Red Ink: A Look at China’s Economy (part 1)

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1. A Review of History

“It takes more than a day for the river to freeze three feet deep.” The problem has been brewing for quite some time. It is therefore necessary to review the last few decades of China’s history to understand its economic “status quo” today. During that historical period, there existed an unequal balance of supply vs. demand. China’s economy went from a previous lack of a distribution system for goods and services to today’s apparently sufficient supplies, a process during which social and moral standards sloped downward at a fast speed. Destructive exploration of natural resources brought some economic benefits whereas the degeneration of moral and social values imposed tremendous costs on people in their lives, both socially and economically.

When you ask a Chinese person who lived during the 1950’s, they will tell you that during the 1950’s they enjoyed a happy life, not in terms of quantity of supplies, but of high moral standards. Unfortunately in the late 1950’s a large-scale, nationwide anti-rightist movement was launched against those who were upright citizens, telling the truth by pointing out the weak points of the country’s systems, and hoping to help the country improve by removing the weak points. What this brought about was for those people to be labeled as “rightist” and under suspicion, to be publicly monitored, to leave home, and to be sent to work in rural areas on farms for the purpose of “re-education-through-labor”, for desired ideological transformation. People shuddered at the prospective nightmare, and the consequences of telling the truth.

The economic “great leap forward” in 1958 resulted in an economic recession, having a widespread and lasting social impact. People learned from the consequences of telling the truth and started to brag and talk about mundane and fabricated things. Cases such as shouting slogans like “5,000 kg per mu yield” while one had an empty stomach were common across the country (Note: mu: a unit of area, about 0.067 hectares). Cherished traditions of the Chinese nation were beginning to erode. Traditions of hard work, honesty, justice, and compassion are just some of those. Looking up into the vast heavens and down at the yellow land that has nurtured them, the Chinese people lowered their head in dismay!

The loss of traditions and virtues and the degeneration of moral standards were followed by punishment from heaven. Natural disasters occurred for three consecutive years. A look into accurate historic data can quickly reveal how many Chinese died of starvation. Very closely came the prelude of the “Cultural Revolution,” which lasted ten years, and pushed China’s economy to the verge of collapse. It further ruined the Chinese culture, a brilliant culture that is several millennia old. With the abolishment of traditional moral values, people no longer believed in retribution according to one’s good or bad deeds and started to exert their own will in whatever they wanted to. It is well documented that moral degeneration is always closely correlated with severe economic crisis in China. Moral and economic crises are just like “a form and its shadow” next to each other. When we recall history we are reminded that without a solid moral foundation, China’s reform and opening to the world cannot sustain a steady progression, and is doomed to collapse at any time.

2. Multiple Social and Economic Crises

(1) Embezzlement and corruption in government and the private sector

Obviously, people play a major role in social and economic activities. People’s behavior can reflect the state of a country’s economy. According to fiscal reports recently released in China, judicial institutions focused their effort last year to investigate the major crimes of bribery and embezzlement. Total cases investigated over the year amounted to 36,447, involving 40,195 people. Several of these cases, 1,319, amounted to over one million Yuan RMB. The number of people involved - 9,452, had worked for the party, governments, law enforcement institutions, judicial institutions and economic and commercial administrations. Among them 2,670 held positions as department chiefs or higher. One sees more and more of these cases across the country, where corrupt officials, high or low, are numerous. More are emerging, indicating possibly that China is at its peak of corruption since the present governmental founding in 1949. It is estimated that the loss in taxes and customs duties from embezzlements and corruption erodes 8% of the GNP. Losses of this magnitude last year reached the equivalent of 80 billion US$. Embezzlement cases are accelerating by 9% annually, exceeding the national economic growth rate.

(2) Legendary “big” numbers in economic growth versus large fiscal deficits

China’s State Statistics Bureau verified that China’s economic growth rate last year was 7.3% and admitted that there is a problem with the accuracy of most economic data in China (Feb. 28, BBC Chinese website). The growth rate for the 1998 GNP, according to China’s officially released figures was 7.8%, whereas the actual rate was between minus 2% to plus 2%, according to research resulting from Professor Roschi’s findings at the University of Pittsburgh. Likewise, the official rate in 1999 was 7.1% while the research result was minus 2.5 to plus 2%. According to the most recent data from China’s State Statistics Bureau (SSB), China’s growth rate for her 2001 GNP was 7.3%. In its public release, SSB states that as a result of the increase in domestic market demand, the total GNP was 9,5933.3 billion Yuan. Officials responsible for approving loans to China at the World Bank and Asia Bank said, “China’s GNP growth rate might have been exaggerated while other indicators have been reduced.” [Translator’s note: this quotation is a translation only, not the original]

Further, according to China’s Time on March 1, 2002, Mr. Shao Zheng-nan, director of Policy and Regulations at SSB revealed to “The Financial Times” in London that an investigation conducted between May and October of 2001 discovered that at least 60,000 cases were not following the “Statistics Act,” among which 20,000 had already been brought to prosecution, leading to penalty fees amounting 30 million Yuan. If the law-enforcement agencies become stricter and better financed, they will be able to discover more cases that are against regulations. An internal newsletter within SSB states that problems in falsifying economic data are very serious (Feb. 28, 2002, BBC Chinese website) and that between May and October there were 62,000 cases brought forward where people had transgressed against China’s statistics act.

Experts and academics raised doubts from many angles about China’s statistical data. At a conference in Hong Kong sponsored by Credit Suisse and First Boston Bank, Professor Lester Thurow from MIT said that Beijing’s official economic data is not reliable and does not reflect China’s real economic status. According to AFP, Professor Thurow came to a conclusion at the conference that when China declared a 7.3% growth rate, Hong Kong’s rate was close to zero, and Hong Kong was one of the major “engines” for economic development in South China. How can this be explained? He said, “One of the two rates must be wrong. They can’t both be right,” stating further that China’s foreign trade in the previous five years “surged up and down violently,” yet its economy maintained a steady growth, which is suspicious. In his discussion of China’s economy, Thurow analyzed another suspicious point, China’s inflation rate, which had been reduced to zero from 10% in the previous year. Meanwhile, China’s economy was said to be growing steadily. Thurow further pointed out that Beijing lists its economic growth at 7 – 8 %, yet its growth in rural areas where 80% of its population lives is very little. “Then how fast must this 20% population develop to make up for the 80% that is not growing at all?” Many Chinese officials probably won’t be able to answer this question.

However beautiful the apparent numbers may be, they cannot cover the truth in the economy. China’s recent official report on its fiscal budget indicates that its fiscal deficits in 2002 will be a record of 309.8 billion Yuan (about 37 billion US$). In comparison with its budget deficits last year, this number suggests a 19% deficit increase, and a 25% increase from its actual deficits at year’s end. In addition, the deficit finance policy adopted by the Chinese government for several consecutive years has built its debts to as high as over 400 billion Yuan, and the budget deficits for 2002 will exceed 3% of the estimated GNP, very close to the insecure loan demarcation specified by the IMF (International Monetary Fund).

What do these huge fiscal deficits tell us? The so-called continuous high economic growth in China in recent years is actually dependent on huge deficits to boost domestic demand that covers up the actual slow economy and presents a misleading picture of false prosperity.

China’s officials primarily hope to rely on huge deficits to alleviate potential social conflicts due to the high unemployment rate. What has become a headache for China’s leaders are the 100 million surplus manpower in rural areas and tens of millions of workers in urban areas who have lost their jobs. These people usually live below the poverty line and have no social welfare, thus becoming a big, hidden factor of social instability. The government has no way out but to continuously increase the fiscal deficit and invest in state-run enterprises to control the increasing unemployment rate, in hopes of quelling conflict. Most economists hold that China has to maintain at least a 7% economic growth-rate to stabilize its unemployment rate.

Secondly, China’s enormous military expenses have become a huge burden on its financial resources. According to the Central News Agency (Taiwan), China’s military expenditure will increase by 17.6% this year, reaching the equivalent of 20 billion US$. Its military budgets have grown by a double-digit percentage for 13 consecutive years. Experts have pointed out that the actual expenses incurred by the People’s Liberation Army are more than that, about five times that of the publicly revealed numbers.

According to a China-economy expert at Oxford University, the economic growth rates backed up by government budgets and investments in state-run enterprises generate consequences that are very worrisome. Investors will lose confidence if there are no gains, and decrease in purchasing power will reduce consumer demand. It is logical, then, that while the government has increased expenditures, public investments will fall. Total investments do not increase. For three consecutive years, government investments have been higher than the increase in public income, and the increase in public investments has been much lower than the increase in public income. These facts tell of the passive role of the policy to expand the financial situation. The longer the policy prevails, the worse the effect of its passive role will be.

Financial expansion has reduced public investments. Gains from investments are poor because state-run enterprises have experienced difficulty in their reforms. When these two factors combine, they are doomed to result in a lack of a strong economy. This is already proven by the trend that China’s economic growth rate was high two years ago and then turned low. Furthermore, the world economy is now in trouble, which affords China no easy way to expand her exports. Financial expansion has also brought great risks to the country’s financial systems.

To be continued tomorrow.


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