Reality check: economy of China

china

First thing first: no countries can grow at a double-digit pace forever.

China, the world’s second largest economic power, seemed to (probably) have learned hard lessons from the recent stock crash that is taking place in the last two months: there are no expected circumstances. No matter how many trillions of dollars the government has been pumping in to support the ailing stock market indices, the money is still lost. And now, more than 5 trillion US$ (pretty much the annual output of Japan’s economy) have all but evaporated from the country’s stock markets in Shanghai and Shenzhen.

The recent crash sparked numerous discussions worldwide about the real situation happening in China’s economy. Google ‘China economy’, and most likely the keywords are overwhelmingly negative; many users even question if the economy is none other than a ‘gigantic Ponzi scheme’. And what makes economic risks in 2015 particularly very distinct – and also unprecedented – from the previous crises in 1998 and 2008 are that the problems are three-fold:

  1. There is uncertainty among US Federal Reserve whether to increase interest rates or not – the first time since 2006. Given that the central bank has pumped more than 4 trillion US$ from 2008 up to the end of 2013 into global financial markets, US economic recovery gradually reverses the quantitative-easing policy, posing countries with massive short-term capital inflows at significant risks.
  2. China’s economic slowing-down ‘exacerbates’ the matter. As the world and China increasingly co-depend on each other – especially in international trade, any economic problems inside the country will translate as bigger problems for global economy as well. If, in case, US Federal Reserve decides to increase the interest rates, this will impose increasing burdens for, plainly speaking, a whole lot of people worldwide – especially companies with bonds and debts denominated in US dollars.
  3. The slowing global economy also pushes commodity prices to unprecedentedly low levels; oil prices continue to linger between 38 and 40 US$ per barrel, the lowest since 2009. Dozens of currencies depending on oil incomes have seen their values significantly decline (Nigerian naira, Saudi Arabian riyal, Malaysian ringgit, Zambian kwacha being the biggest casualties), and in fact, most of the currencies whose commodity exports depend on China’s economy are actually plummeting in values.

Given the tendencies for mass media to make any stories overblown, let us do some reality checks on what is actually happening with Chinese economy in brief points below. Some are indeed alarming, but others may be more soothing, so a delicate balance of views has to be considered. These are the things we need to know:

Soothing: China is different from Greece, and its manufacturing output remains huge

With the country expected to have domestic output at over 11 trillion US$ this year, industry-related sectors account for approximately 45% of the GDP composition, slightly larger than those provided by services-related economies. Even though labor costs are increasing very rapidly in recent years (hint: GDP per capita was already 7,500 US$ last year), China’s manufacturing output remains huge, particularly in coastal regions. Initially, there were worries that Greece’s rejection of financial bailouts would result in a blow on Euro values, and therefore spell a trouble in global economy, until China’s stock market crash took its turn as another headline.

Alarming: China has a bad-debt problem

On paper, and on most statistics offered by CIA World Databook, IMF, and World Bank, China’s external debt and public level debts stand at approximately 25-35% of total GDP. But there is one huge caution: debts generated through ‘shadow banking’ (financial institutions that are not listed in the government records) are not counted in the process, and that is an alarming sign. In fact, much of this debt, whether clean or not, is mostly used to fund projects that turn out to resemble more like ‘white elephants’, say, ghost cities. While estimates provide that the actual debt-to-GDP level for China is more than 280% (which may be true), we truly have no idea how much debt the country has accumulated since the beginning of economic reforms in the last almost four decades.

Alarming-soothing: Some portions of these ‘bad-debt’ amount are actually overwritten

Accounting, no matter how tedious it is, sometimes can have its own magicians. This is particularly the case for Chinese state-owned enterprises that build numerous projects overseas – and end up losing money. The question is, do they actually lose the money, or does the money go ‘somewhere else’? Another controversy is overstating debt amount in order to reduce taxes paid, or even to avoid paying taxes at all. While there has been little research about this area, more works need to be done in the future to understand further about such accounting magic tricks.

Still, we don’t actually know how much China owes the world, and most importantly, its own people.

Soothing: Even at an annualized growth rate of 7% this year, China already ‘grows pretty fast’

Even both President Xi Jinping and Prime Minister Li Keqiang acknowledge that fact. The premier, in particular, emphasized that the economy has entered a new normal, and the world has to accept the reality that China, indeed, can not grow at an astronomical pace forever. With increasing labor costs, China will have to move its factories, one by one, to other emerging markets, and upgrade its economic composition to be based more on services and domestic consumption. China’s appetite for natural resources is also gradually declining, and indeed, the slowing economic growth should be a positive thing to celebrate for environmentalists: they are doing really hard to reduce emissions of carbon dioxide, one side effect resulting from the country’s rapid-fire growth in the last 30 years.

Furthermore, with growth rate at 7% this year, China actually still increases 700-800 billion US$ to its annual output, and that quadruples the amount of real GDP produced by India in 2015, for the first time ever the fastest-growing economy in Asia (with an annualized growth rate at 7.5%).

Alarming: Nobody really knows how the government measures economic growth rate

On theory, economic growth is measured through increase in inflation-adjusted market value of the goods and services produced within a certain time period (usually one year). The real problem here, nonetheless, is not about the definition, but WHAT classifies (or constitutes) as the components of growth by the government. Building buildings is one thing, but do they house people? That’s another thing worth concerning about.

Alarming-number two: China’s gross fixed capital formation is actually increasing, not declining

To get you acquainted with this economic term, gross fixed capital formation is, in simple terms, ‘investment’. Something that requires us to spend money in building fixed assets, such as factories, houses, equipment, infrastructure, or anything that can’t be moved (but destructible). While it is necessary to increase the percentage of gross fixed investment at times of rapid economic growth, no economies can incrementally add up the figures forever. There is always laws of diminishing returns: if you invest too much, you end up losing money. And that is what China is actually experiencing.

In 2008, during the height of global financial crisis, China’s GFCI was already approximately 40% of the country’s GDP, among the world’s highest. The almost 600-billion-dollar stimulus package introduced in 2009, intended to boost domestic consumption to support economic growth, was ironically channeled to numerous investment projects instead, many of which are simply unprofitable. That’s why one sees empty cities, little-used highways, and losses-generating projects overseas, when in fact many people in China are still struggling to gain access to basic infrastructure, particularly in hinterland areas. By 2012, the gross fixed investment was already 46%, and it is estimated that by this year, the rate is approaching 50%, an increasingly unhealthy level.

Soothing: ‘stock market crash’ may be an overblown title

Even until mid-2014, the average indices for Shanghai Stock Exchange remained below 2,000. It was only after Chinese government decided to allow financial liberalization that tens of millions of investors, many of whom used financial loans, placed them on companies’ stock prices. In less than one year, the scores shot up to more than 5,500, an astronomical pace so markedly Chinese form of ‘rapid-fire growth’, that when it dropped starting from June, it dropped catastrophically.

Yes, the stock indices are now below 3,000, but honestly speaking, that is still significantly more than the indices were last year. While government intervention was, admittedly, very heavy, including ‘persuading’ (or forcing?) managers of companies and state-owned enterprises to buy up stocks to withhold the drop in stock prices, that couldn’t do much to reduce the impact. After all, stock index is one unpredictable thing by its own. If the government is committed to financial liberalization, the government should regulate investors so as not to excessively use loans to buy stocks, but not to withhold the drop in stock prices.

Alarming: China’s currency depreciation is not going to help its exports

Shortly after the ‘stock market crash’ and the resulting free-fall of currencies worldwide, China’s central bank took an unexpected turn it has barely done since early 2010s: devaluating the yuan at over 3%. It sends even further shrills to currencies worldwide, delivering a dramatic drop for currencies whose exports increasingly rely on China’s economic strength, such as Taiwanese dollar, South Korean won, Indonesian rupiah, and South African rand.

Even the bank’s recipe-as-usual policy to reduce currency values to boost export is already an outdated move given the changing face of global economy today: China has had more trade agreements in 2015 than it was back in 2008, when their trade policies back then were largely protectionist. While it will increase its export volume, it will not be significant. The most important thing, instead, is to focus on its own 1.4 billion people as potential consumers, and that is where Chinese government needs to pay attention to.

Furthermore, China also ‘suffers another blow’ after surrendering the ‘fastest-growing economy in Asia’ title to India: it now relinquishes the ‘world’s largest trade-surplus’ title to Germany; while China records the volume a little above 200 billion US$ in 2014, Germany put in more than 270 billion US$ in the same year. German model of capitalism, which focuses on ‘hidden champions’ and mittelstand, is slowly winning.

 

BONUS: Oliver Wyman, a respected consultancy firm, has previously forecast that a ‘2015 financial disaster’ will occur back in 2011, and now, what currently happens largely echoes what the analysts had predicted 4 years earlier. Read the full report, and understand things better, by clicking on the link here.

The Food Bubble

commodity speculator

 

 

A 2010 investigative article by Frederick Kaufman, published in Harper’s, attempts to explore the roles played by financiers, hoarders, and Wall Street giants alike – most notoriously, Goldman Sachs – in exploiting commodity prices, riding roughshod over them, until the bubble exploded. The consequences were monstrous: at the height of global financial crisis, nearly 1 billion people worldwide had not enough food to eat as prices inflated in manifold. Worse, even in the United States itself, nearly 50 million Americans relied on food stamps to obtain subsidized provisions by government.

Read the full article by downloading the PDF file here: Harper’s – The Food Bubble.

 

Excerpt:

 

“It’s absolutely mind-boggling,” one grain trader told the Wall Street Journal. “You don’t ever want to trade wheat again,” another told the Chicago Tribune. “We have never seen anything like this before,” Jeff Voge, chairman of the Kansas City Board of Trade, told the Washington Post. “This isn’t just any commodity,” continued Voge. “It is food, and people need to eat.”

The global speculative frenzy sparked riots in more than thirty countries and drove the number of the world’s “food insecure” to more than a billion. In 2008, for the first time since such statistics have been kept, the proportion of the world’s population without enough to eat ratcheted upward. The ranks of the hungry had increased by 250 million in a single year, the most abysmal increase in all of human history.

How an MLM scam triggered a country into a civil war

1997 albanian crisis

 

 

An in-depth story about how Albania dragged itself into ‘a period of statelessness and complete chaos’ after a series of massive financial collapses of multilevel marketing (MLM) businesses in 1997, ending up with nearly 4,000 casualties, a brief military intervention from UN peacekeeping forces, and numerous brutal massacres on both the civilian and security apparatus.

May this dark historical experience, despite its tragic consequences, serve us a priceless lesson that wealth never comes rapidly.

Read the complete article in Wikipedia.

 

Excerpt:

 

In 1992, the Democratic Party of Albania won the first free elections in Albania, and Sali Berisha became president. In the mid-1990s, Albania was becoming a liberalized economy, after years under a controlled economy. The rudimentary financial system became dominated by Ponzi schemes, and government officials endorsed a series of pyramid investment funds. By January 1997, the schemes (actually fronts for laundering money and arms trafficking) could no longer make payments. The number of investors who had been lured by the promise of getting rich quick grew to include two-thirds of Albanians. It is estimated that close to $1.5 billion was invested in companies offering monthly interest rates ranging from 10 to 25 percent, while the average monthly income was around $80. People sold their homes to invest the proceeds, and immigrants working in Greece and Italy transferred additional resources to the schemes back home.

 

 

Spotlight: Republic of Crimea

flag of crimea

 

 

Profile of a newly independent, sovereign state, and a new 2-million-strong nation, ‘born’ amid an international diplomatic crisis involving United States, European Union, Ukraine, and Russia. Read the complete article about Republic of Crimea on Wikipedia.

 

Excerpt:

 

Formerly annexed by the Russian Empire, Crimea was reoccupied by the Soviet Russia in 1921 and was granted the status of autonomous republic. After the World War II in 1945 the Soviet authorities deported the indigenous population of Crimean Tatars and the autonomous status of the region was stripped. In 1954, the Presidium of the Supreme Council of the Soviet Union transferred the region to Ukraine. Ukraine restored Crimea’s autonomous status in 1991 and allowed all Crimean Tatars to return. Crimea’s autonomous status was further reiterated in 1996 with the ratification of Ukraine’s current constitution, which declared Crimea to be the “Autonomous Republic of Crimea”, but also an “inseparable constituent part of Ukraine.”

On March 11, 2014, amid the 2014 Crimean crisis, the Crimean parliament and the Sevastopol City Council issued a letter of intent to unilaterally declare independence from Ukraine. The document specifically mentioned Kosovo as a precedent in the lead part.

The declaration was done in an attempt to legitimize a referendum on the status of Crimea where citizens were to vote on whether Crimea should apply to join Russia as a federal subject of the Russian Federation, or remain part of Ukraine.

A Jewel in Two Crowns

yalta

 

Photograph by Gerd Ludwig. Source: National Geographic

 

It is in Ukraine. It is, in geographical terms, not so far, but also not so distant, from Russia. It is ruled by an autonomous government supervised by Kiev’s authorities. But when it comes to bulk of its people, there is hardly any feeling about being Ukrainian though. They mostly talk in Russian, that’s fine; most of the populace in Ukraine is bilingual, back then, thanks to its centuries-long historical ties with the former, in particular during Soviet’s rule, lasting seven decades. Nevertheless, deep down their hearts, many of these residents feel more proud to be Russians, display Russian culture with more ostentatiously than with Ukrainian one, and almost everything they do in daily lives is much or less similar to their Russian counterparts.

This is Crimea, Ukraine’s uneasy peninsula.

2014 has been an entirely challenging year for Ukraine, notwithstanding its current, interim government in Kiev. A months-long political protest in Kiev that saw nearly a hundred civilians killed. Internal split between those who support Brussels and the others who favor Moscow much better (part of that reason may be attributed to Putin’s high willingness to provide financial rescue package worth 15 billion US$ to Kiev). A shaky, provisional regime now being tested with the interference of a few thousand Russian troops in Crimean peninsula, excluding numberless scores of pro-Russian militiamen now occupying most government offices in the territory. Exacerbate that matter with today’s Crimean parliamentary referendum, most of which favors ‘unification with Russia‘.

With another referendum for majority of the 2-million-strong population in Crimea scheduled in no more than 10 days, the future of this peninsula remains in deep limbo. Will it continue to be part of Ukraine? Or will it embrace back the hugs of Moscow?

 

This article, released in National Geographic Magazine‘s April 2011 edition, attempted to explore deeper what exactly happens in Crimea, the crown that, implicitly stated, dubiously ‘belongs’ to both Ukraine (in nationality) and Russia (in identity). Click the link to find out more.

 

Excerpt:

 

The Crimean Peninsula is a diamond suspended from the south coast of Ukraine by the thin chain of the Perekop Isthmus, embraced by the Black Sea, on the same latitude as the south of France. Warm, lovely, lush, with a voluptuously curved coast of sparkling cliffs, it was a jewel of the Russian Empire, the retreat of Romanov tsars, and the playground of Politburo fat cats. Officially known as the Autonomous Republic of Crimea, it has its own parliament and capital, Simferopol, but takes its orders from Kiev.

Physically, politically, Crimea is Ukraine; mentally and emotionally, it identifies with Russia and provides, a journalist wrote, “a unique opportunity for Ukrainians to feel like strangers on their own territory.” Crimea speaks to the persistence of memory—how the past lingers and subverts.

In 1954 Nikita Sergeyevich Khrushchev, First Secretary of the Communist Party of the Soviet Union, signed Crimea over to Ukraine as a gesture of goodwill. Galina was 14 at the time.

“Illegal,” she said, when asked about the hand­over. “There was no referendum. No announcement. It just happened.”

What was Khrushchev thinking?

“He wasn’t,” she snapped. “Khrushchev had roaches in his head.”

Crimea was a lovely present, but the box was empty. Ukraine was part of the Soviet Union anyway. “My parents discussed the transfer, but we weren’t concerned,” Galina said. Moscow was still in charge. No one could have ever imagined the 1991 collapse of the Soviet Union, when Crimea would be pulled out of the orbit of Russian rule along with an independent Ukraine.

The Ukrainian tumult

Russian parliament approves use of force in Crimea

 

 

[Putin’s] going to lose on the international stage, Russia is going to lose, the Russian people are going to lose, and he’s going to lose all of the glow that came out of the Olympics, his $60 billion extravaganza. – US Secretary of State, John Kerry, during an interview in NBC’s “Meet The Press”, in response to Putin-led Russia’s decision to dispatch several thousand troops to the tumultuous Crimea, a pro-Russian autonomous region in Ukraine, now already shaken by internal split between those who support integration with European Union, and those who advocate closer relationship with Moscow.

Read a complete summary of the 2014 Crimean crisis on The Guardian.

 

 

Bonus: here is another longform article, titled ‘Fascism, Russia, and Ukraine‘, about the country’s ongoing political deadlock on The New York Review of Books. Here is the excerpt as follows:

 

The protesters represent every group of Ukrainian citizens: Russian speakers and Ukrainian speakers (although most Ukrainians are bilingual), people from the cities and the countryside, people from all regions of the country, members of all political parties, the young and the old, Christians, Muslims, and Jews. Every major Christian denomination is represented by believers and most of them by clergy. The Crimean Tatars march in impressive numbers, and Jewish leaders have made a point of supporting the movement. The diversity of the Maidan is impressive: the group that monitors hospitals so that the regime cannot kidnap the wounded is run by young feminists. An important hotline that protesters call when they need help is staffed by LGBT activists.

On January 16, the Ukrainian government, headed by President Yanukovych, tried to put an end to Ukrainian civil society. A series of laws passed hastily and without following normal procedure did away with freedom of speech and assembly, and removed the few remaining checks on executive authority. This was intended to turn Ukraine into a dictatorship and to make all participants in the Maidan, by then probably numbering in the low millions, into criminals. The result was that the protests, until then entirely peaceful, became violent. Yanukovych lost support, even in his political base in the southeast, near the Russian border.

Balinghou

balinghou

 

Believe it or not, no country has encountered – and created – such a huge, formidable wave of change in such a short eon of time as China does.

In Mao Zedong’s era, China was labelled as one of the world’s poorest countries, with virtually nearly 1 billion of its people lingering on state jobs, rationed welfare, and the so-called ‘iron rice bowl’ principle. Employment was guaranteed for life – albeit with very little possibility for ‘status upgrade’, and pot-luck income. Waves of revolution even further disrupted – and reshaped – the whole society’s mindset. The 50s’ generation has witnessed how Great Leap Forward – one paradoxically interpreted to propel China into an ‘equal’ partner as Europe and US had done – led to the deadliest famine in human civilization. The 60s’, and the 70s’ altogether, had also bore the brunt of Cultural Revolution – when culture was entirely destroyed, where children, students, workers, and all ‘revolutionaries’ alike were forced to persecute their own parents, siblings, neighbors, teachers, professors, intellects, party members, or any other dubbed as ‘bourgeoisie’.

And the 80s’ generation, the balinghou – those born in 1980 and beyond – are faced with material greed that has been domineering in nearly all aspects of life in the contemporary Chinese society.

With the introduction of market reforms and the enforced one-child policy (which has recently been significantly relaxed after warnings of population decline and rapid aging), China has rapidly seen its status changing; one transformed from a very huge ‘sick man’ into the world’s second most significant economic powerhouse, now challenging the legitimacy of its long-time rival, United States. With family size reduced and incomes improved, the society’s living standards have risen to an unprecedented level never imagined before by prior generations.

Nevertheless, the economic success of China itself comes at a list of disproportionate costs, one of which is the social crisis that is penetrating towards the society. The children are becoming more spoiled than their parents, a culture of ‘money fetish’ has flourished among bulk of its populace, and individualism has been rampantly misused as ‘all-for-me’ mindset. A huge generational gap is now taking place between the balinghou and their predecessors, those who had been faced with severe hardships throughout Mao’s rule.

A writer attempts to explore deeper the brand-new world of these ‘balinghou’, and the consequences left behind to the overall societal relationship among the society. Read the full article on Aeon Magazine.

 

Excerpt:

 

Immigrants often have a stable set of values from their home culture from which to draw sustenance, whether religious or cultural. But for the children of the Cultural Revolution in China, there’s been no such continuity. They were raised to believe in the revolutionary Maoism of the 1960s and ‘70s, and then told as young adults in the late 1970s that everything drilled into them in their adolescence had been a terrible mistake. Then they were fed a trickle of socialism, rapidly belied by the rush to get rich, and finally offered the hint of a liberal counter-culture in the 1980s before Tiananmen snatched it away. In the meantime, traditional values condemned as ‘counter-revolutionary’ in their youth are being given a quick polish and propped up as the new backbone of society by the authorities.

The young get slammed for their supposed materialism, but it’s a set of values their parents hold more dearly still, since the one constant source of security for their generation has been money. Money — at least the fantasy of it — has never abandoned them. ‘The Chinese love money,’ the PhD student Zhang told me, ‘because it has no history’. Having gone through the gangster capitalism of China’s rush to wealth, the older generation’s bleakly amoral attitude toward how to get by can shock their children. Huang Nubo, a poet, rock-climber and billionaire property developer, now in his fifties, has been one of the few people to talk about this openly, speaking of the ‘devastated social ecology’ in an interview with the Chinese magazine Caixin. But Huang is a rarity, and cushioned by his own wealth; far more parents are concerned that their children aren’t doing enough to get on.

While immigrants dream of their children becoming doctors, lawyers, or professors, domestic Chinese ambitions mostly lie elsewhere. Doctors are poorly paid, overworked, and unpopular, thanks to a flailing and corruption-ridden medical system. Lawyers are bound to the vagaries of the ever-shifting judicial system. Professors earn marginal incomes and rely on outside work to get by. The priority for Chinese parents isn’t professional standing or public achievement, but money and security, regardless of what the job involves.