Tuesday, September 9, 2014

China's Gini Coefficient at 0.73 Shows Deng's Reform Has Failed

Recently Peking University issued a report pointing out that the top 1 percent of Chinese households possess over one-third of the nation's wealth. 

But, 25 percent of the poorest families own just 1 percent of the country's wealth. The report says that families' net property of the Gini coefficient stood at 0.73. Experts say that the huge gap between rich and poor shows Deng Xiaoping's reform and opening policy doesn't work. 

The state-run mouthpiece people.cn said that Peking University's Institute of Social Science issued a report -- “Chinese Livelihood Development Report 2014” on July 25.

The report says that Chinese inequality in property has increased rapidly. The net wealth of Gini coefficient was 0.45 in 1995, 0.55 in 2002, and 0.73 in 2012. The top 1 percent of the families have a third of the nation's wealth. However, 25 percent of the poorest families possess just 1 percent of national wealth.

The Gini coefficient also known as Gini index, is an international measure of statistical dispersion intended to represent the income distribution of a nation's residents. The higher the value, the more the inequality would be.

Jian Tianlun, US-based economist: “We knew in the past that Chinese wealth distribution is seriously unequal. However, the government's statistics have no credibility. We don't know the truth. This time the Gini index is 0.73, it is definitely the top in the world. Around the world only six countries whose Gini index is over 60 percent, and China is on the top. The other five countries are all located in Africa, they are either very under developed or exist serious racial differentiation.” 

Jason Ma, NTD Television special economic commentator: “This figure is shocking and strange. In the world, such as in Latin America, society likely became unhealthy by differentiation between rich and poor. China's Gini index reached 0.73, which proves that Chinese society is completely abnormal.” 

Radio France Internationale (RFI) reported that although Chinese major websites had reproduced people.cn report, the comment function had been disabled. There is no single post to follow the article. Not even propaganda posts followed. 

Writer Nanjinglong's blog pointed out that the reason is simple, if they sent 50-cent Party to post lies, it cannot prove the Chinese Communist Party's “Great, Glorious and Correct”, on the contrary, it will result in even worse impact. Under the propaganda department's arrangement, this news has been muted. Although you know the figure is close to the fact, but there is no way to communicate with readers. How serious is the problem? The real reason the cause is unknown.

Jian Tianlun observes that the top Chinese families often possess huge undisclosed properties.  The figure provided by Peking University is underestimated. 

Jian Tianlun: “This certainly excluded cash that corrupt officials had embezzled. Because embezzled money is illegal, is impossible to be accounted in. For example, after Zhou Yongkang's arrest, we know he possessed over 300 homes in Beijing. Officials similar to Zhou have tens of homes, there are many, so, empty homes and ghost towns exist everywhere in China. This is why less than 1 percent of people seized so much assets.”

Jason Ma points out that Gini index is 0.73, indicating the wealth gap is seriously wide. This kind of society doesn't have any stability. 

RFI says that according to theory of Deng Xiaoping, former Chairman of Central Military Committee, the reform is unsuccessful.

Jian Tianlun: “This actually was caused by China's entire system, direction of reform and reform policy. It was Deng Xiaoping that let part of the population get rich first, and letting the rest support the rich, so the gap widened gradually.” 

Jason Ma: “The more one gets close to the people who have power, the quicker one gets rich. Once the people with power got rich, they would have their social interest firmed. Actually this is an economic development model of an extreme polarized society.  This society is totally unstable, they just diverted the CCP's crisis onto the entire nation.” 

Jason Ma says that since 2003, the statistics bureau announced Gini index was 0.47 or 0.48. This time allowed figure 0.73 being disclosed, showing that at least one faction at high-level understood that they cannot cover their eyes to live. 

What the final reaction of the high-level would be? If the figure 0.73 caused a strong social response, would the CCP come out to deny the rumor? We will see.

Source: NTDTV

Sunday, October 13, 2013

Curbing China’s Grey Income Requires Reforming Political System

By Tianlun Jian
The problem in China of “grey income”—money obtained off the books, often by corrupt means—can only be solved by political reform.
Grey income has always been an interesting topic as well as a serious problem. It reflects many facets of China’s darker side, from the entire political system to its management and supervision systems. The soaring amount of grey income is a result of increasing illegal activities and worsening official corruption on all levels.
Grey income in China amounted to 620 billion yuan ($101 billion) in 2011, or 12 percent of China’s gross domestic production that year, according to an income survey conducted by economist Wang Xiaolu, Deputy Director of the National Economic Research Institute of China Reform Foundation.
What, then, is the source of this mammoth amount of grey income? Deng Xiaoping, the so-called chief engineer of China’s reform and opening up, planned to allow some people to get rich first—namely, Deng’s descendants and other Communist Party officials and their descendants. How was this accomplished?

Political Policies

First of all, some policies have cleared the path for grey income. The Chinese state’s revenue equals roughly one-third of China’s GDP, excluding the nation’s natural resources, according to Mr. Wang Xiaolu’s estimates. The money should have been used on public services, but the Chinese government has invested very little on social welfare such as health care and education.
In 2011, for example, China’s health care spending was only 5.2 percent of GDP. This is lower than that of many other developing countries, not to mention developed countries, which spend from 8 percent to over 10 percent of GDP on education.
While the Chinese state claimed to put a strong emphasis on education, they didn’t increase the education spending to 4 percent until 2012. This is mid-low level among developing countries, and lower than some African countries that are far poorer than China.
So where did all the money go? The government invested a large part of its revenue on many projects. As the funds trickled down to lower levels, officials at each level took the opportunity to peel off profits, often by hiring their relatives or friends and taking kickbacks, or simply hiring themselves. Officials and businesspeople often conspired to pocket project funds.

Industrial Monopolies

The second source of grey income is industrial monopolies and the monopoly of profits.
Grey income is exceptionally high in monopolized industries, especially those of resources like petroleum, electricity, and natural gas.
Income in the electricity industry is much higher than in other industries. At the beginning of 2007, Beijing’s average annual salary was 27,000 yuan (US$4,400). But in the electricity industry, even a meter-reader’s income reached 100,000 yuan (US$16,335).
The petrol system is a similar picture. Recently many petrol industry senior officials were arrested on corruption charges. They even own a hundred-billion-yuan company that is not officially registered. They use state resources without paying a penny for tax. What do they do with all the money? They divide it among themselves, of course.

State-owned Enterprises’ IPO

The third way of obtaining grey income is through SOEs’ initial public offering (IPO). Theoretically, since SOEs are owned by the state, they belong to all Chinese people. However, SOEs that have collected huge amount of funds through IPO are deciding the allocation of the funds themselves.
A Chinese finance department official once revealed that when the general manager of a state-owned insurance company was investigated, the GM was discovered to have paid himself 7.5 million yuan (US$1.2 million) per year. The investigators were shocked, but they didn’t know what to do with him.
What made him deserve such a salary? The GM couldn’t have cared less; he just paid himself that much. What qualified him to be a general manager? The only reason was that he was the Party secretary at the company before it went public. He got his 7.5 million yuan salary right after the IPO.

Capitalization of Land

The fourth source is the capitalization of land.
In the past decade, local governments have started to sell land with the approval of the central government in order to alleviate the governments’ revenue shortage. Today, land sales have become the major source of local governments’ revenue. They often account for 30-40 percent of government revenue, and 50 percent in some cases.
As the governments have increasingly relied on land sales, land prices have skyrocketed, since the local governments have full control of land supplies. Many have forgotten the fact that land belongs to the state and all the people, and used to be assigned to individuals for free.
Land sales have also become a way for government officials to collect kickbacks from real estate developers. The best properties are sold to those who provide the highest bribes or maintain a good relationship with officials. The grey income from this channel is incredibly high. One thousandth of a project would be worth millions or tens of millions of yuan, or several or perhaps scores of housing units.

Double Track Wage System

The fifth source of grey income is state employees’ double track wage system. While their salaries are relatively low, their total take-home is very high when various kinds of subsidies and bonuses are added.
I know a junior level cadre in a mid-size city whose salary is about 2,000 yuan ($327) a month, but his actual monthly income is over 4,000 yuan. In other words, his subsidies are higher than his salary. He also receives a year-end bonus and many other kinds of bonuses.
Why is that? The governments now have many ways to make money, such as approving projects and land sales. This extra income is divided among the officials in various forms, such as bonuses or holiday supplements.

Capitalization of Power

The sixth source is the capitalization of political power.
The Chinese government charges high fees for its daily administrative services such as the issuance of permits and project approvals.
Some Party officials have been found to own many coal mine shares, which were given to them in exchange for government approvals. Only after they pocketed these shares would the officials issue permits in time or give the green light for inspections.

Financial Monopoly

Another source is serious financial corruption.
A 2003 central bank investigation found that, in addition to loan interest, bank clients also have to pay banks “gratuities” and fees to “maintain good loan relationships” with financial organizations. Such additional fees are as high as 9 percent of the total mortgage.
This is why China’s bank officials make so much money. A bank clerk can get a salary of hundreds of thousands of yuan a year, while a mid-level manager easily earns over a million.

Social Instability

All the above sources of grey income originate from the flawed political system as well as erroneous policies. This has negatively impacted Chinese society.
The monopoly of resources and the lack of transparency in government work lead officials and businesses to conspire to generate grey income, which lures more officials to become corrupt and more business people to conduct illegal activities.
Meanwhile, due to the tightly controlled media and little supervision of the government, businesses lack a fair environment to compete in, and social wealth cannot be allocated fairly. Polarization and the sense of insecurity have seriously undermined social stability.
Income gaps have been widening as the rich become richer. The top 10 percent of China’s wealthiest earn an average of 188,000 yuan (US$30,711), which is 20.9 times as much as that of the poorest 10 percent.
The gap is further confirmed by Wang Xiaolu’s investigation, which revealed that the Gini coefficient (an index used to measure income inequality) in China’s urban areas has exceeded 0.5, well above the safety level of 0.4.
Such a high Gini coefficient has only been seen in a very few extremely impoverished countries. Also, the calculation did not include China’s rural areas, which have much lower income than urban areas. The actual Gini coefficient on the national level is even higher.
Another study conducted by a university showed that China’s Gini coefficient in 2010 was 0.61, with 0.56 for urban areas and 0.60 for rural areas.
Moral Erosion
Corruption has caused society’s morality to decline steeply.
All of the above factors point in one direction: make money at all cost. Power, land, and national resources can all be sold for profit. Nothing can stop the officials from greedily grabbing money.
At higher levels, officials ignore and distort the facts and selectively enforce the law to make money. At the grassroots levels, for the sake of money, families have been broken, elders abandoned, and children uneducated. People despise poverty more than prostitution.
What’s worse: in a country with over 5,000 years of civilization, human organs are systematically harvested and sold.

Destruction of National Resources
Critical resources like land, energy, and mines are now used to gild officials’ “accomplishments” and cashed out to deposit in officials’ personal bank accounts.
In a money-worshipping society, officials and businesses collaborate to abusively exploit resources. The unregulated exploitations are destructive to land and mines. Polluted water, air, and soil are negatively impacting the ecological balance.
There is more smog and less farmland. Growing numbers of cancer villages, and toxic foods that can’t be avoided, show that every Chinese has paid for China’s “economic take-off” with losses in their physical and mental health.
Mountains are no longer green, and water is no longer clear. People are learned but not civilized. After just a few decades of communist reign, China is no longer the beautiful homeland we once knew.
The solution to the grey income-driven corruption is an all-around reformation, including the reformation of the political system.
On the economic front, monopolies must be broken in banking, petrol, electricity, and other key industries. Resource-based SOEs should be charged much higher resource taxes. In addition, SOEs’ profits should be invested in public welfare, since SOEs belong to all the Chinese people and should not benefit only a small group of people.
Secondly, some SOEs should be privatized and participate in fair market competition.
China’s political reformation has been lagging. After 30 years of “reformation,” the Chinese Communist Party (CCP) has not changed its autocratic ruling at all. Disaggregating the CCP and implementing a democratic system is the way to bring about fundamental changes for the better. Every Chinese should be given his or her legal rights, and a system that effectively supervises the government has to be established.
In my opinion, it is critical to set up an election-based system so that any officials who are not doing a good job can be voted out. Media freedom and the free flow of uncensored information are also very important, as the media should be able to monitor and reveal illegal behaviors for the society.

Thursday, September 26, 2013

China’s Economy on the Verge of Collapse

By Tianlun Jian

State officials at every level have sought to wring instant benefits out of real estate in China, distorting the economy and setting banks up to fail. Now, the debate about China’s economy is no longer over whether the real estate bubble will burst, but when.
China initiated reform of real estate policy in 1998, and within one year, China had three rate cuts. Interest rates on deposits underwent a rapid reduction from 5.7 percent in 1998 to 1.98 percent in February 2002. In the following decade, interest rates hovered at a low level, between 2 and 4 percent.
The interest rates on deposits either matched with or were lower than the inflation rate. The real interest rate—the nominal interest rate less the inflation rate—was either negative or zero.
Keeping savings in a bank, then, was a losing proposition. The Chinese people had two outlets open to them for getting a return on their money: investing in stocks or real estate.
In 2003, China’s State Council said that real estate would be strategically promoted as a pivotal industry to grow China’s economy. Loans for purchasing real estate should be processed with priority. China’s real estate prices started continuously escalating in 2004.
Local governments fueled the rise in prices with surcharges called “land-transfer fees” and layers of taxation.
In 1997, the total land-transfer fees collected by all levels of governments across the country were only 6.7 billion yuan (US$1 billion). In 2009, the metropolis of Hangzhou alone collected 120 billion yuan (US$20 billion) in land-transfer fees.
According to the calculations of Dr. Ye Tan, a famous financial commentator in China, governmental surcharges and fees have contributed between 50 and 80 percent to real estate prices. In many areas nowadays, the land transfer fees alone constitute about 40 percent of the final real estate price.
Hu Cunzhi, deputy minister of Land and Resources, pointed out on July 11, 2013, that a tacit understanding existed in the land market between the governments that are selling and the developers who are buying. Developers are allowed to illegally take a large amount of land off the market, leaving it undeveloped or underdeveloped. This artificially keeps the supply of land and housing low, which pushes up their price, benefiting local governments.
The regime’s practice of rating officials’ performance by the increase in GDP registered in their area has also driven up real estate prices. Local politicians treat development projects, such as railroads and airports, as political achievements.
However, they devour large amounts of investment, and many are not really needed. Once built, many airports are simply idle, with the number of runways higher than the number of flights the airport hosts in a day.

Distorted Economy

Highly inflated real estate pricing has distorted China’s economy, causing many industries to divert investment toward real estate. For example, some clothing companies have stopped making clothes, and some electronic appliance manufacturers have dropped making appliances in order to throw all their money into real estate.
The profit margin of Chinese enterprises keeps dropping, with increasing labor costs causing operating costs to rise. At the same time, the profit margin on real estate has kept going up. Buying real estate has been equivalent to buying a guaranty of profit.
Although everyone has been aware that the bubble would burst one day, so long as the bubble keeps swelling, nobody wants to miss the last train to make money.
At the same time, Beijing and Shanghai have benefited from what are called conglomeration effects. Jobs are available in these two cities, and people are willing to move there for the sake of a job, which helps drive demand for housing.
However, even in Beijing and Shanghai, the wealthy often own several apartments, and many apartments stand empty. In 2007, 36 percent of the apartments in Beijing were empty, and the number is now certainly higher.

Precarious Situation

China’s GDP growth rate has decelerated. Yet, overinvestment throughout the years has resulted in a significant oversupply of production capacity.
For instance, the expansion of real estate in the past decade has heavily boosted the demand for steel, driving steelmaking plants to expand their capacity. China’s overall steel-production capacity today is almost half of the world’s total, and the steel industry is facing a serious problem of oversupply.
As China’s economy slowed since 2011, the demand for metals has dropped and steel prices plummeted. Now, the steelmaking companies have to come to terms with their heavy debt. The total debt of China’s 86 leading steelmaking enterprises has surpassed 3 trillion yuan (US$480 billion).
To make the situation faced by these companies even worse, their overall profit in the first six months of 2013 was merely 2.2 billion yuan (US$350 million). Thirty-five of these companies (or 40 percent) are running in red ink. Similar overcapacity exists in other segments of the economy.
Complicating the picture is the indebtedness of China’s local governments. While local governments have profited greatly from land sales, the money made has not begun to cover yawning chasms of debt these governments are running up.
In 2010, China’s local government debt reached 10.7 trillion yuan (US$1.74 trillion) according to the National Audit Office, while China’s former Minister of Finance Xiang Huaicheng estimated it was 20 trillion yuan. In other words, local debt equaled 20 to 30 percent of China’s GDP.
Many local governments have been taking on new debt to pay the old debt. About one-third of local debt is used to pay off old debt.
Either the failure of China’s enterprises, as overcapacity sends them into bankruptcy, or the inability of local governments to pay their loans can lead to the collapse of China’s economy.
Banks cannot be spared from either crisis. This may be the reason why Bank of America and Goldman-Sachs Group have been dumping stocks of China’s banks.
Before the bubble finally bursts, the real estate pricing in major cities may keep rising, while the prices in some cities, such as Erdos, Wenzhou, and Guiyang, have already started falling.
The falling of real estate prices will cause the flow of cash in the economy to be interrupted. Bank loans won’t be repaid, and the dominoes will start to fall. The bankruptcy of one bank may trigger the collapse of all the others. No matter in which city the bankruptcy first occurs, a chain reaction will start, and the speed of the collapse will accelerate.
After Japan’s bubble burst in the late 1980s, its stock price kept falling for more than two decades. The price of stocks plunged between 70 and 80 percent, and the value of real estate fell 55 to 65 percent. Today, Japan’s real estate is at the same price level as in 1983.
Nobody is sure when the bubble in China will burst, but everybody knows the country is facing many serious problems. Just like a balloon with a thin wall in many spots, the balloon will burst as soon as the weakest spot fails to hold the pressure.

Thursday, August 22, 2013

Monday, August 5, 2013

China’s Land Prices Hit New Peak, as Bubble Swells

By Tianlun Jian

Cash-starved local governments, cash-rich state-owned enterprises, and banks’ too loose credit policies are fueling speculative land buying in China despite what everyone knows: This bubble is going to burst.

Wednesday, July 10, 2013

China’s Money Shortage Reveals System’s Weakness

By Tianlun Jian

China’s economy is in crisis. Since June, investors have been preoccupied with the shortage of money in China’s financial system, but while that shortage reveals much that is wrong in China’s formerly high-flying economy, the systemic problems go far beyond tight money.
The shortage in money occurred because an increase in the demand for capital coincided with a reduction of money flowing into the system and an increase in money flowing out.
In the past few years, China’s banks began offering wealth-management products in a big way. With these financial instruments, the banks offer investors a chance to put their money into highly speculative projects in exchange for a higher rate of return. In June, the banks’ investment in wealth-management products caused the need for liquidity to soar.
Fitch, one of the three major rating agencies, released a report on June 21 suggesting that China’s banks had 1.5 trillion yuan (US$245 billion) in wealth-management products that matured at the end of June, with China’s medium-size banks having put 20 to 30 percent of their deposits in such products.
The latest research data of Puyi Investing Consulting Co. shows that in the last week of June, a total of 1592 wealth-management products offered by banks matured.
The need to pay back 1.5 trillion yuan significantly and suddenly increased the demand for yuan within a short period of time.
Less Coming In
The reduction in recent years in China’s export surplus has indirectly reduced the money supply. With less foreign exchange surplus, the amount of yuan released by the People’s Bank of China for buying U.S. dollars has correspondingly declined.
An attempt to clean up the foreign exchange system by the State Administration of Foreign Exchange has to some degree blocked the passage into China of hot money—money that moves into a market for the sake or short-term gains, further limiting the money supply.
In the past, businesses would file false export reports that would allow them to bring foreign exchange into China. They would then profit off arbitrage—trades that make money off the differences in the exchange rates and interest rates.
A new rule for strengthening the management of foreign exchange inflows has substantially reduced the amount of foreign exchange brought in through the false reporting of exports. As a result, the amount of yuan that the People’s Bank of China is obliged to convert into foreign currency has been reduced.
More Going Out
While less money is flowing into China, more money is flowing out, in part due to corruption.
More than any other single initiative, the administration of new Chinese Communist Party chief Xi Jinping has been marked by his aggressive anti-corruption campaign. Fearing losing what they stole, many senior officials have transferred their money overseas.
The corruption of CCP officials permeates China’s entire economy and complicates managing that economy. There are no statistics on how much black money there is or how much of it has been transferred abroad. Some banks may appear to have a lot of money on their books, but in fact are empty shells.
Foreign direct investment is also bringing less money into China. According to the 2013 A.T. Kearney Foreign Direct Investment Confidence Index released on June 26, the United States is the world’s best place to invest, with China demoted to second place. China’s economic outlook is not optimistic and its expected economic growth rate is only 7 percent, much lower than in the past.
Money that would have headed to China is now going to the United States. Also, some investments that were previously made have been withdrawn.
With less money flowing into China, a global economic crisis reducing demand worldwide for China’s products, and the end of the high rates of increase previously reached by the Chinese economy, the bubbles in China’s economy are being exposed. In 2011, China used 60 percent of its productive capacity.
Major industries afflicted by overcapacity include chemicals, steel and iron, cement, electrolytic aluminum, flat glass, and photovoltaic cells.
Take as an example the iron and steel industry. This year, the demand for steel and iron is estimated to be about 700 million tons while the production capacity is about 1 billion tons. This May, the raw steel production was 67 million tons in China, which accounted for almost half of the global production.
According to a report by the state-run media outlet Beijing Times, Pingte Iron and Steel Co. Ltd. in Jiangxi Province went bankrupt recently because it could no longer get credit.
In fact, this company had been operating at a loss for a long time. If the company stopped production, its crisis would be immediately exposed. So the company continued production in the hope of convincing banks to believe in its ability to make a profit. However, the banks did not lend it money, and the company went bankrupt.
Many other small steel companies in China, like Pingte, face closure or have already closed. According to mysteel.com, a Chinese Internet portal dedicated to the iron and steel industry, a survey of 163 steel companies on March 8 shows that 66.87 percent of iron and steel companies are operating at a loss.
Factory closure is a result of overcapacity, overstocking, and loss of credit. Overcapacity has not only wasted money, manpower, and national resources, but has also led to massive layoffs of workers, resulting in social instability. Large amounts of credit from banks for these companies have become bad loans and uncollectible.
Markets Shaken
The money shortage has been the highly visible part of the systemic problems plaguing China’s financial system.
The most direct trigger for the crisis in June was the failure by China Everbright Bank to repay a loan to the Industrial Bank. No one knows how many banks and financial institutions face a situation similar to Everbright’s.
After Everbright defaulted, the short-term interest rate, overnight rate, and weekly rate went up sharply, with the overnight rate jumping from 2 to 3 percent to 13.44 percent.
According to Sound of Hope Radio Network, the interest rates for financial products offered by many banks and wealth-management companies in China suddenly soared recently.
For example, the Zhengzhou Branch of Huaxia Bank’s 36-day wealth-management product has an interest rate of 7 percent, while Industrial Bank’s Shenzhen offered a 31-day wealth-management product with an interest rate of 7.5 percent. The market rate before June was normally 3 to 4 percent.
A shortage of money reduces banks’ credit and people’s confidence in the economy. As the banks have recently had problems one after another, the Chinese stock market has gone down again and again.
At one point in June, the stock market had declined by 19 percent. On June 24, the stock market fell 5.3 percent in one day and suffered another drop of 5.8 percent right after the opening on June 25.
After intervention from the People’s Bank of China, the stock market rebounded a little. In fact, such intervention can only temporarily stabilize the market, but cannot fundamentally resolve the long-standing problems in China’s financial industry.
Normally the long-term interest rate moves up when people have a positive economic outlook, and the short-term interest rate goes up when capital demand increases or money supply decreases.
With China’s GDP growth rate this year expected to be only about 7 percent, far below that of previous years, the expected return on investment is naturally lower than before. However, China now has a low long-term interest rate and a short-term interest rate that is much higher than the long-term rate. This structure, called an inverse yield curve, shows that the market is not optimistic about the Chinese economy.

Source: Epoch Times

Tuesday, July 2, 2013

The Long and the Short of China’s Credit Crunch

By Tianlun Jian | July 1, 2013
The Epoch Times

News Analysis

Suddenly in early June, banks and businesses in China couldn’t get the credit they needed to operate. This was due to both short-term and long-term causes.
On June 6 a loan default triggered credit tightening. China Everbright Bank failed to repay a loan to the Industrial Bank. Subsequently, several major banks such as ICBC, Bank of China, and others closed large fund transfer services in major cities.
In several cities, banks refused to allow withdrawals on the pretense of computer glitches. In fact, the sudden constriction of credit was the problem. Within a few days the interbank overnight rate soared from 3-4 percent to 13.44 percent as of June 20.
An unintended consequence of new Communist Party leader Xi Jinping’s fight against corruption has also placed a burden on the banking system, as many senior officials have moved their money overseas.
In fact, corruption has penetrated the entire Chinese finance system. The total amount of money embezzled and the amount of money transferred overseas is unknown. Due to corruption, many Chinese banks give a false appearance of health, showing plenty of money on the books when in fact they are cash short.
The official reason for the credit crunch—apart from computer glitches—was said to be the Dragon Boat Festival, which was celebrated this year on June 12. This popular traditional Chinese holiday comes every year, and yet this year, it was said to cause a large number of withdrawals from the banking system.
In fact, in the first ten days of June, China’s new loans reached between 500 billion yuan (US $82 billion) to 1 trillion yuan (US $164 billion). This number is very large, as the monthly total for new loans in China is generally well below 1 trillion yuan (US $164 billion).
Withdrawals connected to the Dragon Boat Festival could not have caused such an unusual upsurge in new loans. I believe the main causes for the new loans, and the main, long-term causes for China’s credit crunch, can be traced to China’s local government debt and shadow banking.

Long-term Causes

Shadow banking—off-the-books loans at high interest rates mainly to private enterprise—has accounted for over 40 percent of the loan activity in China. This lending carries much higher risks.
Local officials have also put further strain on the financial system. Always trying to boost their supposed achievements, local officials continually investing in vanity projects has led to endless local debts.
Many investment projects are built by taking on new debt to repay the old debt, in the manner of a giant Ponzi scheme.
For example, if an investment was originally estimated to have a high profit, but the estimates overstated the actual performance, then a new project will be engaged for financing. As long as someone is willing to invest in the new project, that investment is used to pay for the old loans.
Local debts in China total about 20 trillion yuan (US$3.3 trillion), accounting for about 30 percent of China’s GDP. Since the financial crisis in 2008, central authorities have invested 4 trillion yuan (US$656 billion) in local projects. Local government debt has since grown.
In a March speech, Chinese central bank chief Zhou Xiaochuan said, “20 percent of local government debt is quite dangerous, because these projects contribute no fiscal income.”
As much as one third of the current new local governmental debt is used to cover old debt. The sharp increase in new loans is surely related to the flood of local governmental debt.
Overall, today’s credit crunch is no accident. Structural problems have long existed in China’s banking system. In addition, there are problems of excessive infrastructure investment, the housing bubble, and so on.

Stock Market Crash

At first, the Chinese central bank seemed to ignore the credit crunch and provided no liquidity.
Then the central bank saw that if the situation were allowed to continue, the stock market would likely crash. The Shanghai index dropped from 2,300 to 1,849, down by 19 percent from early June. This is a huge decline.
On June 24, it fell 5.3 percent, on June 25 it dropped another 5.8 percent. The central bank provided liquidity and announced three times that day its willingness to intervene, and the stock market finally came back a little.
While stocks slid down, banking stocks in particular took a hit. Because the credit problems started in the banking industry, it is inevitable bank shares would fall.
However, stocks in other industries also experienced a big drop. They all rely on bank loans, and, without loans, most companies could no longer continue to operate normally. Their cash flow will break down, which may even lead to bankruptcy.
The tightening of credit, then, has put everything at great risk and had a major impact on the entire economy.

The liquidity provided by central bank can only temporarily ease the money shortage. It won’t solve the fundamental finance problem facing China today.

Source: The Epoch Times

Saturday, April 27, 2013

Will Boosting Domestic Demand Help China?

Click here to watch the NTDTV Video Interview.

In China today, the economic Troika has stopped working. In addition, the macro-control has often been interrupted. On April 25th, the Standing Committee held a meeting to study the current economic situation and related tasks.

Observers point out, China's current economic predicament has tightened the space for macro-control policies. Will their focus on “bringing out the potential of domestic demand” become the cure for the economic plight?

It was pointed out during the Standing Committee meeting, that China's economy still faces difficulties and challenges. Continuing implementation of fiscal policy and prudent monetary policy is necessary.

Mao Yushi, Mainland economist: "China's problems come from the microeconomics, which cannot be resolved by macroeconomic adjustments. From microeconomic perspective, there are many issues, such as the land cannot be freely traded; RMB is not internationalized; and many industries and private capital cannot enter.Food supply and the limited 295 million acres of arable land are all problems too. "

On April 25th, British Reuters published an article on China's economic realities predicament and macro-control policy. It says, the dilemma China faces today is similar to that of the global financial crisis five years ago. With the exception that there were 4 trillion Yuan economic stimulus plan at that time.

At present, option policies are very limited. Observers think, the economic Troika is no longer effective, after 30 years. Thus, it was suggested in the meeting to focus on “bringing out the potential of domestic demand.”

Mao Yushi: "Increasing GDP’s consumer spending share has many issues, like tax’ and large state enterprises’ reform. If they remain the same, there will only be limited improvement in consumption.Currently, only changing of policy can result in increasing potentials. To increase consumption, you must first increase income; without an income, how can you boost consumption?” 

The meeting also stressed on the good grasp of real estate market regulation and housing market security.

Jian Tianlun, Chinese economist in the US, believes, China’s macroeconomic policy is entirely wrong.
Due to the nationalization of land and the real estate market irregularities, housing prices continue to rise.

Jian Tianlun:“The main revenue of local governments comes from land-selling. If private ownership of land was in place, this would not happen.

Once having house and land, one does not need to hand his money over to the government.”

Jian Tianlun further points out that for these very reasons, officials have colluded with real estate developers. Officials supply them with cheap land, and in return are ‘rewarded’ with free housing units.  Thus, it is not uncommon for a person in China to own more than 100 housing units. Therefore, one can see “ghost towns” or “empty cities” popping up here and there. When these officials can obtain free housing units, they don’t mind paying the 20% tax surcharge.

Jian Tianlun: "That's why recently housing prices went up, even with 20% surcharge of tax from selling a housing unit. Simply put, the demand exceeds the supply, and the owners can add the surcharge to the selling price. The uneven distribution of wealth, and the housing price’ increase are forming a vicious cycle; the bigger the increase of house prices, the bigger the gap between rich and poor.”

The well-known U.S. investment firm GMO published a research report on China’s stimulus measures. It says that in response to the global financial crisis, and export orders collapse, China ordered the banks to lend. Last year, new bank loans were equivalent to 29% of GDP. Most of these loans flowed to the infrastructure, real estate, as well as state-owned enterprises. This stimulus would lead to terrible aftermaths, the research predicts.

The report also said that this real estate boom offers great opportunities for corruption. Land is often forcefully gained; developers underpay owners of properties; officials are addicted to kickbacks. As to infrastructure spending, local officials have many opportunities to fill their pockets too, by turning a blind eye to the poor quality of building materials. The report also noted that the systemic corruption has lowered the quality of China's economic growth. That results in a fragile financial system, environmental degradation, inadequate law enforcement, unsafe infrastructure, unresponsive public health services, and crumbling regulatory systems.

Tuesday, February 12, 2013

China’s Official Statistics Paint Grim Economic Picture

Not many people take the statistics coming out of China at face value. The Chinese regime and local governments have a long track record of manipulating or even completely fabricating economic data. However, if more reliable data is not available, the data published by the National Bureau of Statistics of China remains the only one usable for analysis. No matter how unreliable it is, this data can still provide the ability to peek into the reality of China’s economy. (Read more)

Monday, December 24, 2012

Another Aspect of Chinese Economic Trends

I read the article "Halloween decorations carry haunting message of forced labor" with fear. The message was from a product made by forced labor in China. I believe this constitutes a real part of Chinese economic trends.  So I put it into my blog.

This article may help us understand why those "made-in-China" products are so cheap.  More important, readers, what can we do to help the writer and other innocent people in the labor camps?  Here is the article.

"The letter came in a box of Halloween decorations purchased at Kmart, but for a year Julie Keith never knew. It gathered dust in her storage, a haunting plea for help hidden among artificial skeletons, tombstones and spider webs."  Click here to continue.

Thursday, December 20, 2012

Why the Party Can’t Fix the Chinese Economy

By Tianlun Jian
Income inequality is commonly recognized as a major hindrance to China’s economic and social stability and continued development. Many have observed with disbelief the level of polarization in China, and wondered what has gone wrong with the system.
Nothing, in fact, went wrong. The state machine has executed precisely the ideas of Deng Xiaoping, the designer of China’s current economic model.
When Deng first laid the framework of economic reforms, his goal was to maintain the rule and absolute power of the Chinese Communist Party (CCP), controlled by a small group of men. At that time, China had just finished the Cultural Revolution, and the economy had been shattered by a decade of chaos.
To pull the CCP out of the mess, Deng knew that he had to grow the economy. But equal opportunity was never part of the plan. He stated clearly that the reforms aimed to “let some people get rich first.” Of course, those in the center of the circle of power, and those close to them, were the “some people” who got rich first.
Corruption grew rampant as officials used every opportunity to abuse political power and thus gain economic benefits. The rapidly widening income gap and inflation created anger at the grassroots level. To protest official corruption, college students took to the streets in 1989 calling for justice and democracy, which ended in the notorious Tiananmen Square massacre.
After the incident, Deng stressed that “development is of overriding importance” and “maintaining stability is the top priority,” in part to justify the massacre. These ideas then became the guiding principles that led to the complete disregard for the well-being of ordinary people.
The fundamental macroeconomic policies of reliance on exports, investment-driven growth, the handing out of monopolies to state-owned enterprises, and low interest rates to plunder wealth from households were all products of these initial ideas.
These macroeconomic principles and their byproducts—including widely discussed issues like the real estate bubble and violent land acquisitions—all served to benefit those with political power.
The most lucrative industries, like energy and telecommunications, are all state monopolies and headed by CCP officials or their family members. The power industry, for example, is controlled by former premier Li Peng’s daughter, while telecommunications are controlled by the son of former Party head Jiang Zemin.
Foreign and domestic investors often have to pay large “consultant fees” to families and friends of officials to gain permits to do business in China, or to gain favorable policies, or sometimes just to avoid trouble.
Loyalty to the CCP and its senior cadres has become the No. 1 consideration in staffing critical positions in China, including the judicial system, the education system, and the media, to ensure that policies are made to protect and maximize the benefits of these interests groups. With the entire state machine designed that way, policies that truly benefit ordinary Chinese and narrow the income gap have little chance to be passed and executed.
Examples abound. Income distribution reform, the abolition of the Hukou residential system that discriminates against people from rural areas, the appreciation of the Chinese yuan, and real anticorruption measures are just a few in a long list of initiatives that have been discussed for years but never implemented. Any of these initiatives, once carried out, will significantly block the way to greater wealth for some powerful people.
It is not realistic to expect the CCP to carry out top-down reforms that will share the spoils with the average Chinese. This is why in the future the last three decades will be seen as a period in which the CCP went further and further into a death spiral.
The Party’s cadres want to benefit from an unjust system while somehow mitigating the anger of the rest of the population. Given that genuine reform is impossible, eventually that anger will catch up with them and the Party will be no more.
With reporting by Pingping Yu.