What is the current state of affairs in China?

[wasteofo2]

I'm really interested in learning what things are like in China. I know from an economic perspective, employment and GDP are booming at a rate unmatched in the entire world, but what of the political structure? How "Communist" is China still? What's the tax structure like in China, and how much re-distribution of wealth is there? Is there any sort of Democracy at all, or is it still a totally unrepresentative form of government? Does anyone know of any good articles, books or anything like that outlining the current state of affairs in China?

Thanks alot,
Jacob

 

[Joel]

Try OECD: http://www.oecd.org/infobycountry/0,2981,en_2649_201185_1_70342_1_1_1,00.html

UNDP: http://hdr.undp.org/reports/view_reports.cfm?year=0&country=C54&region=0&type=0&theme=0

 

[Pengwuino]

I need to find some chinese mutual funds :D

 

[sid_galt]

Personally I don't trust China AT ALL.
The Communists are in power and the anti-secession bill, restrictions on free speech, etc. just show that they have no intention of letting it go.
They do not have free press and free speech. All the economic "liberalization" of China is just at the mercy of the government. One word and it could completely end. Besides China would be a very useful ally for someone at war against the US. It could totally disrupt the economy.

 

[Pengwuino]

Well, remember, economics is a 2 way street. They'd take a huge hit as well... but is till want to invest there :D

 

[Locrian]

Given the state of chinese stock markets, I'm suprised. They've performed exceedingly poorly over the past decade, are rife with corruption, contain large numbers of companies that exist only in name, and as a whole don't do a good job of mimicking the chinese economy.

Of course, if they let their currency float it could make up for some of that, I suppose.

 

[adrenaline]

Here is a good synopsis from Sratfor Intelligence:

China's Long March to Bankruptcy
March 23 2005 23 59 GMT



By Peter Zeihan

The Chinese economic miracle is faltering -- the result of a complex mix of political and economic factors that cannot be changed without serious harm to some aspect of the Communist-run system. Though it has not yet become obvious from the outside, internal pressures generated by China's dependence on cheap credit, guaranteed employment and state-financed, state-owned industry are building steadily. A series of crises will erupt between now and the end of 2006, anyone of which could be sufficient to cause an implosion.

The Expensive Cost of Cheap Credit

The import/export industry rooted in China's coastal regions has grown at gangbuster rates since 1979, forming the core of the country's economic expansion. The industry has succeeded by applying the Asian principle of maximizing cash flow and market share -- which are valued over profit and accountability. Under the Asian model, governments guarantee companies access to generous amounts of subsidized credit as a way of ensuring that the firms remain operational -- no matter what product, managerial, marketing, financial or other normally critical shortcomings they may have.

This system can continue to operate so long as loans come with lenient terms of repayment. After all, debt is only debt if the borrower actually has to pay it back. And since the state determines just what borrowers need to pay back, the method is safe -- so long as exposure to international forces remains limited.

China, however, began to expose its coastal industries to just those foreign forces when Deng Xiaoping began opening China up to the outside world in 1979. Because they now have the option of accessing foreign capital, Chinese companies have become as vulnerable to debt crunches as their Western counterparts. Beijing's decision in 1994 to peg the national currency to the U.S. dollar came partly in reaction to this exposure. The peg minimizes currency risks; without it, China would have suffered along with the rest of its neighbors in the 1997-1998 Asian financial crisis.

Nevertheless, the government knows that the growth in its coastal import/export industry is not altogether healthy. Businessmen and corrupt officials have taken advantage of the system to channel huge amounts of money toward projects that do little -- or have stolen the money outright, or built capacity that simply is not needed. All that extra production capacity threatens to swamp the Chinese economy with unneeded goods of all stripes. The net effect is that, with the exception of the past nine months, China has flirted with deflation for the past six years. The last time the United States suffered from a deflationary spiral, the Great Depression resulted.

Understandably nervous, the government -- beginning in March 2004 -- sought to pull itself back from the brink. In an attempt to head off breakneck growth as well as rein in deflation, Beijing issued a moratorium on any new lending for several days and drastically reduced credit access thereafter for specific sectors such as steel, where officials feared over investment had reached particularly disastrous levels.

Within a few months -- aided by roaring commodity costs -- inflation had accelerated to decade highs of 5.3 percent. While economic pundits waxed philosophical about the dangers of inflation, Beijing heaved a quiet sigh of relief -- believing its problem to be deflation rather than inflation. At 5.3 percent, inflation hardly threatened to crash the Chinese economy -- but certainly was strong enough to ward off deflation.

Of course, not everyone agreed with Beijing. For the steel industry and others affected by the lending restrictions, the new policy was tantamount to a death sentence. Companies in these sectors could survive only with continual infusions of cheap money, and they could not get that money without expansion projects to back the loans.

So, refusing to lie down and die, these companies sought new sources of funding and borrowed from international lenders. In 2004, Chinese companies' exposure to international debt increased 18.1 percent to $228.6 billion. More importantly, the massive need for immediate funding meant that the structure of that debt shifted heavily to short-term loans; $104 billion of that debt now has a maturity in one year or less. That short-term debt alone amounts to more than 6 percent of Chinese gross domestic product (GDP).

In trying to solve the deflation problem, Beijing unintentionally condemned the coastal economy to precisely the sort of exposure that the yuan-dollar peg was designed to prevent. China's coastal regions are now exposed to a large amount of dollar-denominated loans, ending their immunity to the ebb and flow of international finance. All it would take to trigger a coastal debt crisis is an increase in international -- read, American -- interest rates from their near-record lows.

China is on the verge of precisely this sort of crisis; it most likely will begin in the second half of 2005. U.S. interest rates have tripled in the past nine months, and the Federal Reserve has made it clear that many more increases are on deck. Every time U.S. rates increase, all that newly commissioned, dollar-denominated debt becomes more difficult to sustain.

And this time China's coastal companies do not have the option of turning to state banks for help.

Trust, the WTO and the Government's "Dispersing" Arm

At the heart of China's second key problem lie those very banks.

The import/export industry is only one underpinning of the Chinese economy. The other -- state-owned industry which primarily services the domestic economy -- is of far greater concern to typical citizens.

Like its counterparts in many centrally planned economies, China's industrial sector is almost entirely state-controlled. Known collectively as state-owned enterprises (SOEs), these companies -- like the coastal enterprises -- feed on cheap money, and their planning and investment policies tend to engender deflation just as much as -- if not more than -- those of their coastal counterparts.

But unlike the import/export industry, the SOEs have rather limited contact with the outside world. Their main purpose is not necessarily producing goods, but keeping two-fifths of China's urban population steadily employed. Put another way, the SOEs form China's social safety net -- and in this light, they make the coastal businesses appear paragons of financial virtue.

Which brings us back to the banks -- the principal enablers of this economically shaky strategy. The four largest of China's state banks -- the Industrial and Commercial Bank of China, the Bank of China, the China Construction Bank and the Agricultural Bank of China -- control 60 percent of the sector.

China's SOEs are shoddily run because they report only to their political masters, who never intended them to be economically viable in the first place. Lending policies at state banks reflect this: The banks are simply arms of government policy. All of them were hived off from the Chinese central bank only in 1984, and, as recently as 2002, the government officially referred to the China Construction Bank as "the dispersing agency for the Ministry of Finance."

The banks suck up the capital from China's absurdly high savings rate, grant next to nothing in interest to depositors and by government fiat shovel cash into the SOEs to keep them running. Not surprisingly, the Chinese government in 2002 officially reported the bad debt ratio for the Big Four at a stunning 30 percent. Independent assessments put the number in excess of 50 percent. (For comparative purposes, the U.S. savings and loan crisis of the 1980s required a government bailout equal to some 3 percent of U.S. GDP; China currently would require a bailout on the magnitude of 35-40 percent.) However, since the SOEs operate almost completely divorced from the international system, such a state of affairs could continue indefinitely -- if not for China's decision to join the World Trade Organization (WTO).

Among other WTO accession protocols, Beijing agreed to a mandate that the Chinese economy would slowly open up for foreign competition. Banking is one of the final sectors to be liberalized, with a break-out date assigned for the last possible moment.

That means that in December 2006, the state banks will start to wither. As soon as foreign banks are able to compete freely, they will begin to siphon off Chinese depositors by the millions. Because they are unburdened by unprofitable SOEs, these foreign banks can pay interest to their depositors. As a result, the state banks will no longer have the resources to sustain the SOEs, and this in turn will force the government to begin paying subsidies directly in order to stave off social disintegration.

The Chinese have been working furiously to clean up the banks, hoping to avoid the coming train wreck. Since 1999, the government has transferred nearly $300 billion in dud loans off of the banks' books and pumped $22.5 billion into both the China Construction Bank and the Bank of China in efforts to recapitalize them. The idea is to clean up the balance sheets -- both of those banks now have an "official" bad loan ratio of less than 5 percent -- so that they will be able to compete better once the sector is fully opened.

There are, however, two problems.

First, no one is buying the Chinese line. The credit ratings firms consistently estimate that the sector's overall bad debt ratio remains stubbornly high -- around 35 percent, triple the government's official line of 13 percent -- and believe the "change" represents little more than a shell game with the dud assets.

The Chinese government could signal that it means business by making earnest attempts to resell the nearly $300 billion in bad loans that it transferred off the banks' balance sheets. Such an effort would have massive impact, since new managers -- most likely foreign -- would substantially downsize the unprofitable SOEs and shut down many of them. That cannot occur, however, so long as Beijing (rightly) fears that cutting the SOEs off would lead to a systemic collapse. Instead, the government has merely required financial constructs called asset management companies to hold onto the dud loans. On occasion, some of this debt comes up for sale; by value, fewer than 1 percent of the loans have found foreign buyers.

As a result of all this, foreign banks are unwilling to commit financially to their Chinese counterparts. That represents a critical failure for Beijing; foreign money and expertise are among the tools that might help the state banks survive the coming onslaught of competition.

The second major problem is that corruption has taken a toll on the bank cleanup process. Incidents of outright theft by local branch managers are so common they have become Page 8 news. On March 15 the government sacked the chairman of China Construction Bank, allegedly for taking kickbacks, and the China Banking Regulatory Commission is currently investigating more than 150 "irregularities" within the Big Four.

The Chinese leaders do understand the argument in favor of change -- indeed, they correctly anticipate the result of the necessary financial adjustments: social collapse. The government can bail out and asset transfer all it wants, but without a fundamental change of policy, the banks will simply continue with business as usual, adding new bad loans to recently scrubbed balance sheets.

The Yuan and Yang of the Double Economy

Naturally, the government in Beijing will not sit idly by and wait for the country to implode, but that does not mean it has any attractive options.

China's two economies -- the import/export and the SOE sectors -- have exceedingly little to do with each other. They are even divided along geographic lines, with the import/export sector spreading up and down the coast and into southern regions, and the SOEs more heavily concentrated in the interior and the north.

China's final problem is that what is good for one sector is cyanide for the other. The best way to preserve the coastal boom would be to implement immediate and drastic banking reforms while unilaterally opening all sectors to full international competition. This undoubtedly would spark a recession, but the large-scale presence of foreign companies would both cushion the blow and provide capital, markets and expertise to exploit China's low labor costs and trigger a rapid revival. But on the other side, the same measures would destroy the SOEs and put hundreds of millions of angry Chinese on the streets.

Conversely, the best thing for the SOEs would be for China to pull out of the WTO and place heavy taxes on all imports and exports. This would provide additional funding to subsidize the state sector and make it relatively more sustainable. However, it also would crash the import/export sector and drive foreigners out of the country.

The crux of China's problem then, is not so much what to do about the banks, but what to do about the country. Every government's primary concern is survival, and China is no exception. The leadership soon will need to choose which part of the economy to salvage.

Stratfor believes Beijing is likely to choose the import/export sector -- which would make part of China a very rich place, but also make a social explosion inevitable.

The coastal economy has been the key to China's quarter-century growth burst, but additional exposure to the international economy now threatens to destroy the country's financial structure and the primary mechanism of providing employment -- and social stability.

However, if China can preserve the state banks and SOEs by abrogating its WTO commitments, then unemployment -- and thus social discontent -- would be somewhat contained, both in terms of geography and absolute numbers, despite damage to the nation's overall wealth. Ideology and nationalism both could be used to solidify control, and the Communist Party might manage to muddle through; Beijing's saber-rattling at Taiwan and recent passage of an Anti-Secession Law should be viewed in this light.

No matter what choice Beijing eventually makes, foreign investors will not fare well. In the unlikely event that the SOEs are sacrificed, the country could well disintegrate. If Beijing retreats from its WTO commitments, foreign banks -- heretofore the most boisterous cheerleaders for investment in China -- would become China's most damning critics. Either way, the foreigners who underwrote the Chinese "miracle" are about to depart in droves.

Ultimately, this dichotomy will cause the biggest rips in the Chinese social and political fabric during the next two years. Conflicting and competing economic zones do not a stable country make. Sooner or later, they either must separate under disparate political authorities or come to blows over which one will dominate.

China provides plenty of historical examples as to just how far this can go. During the days of colonial domination, coastal communities cooperated with foreigners, essentially breaking the country up into different political circles. Later, in the 1960s, Mao Tse-Tung repudiated the economic modernization espoused by the coast and opted for the Great Leap Forward -- which kept the nation in one piece, but crushed China as an industrial power.

Past is once again prologue.


© Copyright 2005 Strategic Forecasting Inc. All rights reserved.
Terms of Use | Privacy Policy | Contact Us |

 

[Dayle Record]

You better be concerned with what is happening here, let me give you an example. I passed a train yard on the way into town today, every car on every train, was from China.

 

[Pengwuino]

Maybe the train traveled underwater all the way from china... yah... ever think of that? lol. How in the world did you know what every car was? did you stop and look? Do yo have a job? lol. :D

 

[stoned]

maybe not every car is made in china but half of its components are, and well... whole Wal-Mart is China.
i have nothing agaist china, problems lies with american corporations in search for cheap buck, and with zero loyalty to America.

 

[Yonoz]

i have nothing agaist china, problems lies with american corporations in search for cheap buck, and with zero loyalty to America.

I guess then that the American corporations destroyed the Tibetan Buddhist culture.
My problem with China

 

[stoned]

Okay ! Tibet was invaded by Chinese, so why Bush does not liberate Tibet if he is such a freedom fighter and lover of democracy?

 

[El Hombre Invisible]

Not a bad idea. Liberate Tibet, install a US-friendly Dalai Llama who used to work for Unical until they can elect their own (no need for all this reincarnation red tape), thus creating a government likely to give the US a good deal on cheap karma. The French will complain, mind, when they start getting what they deserve, eh? Eh?

 

[El Hombre Invisible]

I said llama... i friggin kill me...

 

[Yonoz]

Okay ! Tibet was invaded by Chinese, so why Bush does not liberate Tibet if he is such a freedom fighter and lover of democracy?

That is the first sensible thing to come from you.
A very good question.

 

[sid_galt]

Okay ! Tibet was invaded by Chinese, so why Bush does not liberate Tibet if he is such a freedom fighter and lover of democracy?

a. The US would gain nothing out of it. War in Iraq was for WMD which according to the intelligence report, were not found. The fact that the war liberated Iraq is an effect, it was not the MAIN purpose of the war.

b. Warring with China would devastate the US and China economically, cause countless deaths and will end in a mutual nuke attack.


China should have been forced to set up a democracy and constitutional republic protecting individual rights BEFORE it had any influence.
Now only a very major tech discovery which escalates US to the heights of glory and ruins the Chinese eco. can get the world out of the coming Communist domination.

 

[danAlwyn]

As sid_galt pointed out, declaring war on China is a good way to get into trouble. Death toll for that conflict would probably be in the hundreds of millions. Not to mention the fact that the economic havoc might destroy a good chunk of the world economy. Personally I would like to have a free Tibet, but I don't think it will be an easy job.

China's a bit of an enigma these days. On one hand it has insane economic growth, excellent potential and an extremely active industrial sector. On the other hand it has a tremendously high percentage of its population working agriculture, with less arable land than the United States. In their big cities they have a huge divide between the rich and the poor, and the social system that ties everything together is starting to show some strain. They also have massive, uncontrolled corruption. China is no longer a Communist country-it's been transformed into a hyper-capitalist nation. If they ever do re-discover Marx and Mao in China the results will probably be very messy.

In short, although predicting the future of China is slightly easier than predicting tomorrow's winning lottery numbers, it's not much easier.

 

[Pengwuino]

Okay ! Tibet was invaded by Chinese, so why Bush does not liberate Tibet if he is such a freedom fighter and lover of democracy?

i don't know if your being serious or not but do you really think we're going to throw common sense aside and attack one of hte largest militarys on earth?

 

[ron damon]

Okay ! Tibet was invaded by Chinese, so why Bush does not liberate Tibet if he is such a freedom fighter and lover of democracy?

Well, Bush is the only major world leader who will meet with the Dalai Lama, and publicly give support for his people's cause.

Enlightened, virtuous and selfless Europe won't even receive the Dalai Lama for fear of upsetting totalitarian China, to whom they now want to sell arms with which to crush democratic Taiwan and further brutalize the people of Tibet (or what's left of it).

Yet they opposed the removal of a genocidal dictator on the basis of morality.

 

[stoned]

Well, of course all the fault of those europeans in particular frogs.
If you want to blame someone blame Nixon/Kissinger.
Look also who is outsourcing most of the good paying jobs to China- Americans.

 

[Pengwuino]

Well, of course all the fault of those europeans in particular frogs.
If you want to blame someone blame Nixon/Kissinger.
Look also who is outsourcing most of the good paying jobs to China- Americans.

source please :)

 

[selfAdjoint]

Nixon's China trip. Google it if you don't recall it. It "opened up" China for US business.

I recall about a year after the trip, the company I was then working for hosted a delegation from the PRC. And in front of their headquarters they flew the Chinese Communist flag along side Old Glory. Man, that was a wakeup call!

 

[ElDiablo]

why not free Tibet?

Reasons why Bush won't free Tibet:
1. There's no money in it for the US (usually you go to war to gain something for your country).
2. China is too strong, and Bush knows it.
3. How would the invasion of Tibet work? the place is in the middle of nowhere in the mountains and the place is frozen most of the year.
4. IF (biiig if) Tibet could be freed, how would it defend itself from China? Buddhists are pacifists--they probably wouldn't even support the US in freeing Tibet because it would be by war and bloodshed.

Reasons why China won't let Tibet go:
1. it makes them look big and threatening on a map
2. They've "freed the peasants" from the oppressive middle and upper class
3. they don't want to.

 

[ron damon]

Nixon's China trip. Google it if you don't recall it. It "opened up" China for US business.

Which was good. Since Nixon and Kissinger opened up China, she has seen spectacular economic growth and tens of millions of people have been lifted out of poverty.