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.
Regarding inflation, compared with the same period last
year, the Consumer Price Index has dropped for three consecutive months, and
the Industrial Commodity Price Index has dropped for four months in a row, very
similar to the situation in 2009.
But in 2009 Beijing injected a huge 4 trillion yuan (US$585
billion) stimulus package into the economy. While this made up for the lack of
demand and managed to maintain economic growth, it actually exacerbated the
real estate bubble. The regime panicked as public discontent rose. Neither
common folks nor high-class intellectuals could afford to buy a home.
Cash Flow Conundrum
Since last year Beijing has been trying to control the real
estate market, but to little effect.
Under such poor economic conditions, lowering interest rates
and lowering the bank reserved requirement ratio are measures used to increase
cash flow in order to stimulate the economy and maintain growth. However, the
increased cash flow can push housing prices up even further.
Maintaining economic growth and eliminating the real estate
bubble are contradictory to each other, and that’s why Beijing cannot achieve
both of these goals at the same time.
The regime has lowered interest rates twice this year,
exceeding measures taken in 2009. The benchmark interest rate is 6 percent, a
little higher than the 5.31 percent in 2009. But by allowing a 30 percent
discount on the lending rate, the regime has in fact dropped the actual lending
rate to around 4.2 percent—lower than in 2009. Beijing would not do this unless
they think economic growth is a considerable problem.
The regime has undertaken a series of capital injections to
drive the economic growth during the past years, in particular during the
financial crisis, causing extra capacities in manufacturing, excessive unsold
real estate, and overpriced housing. Now the regime has no more room for
stimulation through capital injections.
Most importantly, the capital injections have caused the
deformation of China’s economic system, which is very hard to correct, and the
regime dares not do this again.
Reform
Now, Beijing should not only lower the interest rate, but
should also significantly reduce the bank reserved requirement ratio (the
minimum amount of funds that a bank is legally required to hold). During the
past few years, the regime has significantly increased the reserve-deposit
ratio, in an effort to reduce the appreciation pressure on the renminbi,
promote exports with a low exchange rate, and maintain high economic growth.
From 9 percent in January 2007 to 21.5 percent in June 2011, the increase of
the reserve-deposit ratio has deformed the already troubled economic structure
even worse.
The engine that drives China’s economy lies in private
enterprises and small- and medium-sized enterprises (SMEs). Employment in
state-owned enterprises and state-owned holding companies account for only
about 20 percent of national employment.
To help China’s economy get out of its current difficulties,
current lending policies must be changed first so that the financial monopoly
of state-owned banks can be broken. Preferential policies for SMEs and the
private sector must be created so that the trade monopoly of state-owned
enterprises can be broken.
Unless loans are available for SMEs, the macroeconomics
stimulus has no effect, as SMEs cannot benefit from the interest rate drop. If
SMEs cannot obtain loans, cannot survive, then talk about China’s economic
development is nothing but empty words.
Tax breaks can help reduce the burden on businesses and
stimulate economic development, but it is not quite feasible in today’s China.
In other words, local governments need to make substantial changes, for example:
real reform, deep budget cuts, and putting an end to unreasonable expenses,
such as the “three public consumptions”—overseas travel, receptions, and cars
for officials, and other perks.
Local governments’ revenue has been increasingly dependent
upon land transfer fees for the past ten years or more. In many cases, between
30 and 60 percent of their revenue has come from land sales. Given the current
real estate downturn, revenue from land sales is greatly reduced, and has
affected the fiscal balance in some areas. Some local governments have to rely
on loans to maintain their expenditures.
In fact, local government finances have developed major
problems, which cannot be resolved by economic means alone. To fundamentally
change the economic system may require first changing the way the government
functions.
It would take a minimum of two to three years to adjust the
entire Chinese economic policy, and even longer to change the economic
structures.
* This article was first published on the Epoch Times on July
30, 2012.