming the last straw that
would crush the SMEs.
The
Summer report on China's industrial economic operation
2011 (2011年中国工业经济运行夏季报告), published in early
September, showed that from January to July this year, of the 310,000
enterprises above the scale, 40,000 or 12.7% had recorded losses. It
is noteworthy that business losses have been increasingly serious by
the month—
The percentage of increase in losses from loss-making companies rose from 22.2% in January to February to 41.6% in January to June. The figure rose further to 46.9% in January to July.
It has become a recurring
content of recent China news report that entrepreneurs who could not
afford the interest charges of private loans have fled with their
entire family or committed suicide.
If a simple graph is
needed to make things clear and easy to understand, the casual map of
the fourth round of economic overheating would be as follows: first,
the government issued staggering amount of money, which resulted in
excessive investment, which in turn triggered monetary tightening,
and rampant private lending ensued. And this induced repeated usury
collapses and flights from debts in places like Fujian and Wenzhou
and eventually SMEs went bust in succession.
Then, can Beijing learn
the lesson and quit setting things ablaze in one moment and fighting
the fire in another? The answer is: no.
China's Deputy Minister
of Finance has said long ago that “there is an old Chinese saying,
'to go up hill is difficult, to come down from it is even more so'.
If the role of stimulus policy is seen as going up hill, and the
withdrawal policy as coming down from it. I think the decision to
withdraw from the market would be harder to make than the one to
stimulate it.”
Indeed, Beijijng would
not quit easily. A few days back, official information revealed that
Shanghai, Zhejiang, Guangdong and Shenzhen will within this year
participate in a trial program to directly issue local government
bonds, which in sum will be worth approximately 25.1 billion. If
people are not forgetful, they should be able to recall that two or
three months ago, the voice of worries that China would be deeply
trapped in the quagmire of local debts was at one point the important
topic of the media.
With a situation like
this, what should premier Wen, who experienced economic overheating
twice during his term speak of then? Apart from empty talk on
political system reform, there really is nothing else left to say.
