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.

China Faces an Inevitable Economic Failure

Thousands of job seekers flock to an employment fair in Hefei, east China's Anhui Province on Feb. 25. A decline in the housing market will create unemployment and depress other economic sectors that hinge on real estate. (STR/AFP/Getty Images)
Thousands of job seekers flock to an employment fair in Hefei, east China's Anhui Province on Feb. 25. A decline in the housing market will create unemployment and depress other economic sectors that hinge on real estate. (STR/AFP/Getty Images)
China’s economy has experienced a recent slowdown that comes as no surprise to economists who have kept the fundamental problems of the country’s macroeconomic policies in sight. China’s economic reform in the late 1970s set up the system in such a way that failure was inevitable.
The two policies at the heart of the Chinese economic model have been the over reliance on investment and exports, supported by artificially low interest rates.
High investment from the Chinese regime and foreign investors in infrastructure and manufacturing capacity has been a major driver of growth in China’s gross domestic product (GDP).
The share of investment as a part of the GDP went from 35.1 percent in 2000 to 48.4 percent in 2011. In contrast, investment in other countries generally declined to a level in the 15 to 29 percent range. To put it simply, in other countries, people are mostly buying and selling things. In China, the government is mostly building things.
The massive investment in China was spurred in part by artificially low interest rates. After accounting for inflation, these rates were at zero or negative. In other words, free money.
That money, obediently supplied by state banks, has been ploughed into infrastructure, real estate, and other big industrial projects. But there are only so many bridges, railways, and one-ton spools of copper that can be put to productive use.
For more details, click here to continue

Friday, November 30, 2012

China's Political Economic Structure Creates Inequality

By Tianlun Jian

Chinese people all like to talk about the economy, fear to discuss politics, fear to touch politics. I remember before I obtained my PhD in economics, I obtained a master's degree in political economy. My wife complained: you are studying in the Department of Economics, why do you get a degree prefixed with a "political" word, in front of the economics? At that time, I did not give more consideration. Just perfunctorily said: The school has only a master's degree.

Daron Acemoglu, Professor of Economics at the Massachusetts Institute of Technology and James Robinson, a political science professor at Harvard University jointly published a best-selling book in 2012, "Why Nations Fail."

This book analyzes the relationship between the political and economic institutions for many countries, ancient and modern, their histories, political institutions, economic institutions, and economic development and current status. The economy cannot be divorced from politics and exist independently. The book cited the lessons of the failure of many countries - exclusive political institutions and exclusive economist institutions. The book also mentions successful experience -- today's developed countries all adopt inclusive political institutions and inclusive economic institutions.

China's current macroeconomic policies all are set around the Chinese Communist regime. China's political system, economic structure, as well as their principles and policies are used to totally serve the interest Group of the CCP. So today's China has an exclusive political system, and an exclusive economic system.

One might ask, why in the past three decades, has China's economy grown so fast? It does not mean that with exclusive political institutions, the economy will no long have high growth rate.  Rather its economic growth cannot be sustained.

For example, before the 1970s, the Soviet Union also had three or four decades of high economic growth. Paul Samuelson, the world's most well-kwon economist who later won the Nobel Prize in Economics forecasted in 1961 that the Soviet Union’s GNP would exceed that of the United States as early as in 1984, or perhaps by as late as in 1997. In 1980, he still estimated the Soviet economy would overtake the United States, though the years were postponed the timing to as early as in 2002 and as late as in 2012. But it did not come true. As a matter of fact, the economy of the Soviet Union basically stagnated in the late 1970s, and only got worse in 1980s and 1990s.

Why Nations Fail also points out that current economic growth in China cannot be maintained. This is due to its political system. Unless China undergoes political reform, its growth cannot be maintained. The reason for China's higher growth in the past three decades than that of the Mao’s era, is that China went through some adjustment in its political institutions and undergone some economic reforms. The economic reforms adopted some capitalism ideas, and its economic institutions have become somewhat inclusive. But it still clings to the exclusive political and economic system, thus causing the polarization of Chinese society.

Why has the share of Chinese consumption in GDP decreased year by year? Because its macroeconomic policies are distorted, income distribution system is controlled by bigwigs who occupy a majority of the national income.

In essence, the high growth rates of China's exports and investment are developed by China's economic policies. And such policies have led to the decline in income share of the Chinese residents in GDP, year after year. For example, Chinese exports rely on the long-term rmb undervaluation. Such economic losses are born by the Chinese nationals. The high investment growth is built on the basis of low real interest rates.

In the nine years between 2003 and 2011, the average real deposit interest rates were almost zero, yet its GDP grew at double digit rates during the same period. This is an obvious example of mis-allocation of capital funds and mismatch between supply and demand. With a real rate on deposits almost close to zero, it means that after adjusted for inflation, Chinese depositors do not have any interest compensation for their money in the bank. From another perspective, that is to say, borrowers do not have to pay interest for borrowing money from the bank. So whoever could obtain money from the bank would gain, but who could obtain money from the bank?  State-owned enterprises, governments at all levels, and, in the past decade, land developers as well.

So, on the one hand, GDP has grown rapidly through exports and investment. On the other hand, majority of the Chinese people have not benefited much from the rapid growth. For many people, real income has not grown much. China's national savings has a strange phenomenon: on the one hand, the national savings rate is very high; on the other hand, a lot of people have very limited or no savings, therefore, they do not consume much.

It is worth noting that the high savings rate refers the overall savings rate in China, which is the average savings rate. So talking about China's high savings rate, it refers the national average savings rate. That is why nowadays Chinese people often say that they “are averaged.” In China, the very rich people save tons and tons of money. A popular jingle goes: Our village has a Billionaire Zhang, followed by nine paupers; when calculating the average, each becomes a Millionaire Zhang. This is a domestic popular jingle, a vivid description of the status quo of Chinese society.

According to the latest survey report of Chinese Family Financial Condition, about half of the Chinese people have only a very limited savings or no savings. If so, their income is only enough to purchase life necessities, and cover housing costs, health care, and education. It is impossible for luxury consumption. Maybe they have to choose the cheapest place to eat and live. In China, 75% of the savings comes from top 10% of the population. Then who are the rich in China? They are government officials, senior managers of big corporations, and real estate developers. These rich people, 10% of the population account for 75% of China’s savings, yet the poor, about 50% of the population have only limited or no savings. The serious condition of the uneven distribution of wealth in China is clear at a glance.

No matter how rich they are, consumption by the top 10% of the population is limited. And it is not possible for them to consume in proportion of their income. This is why Chinese consumption share in GDP has decreased year by year, in the past two decades, from 47% in 1990, down to only 34% in 2011. This situation is actually caused by exclusive political system and exclusive economic institutions.

With the exclusive economic institutions, the income distribution system serves for the Chinese Communist Party's exclusive political system.  As a result, Chinese national consumption share in GDP continues to decline. While it reaches the CCP’s goal of "let some people get rich first," at the same time it causes the polarization between rich and poor in the Chinese society.

When reproducing it, please make a reference to Chinese Economic Trends.

Sunday, October 28, 2012

Fundamental Problems in the Chinese Economy (II)

By Tianlun Jian

Can exports and investment continue to support high GDP growth in China?

China’s International Competitiveness Is Weaker

Fundamental Problems in the Chinese Economy (I)

By Tianlun Jian

China's economic data has dismayed investors and economists since last year.  The HSBC Purchasing Index (PMI) posted 47.9 in September, signaling an eleven month-on-month deterioration in China's manufacturing sector. Industrial output in August rose at the slowest rate in three years, and profits in the industrial sector declined 6.2 percent in August vs. a year ago, according to China's National Bureau of Statistics.

Thursday, August 2, 2012

Shanghai Composite at 41 Month Low


The Shanghai Composite Index moved lower in back-to-back sessions to a fresh 41-month low at close yesterday, settling just above 2,100. The large-cap focused CSI300 of the top Shanghai and Shenzhen listings moved into negative territory year-to-date.

Monday, July 30, 2012

Structural Problems Plague Chinese Economy

By Tianlun Jian

China’s current economic situation is similar to that in early 2009, perhaps even worse. The engine that is driving China’s economy is sputtering. Exports and investments, the main driving forces of China’s economic growth, are slowing down. The real estate industry, the locomotive that just recently pulled the economy, is also weakening. All three aspects are fading.

Sunday, July 29, 2012

China’s Loan Crisis Threatens Privately Held Companies

By Tianlun Jian

An arrangement put in place by China’s state-owned banks to help them extend credit to China’s privately owned companies is now threatening to drag that sector down. A slow economy is making the crisis worse.

On July 16 the Zhejiang Provincial Financial Office acknowledged having received a letter from six hundred private companies in the provincial capital, Hangzhou, calling for urgent help. They are in trouble because of mutual-guarantor loans they had signed.

Wednesday, June 27, 2012

China’s Housing Boom Has Ended

By Tianlun Jian

Is the ice thawing and spring returning to China’s housing market? Investors have recently dared to ask this question.

The recent interest rate cuts and Premier Wen Jiabao’s words re-emphasizing “stable growth” have led the market to wonder if the Chinese state has changed its policies for controlling the housing bubble.

Friday, June 8, 2012

Worsening Economy Forces China’s Interest Rate Cuts

Worsening Economy Forces China’s Interest Rate Cuts
Cuts give banks greater flexibility in offering loans

By Tianlun Jian

Fears of a hard landing appear to have caused the People’s Bank of China (PBOC) to have reached into its tool kit to find another way to spur China’s sluggish economy. Along the way PBOC may have taken a step toward reform of China’s banking system.

Wednesday, April 18, 2012

China’s Economic Reform Requires Political Reform

By Jian Tianlun

China’s economic reforms have reached a critical point, and the economy designed to support the Communist Party’s rule now calls that rule into question.

When Deng Xiaoping proposed economic reforms in 1978, the Chinese Communist Party (CCP) found maintaining its rule difficult. The Chinese economy was about to collapse, and people’s daily living had become a problem.

Wednesday, April 11, 2012

Can China Break the Banking Monopoly?

By Tianlun Jian

Currently, the Chinese mainland banking sector is still dominated by four state-owned banks (Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China and Construction Bank). China is such a big country, the second largest economy in the world with a population of 1.3 billion, yet it has only a few dozen banks, which coupled with foreign bank branches total one hundred banks at most. In contrast, the U.S. has 300 million people, yet more than 7,000 banks. Among the one hundred banks in China, four state-owned banks control more than 80% of the business.

Wednesday, March 14, 2012

Why Hasn't China's Housing Bubble Burst Yet?

By Tianlun Jian

After my series of articles on China's housing markets, some readers have asked why housing in China is so expensive? The bubble is known to everyone, and the government is taking measures to control it. Why has the bubble not burst?  Actually many researchers have forecast that China's housing markets would collapse years ago. Beijing's housing prices were already as high as those in Manhattan even in 2007.

Indeed, there are many things that could have triggered the collapse of China's housing market: the financial system, high housing prices, local government debt, social unrest due to huge income gaps, forced demolition, etc.—just to name a few.

Monday, March 12, 2012

China’s Real Estate Spirals Downward

By Gao Zitan
Epoch Times Staff

China’s real estate (RE) market is in a downward spiral. A big drop of 30-50 percent this year is not impossible, according to a Chinese economist.