Submitted by Zarathustra of Also Sprach Analyst,
Did you know that Chinese government officials are all corrupt?
Did you know that many of Chinese statistics look either weird or totally unreliable to a point that even the Vice Premier can’t help admitting it?
People outside of China have never really trusted the Chinese Communist Party as far as politics are concerned, and probably never will. However, the seemingly unstoppable growth engine of China has produced a remarkable level of complacency among investors that China is going to do well. Indeed, our contacts in Europe even suggest that investors are looking to invest in China because China seems to be in better shape than Europe, and that seemingly depressed Chinese stocks represents a buying opportunity.
Read more: the death of China cult
While recent economic data from China are mixed at best, the market consensus is unanimously biased towards believing that the second quarter is the bottom. We acknowledge that there is a chance that the government does have enough ability to stimulate growth in the short-run, it was precisely that ability which made matters worse for the long-term. And with the current economic growth model in-place, we argued that China will be a very bad place to invest in even if growth can be artificially pumped up by massive stimulus.
|By World Economic Forum from Cologny, Switzerland [CC-BY-SA-2.0], via Wikimedia Commons|
We do not understand the reasons behind the faith in the Chinese leadership as far as running the economy is concerned. We do have a few reasons on why you should just stop believing in the Chinese leadership when it comes to running the economy.
1. Chinese government cannot even get the numbers right
This is not even news. All of those who have actually worked with Chinese economic data know very well how bizarre these numbers can look, and how some of them make no sense at all. We as a keen watcher of the Chinese economy is not alone in making that judgment. In fact, vice premier Li Keqiang said it as well.
Poor quality data always leave economists and analysts baffled and unsure of how the numbers should be interpreted (especially in some monthly indicators). Now imagine running the country with a bunch of numbers that either looks weird or simply wrong.
Economists like to use all sorts of aviation-related metaphor to describe an economy (like stall speed, hard landing, etc). To use this to depict the Chinese economy, running the Chinese economy with inaccurate numbers is like flying in a dark night with wrong instrument readings. We all know how dangerous it actually is.
2. Reforms? Rebalancing? What?
There is very little doubt that China has some structural issues: low consumption, high reliance on investment, a foreign exchange system which tended to create too much liquidity within the banking system, high involvement of state-owned sector despite apparently lower efficiency, etc.
Economic data are not totally reliable, yet Chinese leadership know all these for years. The desire to rebalance the economy did not first appear in the 12th five-year plan. It has been mentioned for years. Likewise, internationalisation of Chinese Yuan, freeing capital account, liberalisation of interest rates and many other things that we are hearing a lot these days have been mentioned, on-and-off, for years.
But beyond occasional baby steps, very few have been actually achieved. This is especially true whenever the economy slows and growth became a big concern for the government, like it was in 2008/09: the government did know that the contribution from investment towards the GDP calculation looked too high (which is just part of the symptoms of an unbalanced global and Chinese economy), yet the government managed to boost it to an even higher level for the sake of maintaining economic growth.
They have failed to rebalance for quite a while, and it becomes increasingly clear that the large share of investment within GDP is at the heart of the “growth engine” of China. So why should you be so confident that they will succeed this time round? And perhaps more importantly, why should you be so sure that the rebalancing will be in the forms of high growth of consumption and stable growth, instead of falling investment and dramatically slower growth?
3. Chinese government officials are corrupt at all levels
We are not the only ones who think Chinese leadership are all corrupt. In fact, you cannot be not corrupt in order to survive (that is, of course, excluding the moment when you got caught or you lost out in a power struggle). As a result, we heard a joke that 101 out of 100 government officials are corrupt.
Exactly how? Well, businessmen often bribe officials and/or their families in order to gain benefits. Perhaps it would make bank loans easier to come by, or perhaps they could be contracted to build something for the government, or they could get land at a cheap price for their real estate developments.
The above are just some random examples of how corrupt those people running the Chinese government are. Bao Tong, the former policy secretary for Zhao Ziyang, put it more vividly in an interview with the New York Review of Books:
If you’re in that system, they’ll say, oh, your son should be a CEO. If you say, no, he shouldn’t, then they say, how can he not? If your son can’t be one then ours can’t be one either. Then they’d push you out of the boat. So if you’re in the boat, you’re corrupt. Everyone has a villa and they give you one. One in Beijing, one in Hangzhou, one in Suzhou, one in Shanghai. You say you don’t want it. What? But even the provincial leaders have villas, how can you not? It’s legal, take it.
And as we put it earlier regarding the role of corruption and over-investment, the more large-scale and extravagant the projects are, the more chance for officials to gain in the process.
4. How about the unintended consequences?
There remains a lot of bulls who insist that China has greater control over its economy, thus the government is able to shift gear in a way that the Western developed economies are unable to do so. This is nonsense.
Some of the actions by the Chinese government in the past many years illustrated perfectly how a far-from-omnipotent government led to potentially disastrous unintended consequences.
Take the one-child policy, for example. One the positive side, the policy reduced dependency ratio in the past 2 decades at least, and led to the increase of working population relative to other age groups. The so-called demographic dividend from the artificial reduction of fertility rates propelled growth in China. Yet as the demographic dividend comes to an end now, one then realises that China is ageing very rapidly and dependency ratio could rise very rapidly. Also, working population will start to shrink as the rapid artificial decline in fertility rates over the past 3 decades lead to less young people coming into the working population. On top of that, the traditional preference for boys leads to selective abortions of girls, increasing the gender imbalances. These combined produce what Nicholas N. Eberstadt called a “demographic version of ‘the perfect storm’”, which will contribute to a dramatically lower economic growth in the years to come.
We also thought of the last massive stimulus programme after the 2008/09 financial crisis as a “failed gamble”. It could be thought of as an attempt to offset the slump in external demand by increasing domestic demand, but mainly come through investment as it is much harder to boost consumption in the short-run, not to mention that the growth model of China has been essentially based on hurting consumers. The Chinese government-led investment binge has ended up building a productive capacity that is now able to serve a global demand that they thought would exist. The problem is it does not exist. The US has been growing, yet below trend. Europe is in a deep recession, if not downright depression. The last massive stimulus also inadvertently created a nation-wide real estate bubble despite massive over-building and short bout of high inflation, yet the over-building of real estate and productive capacity now points China to a problem which is arguably more difficult to tackle: debt deflation.