No Soft Options for Debt-ridden Chinese economy

The brightness of its GDP data notwithstanding, China economy appears to be riding on borrowed time in the near term at least, shows a new analysis. Frauds tumbling out of its bank vaults, mounting household debt, busts in housing market, and grand admission by provinces that they have been faking their accounts show the Year of the Dog may have no dull moment, says our in-house China watcher

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The Year 2018 is the Year of the Dog, according to Chinese Zodiac, but it has brought for the Chinese a host of superstitions that will have a bearing on how the coming days unfold.

For instance, bad luck will haunt you throughout the year if you clean clothes, used scissors or sweep floors on the New Year Day (Feb 16 this year).  How many Chinese had set aside these chores on that day is unclear. It is certain that the number could be substantial.

Whether guided by one such superstition or goaded by the compulsions of the market place, the Chinese economy managers have undertaken spring cleaning of the books of the debt ridden banks just days before the New Year Day. And slapped fines as frauds tumbled out of bank vaults.

The Shanghai Pudong Development Bank, for instance, has been slapped a fine of whopping $72 million (462 million yuan).

This is the penalty for ineffective internal controls that had resulted in a major shell company fraud at its Chengdu branch.  Interestingly, the branch had long claimed to have “zero” non-performing assets (NPAs) or bad loans. But in reality it advanced 77.5 billion yuan to 1,493 shell companies. Inspectors of the China Banking Regulatory Commission have found the pile of bad debts could run to 10 billion yuan in losses.

The scandal has renewed concerns about the quality of the lender’s loan data and that of the broader Chinese banking system, Mandy Zuo reported in the South China Morning Post (SCMP) on 22 January. Bad loans are not new to the Chinese lenders. Nor hiding them by falsifying accounts.

Take Shanghai Pudong Development Bank case itself. Days before it was engulfed in the scam, the bank reported a net profit of 54.2 billion yuan for 2017, up by 2.2 per cent from 2016. Its NPAs ratio increased to 2.14 per cent in 2017 from 1.89 per cent in 2016, 1.56 per cent in 2015, and 1.06 per cent in 2014. The banking regulator has now found that the Chengdu branch “dressed up financial statements and made up profits”.

Another bank, China Guangfa Bank, was found offering illegal guarantees for defaulted corporate bonds. The regulator asked the bank to pay 722 million yuan as fine. In all more than 1,800 banking institutions were found guilty of various frauds resulting in bad debts. And forked out a whopping 2.9 billion yuan in fine last year.

Accumulated financial mess is one of the three problems confronting President Xi Jinping regime, who is seeking to find nirvana for the Chinese economy through the OBOR way.  Pollution, poverty and resultant social problems are the other challenges for which Beijing has no magic wand. Well, the GDP registered a modest growth in 2017 but it came after a steady downslide that became manifest from 2011. The growth has come on the back of strong showing by exports, construction and consumer spending.

The old economy — heavy industries and property sectors are slowing. The new economy — services and part of the manufacturing sector such as high tech is not yet strong enough to overwhelm the old economy. Xinhua says the Chinese economy is going through a phase of “creative destruction”. Will this enable the China’s economy to hit its sweet spot in 2018?  Opinion is divided since the growth rate is due to cyclical factors and an improved global economy.

The short point is that the unfolding months of the Year of the Dog may not provide the space President Jinping needs to restructure the economy with least pain. If any, it can complicate matters going by the mood in the countryside, which is often not in the radar of Beijing watchers.

Like in the past, now also there are question marks on the quality of official statistics as the New York Times said in early January, “the Chinese official figures have become implausibly smooth and steady, even as other countries post results with plenty of peaks and valleys”.

The problem has become compounded in the past few weeks with a host of provinces and counties publicly confessing to doctoring their accounts. Why did they talk up the economy? To please the masters in Beijing. It is not a new development. What is new that admission of the guilt as never before.

Nikkei Asian Review attributes the rush of confessions to “Central government subsidies for coming clean”. A growing number of Chinese local governments are owning up to having faked economic data and are moving to correct their doctored numbers, responding to a major shift in Beijing’s economic policy toward the quality of growth, it says.

Future thus may become rosy for number crunching. But what about today. Can we take the Chinese growth data on face value? My answer is a resounding no!

Liaoning, the northeastern Chinese province bordering North Korea, reported an unusual 2.5 per cent drop in gross domestic product last year; it admitted cooking its books between 2011 and 2014 through forgery, tax refunds and taxation calendar adjustments; these admission followed probe against Wang Min, the provincial party boss.

Another province, Inner Mongolia has revealed that two-fifths of the industrial production it reported for 2016 did not exist. Take a close look at the Xinhua despatch of January 3, 2018. It was filed from Hohhot.

The text is unedited to retain the original flavour.

  • On January 3, at the Fifth Plenary Session of the Tenth Committee of the Inner Mongolia Autonomous Region and at the Economic Work Conference of the Region, the regional party committee of the autonomous region proposed three things and caused the attending delegates Strong resonance.
  • “Some work instructions are out of practice, some of the economic data are not true, and some places blindly excessive borrowing to engage in construction … At the meeting, the leading responsible officials and comrades in the autonomous region directly confronted the issue and admitted that the autonomous region did three things: stop building and gradually build up a number of governments Excessive debt projects, and resolutely stopped Baotou subway project and Hohhot Metro Line 3,4,5 projects, comprehensive sorting out the construction and construction of government investment projects; resolve government debt, bank non-performing loans and rural pastoral usury, made it clear from Starting from 2017, it will take three to five years to reduce the government debt ratio to a reasonable level in three years. For the “ten full coverage” over-borrowing projects and arrears of construction projects, migrant workers wage issues, the development of solutions; squeeze fiscal revenue inflated idling and part of the industrial added value of Qi County, the existence of water, compaction of the economy, solid Revenue.
  • To tell the truth, tell the truth, and report to the real number, the deputies expressed their courage to the party committee of the autonomous region and praised the style of seeking truth from facts.
  • Hohhot Yuquan District Secretary Wu Wenming notebook draws on the focus is to resolve the debt. “It is very real that government investment should be devoted to food and vegetables and resolutely prevent excessively over-indebtedness and to prevent irresponsible risk-making.” He said with deep feeling that over the past few years, local infrastructure construction and shanty towns Transformation and people’s livelihood have made a relatively large investment and have generated huge debts. Some of them have now solved some of their debts through measures such as financial capital, land sales and the sale of state-owned assets. In the future, they must insist on rational investment and prevent new unreasonable debts.
  • Must never stop at a high-profile standpoint and follow the meeting without any action; never stop by formulating a resolution plan, documenting documents and negotiating with the people on paper; never failing to trust the old officials … stark views and attitudes have arisen Hot discussion. In the afternoon’s panel discussion, Wu Wan, secretary of the Wuhai Municipal Party Committee, took the lead in his speech and said: “The measures taken to break the poverty line are based on what we can accomplish? The important task of building a well-off society in an all-round way depends on what we accomplish? We must make the best of the pragmatic style of development. Truly conducive to the development of the cause. “
  • High debt, cordon, there is risk, the autonomous region has announced the end of the region’s debt. Zhao Guide, president of ICBC Inner Mongolia Autonomous Region Branch, said: Preventing and resolving financial risks, which are related to national security, overall development and people’s well-being, is the primary battle to win over the three major storming battles in building a moderately prosperous society in all respects and must be solved in the interest of seeking truth from facts and speeding up the resolution. 
  • What data is true? What is fake? Autonomous region party committee “exposes house ugliness”: Autonomous Region government fiscal revenue inflated idly, some flag counties industrial added value exists moisture. After repeated accounting by the financial auditing department, the general public budget revenue was reduced by 53.0 billion yuan in 2016, accounting for 26.3% of the total, while the estimated revenue and expenditure for 2017 was revised. After the reduction, the general public budget revenue of the region in FY17 was 170.34 billion yuan, down 14.4% from the 2016 figure and an increase of 14.6% over the same period of the previous year, excluding the inflated downturn factor. After initial recognition, 2016 should be reduced by 2016. The added value of industrial enterprises above designated size was 290 billion yuan, accounting for 40% of the total industrial added value. In 2016, the base of regional GDP was also reduced accordingly.
  • “Downsizing”, “debt relief”, “water squeeze,” Inner Mongolia to seek economic reality. This information makes Baotou Iron and Steel (Group) Co., Ltd. Chairman Wei Jian tied up very excited. He said that the government is seeking truth from facts and is also good for enterprises to seek truth from facts and reduce the unreasonable burden. The disposal and disposal of zombie enterprises have the impetus and pressure, and the enterprises will provide high quality, high efficiency, wisdom, low consumption, safety and environmental protection. Continue to exert force and make high-quality development to make up for the government’s debt and deflation gap. In particular, state-owned enterprises should assume greater political responsibility, economic responsibility and social responsibility”.

The unvarnished truth from the above is what has been suspected all along that many if not very substantial number of Chinese provinces are exposed to what Xinhua reporter grandly terms as “house ugliness”.

China’s National Audit Office (NAO) also did some searches. Its Dec 8, 2017   report says five city or county governments in Jiangxi, Shaanxi, Gansu, Hunan and Hainan provinces had incurred 6.4 billion yuan of debt through financial guarantees.

Wangcheng district in Changsha, the capital of the central province of Hunan, faked the ownership transfer of local government buildings to increase local fees revenue by 1.2 billion yuan ($181 million). Six counties in Jilin province listed 110 million yuan in project funding and hospital revenue as revenue from administrative fees.

Tianjin, a sprawling metropolis, briefly posted on one of its official websites in January that previous data had been inflated. The post was quickly deleted though. No surprise China’s GDP numbers invite disbelief and pointed jokes.

What would be the level of China’s local government debt? Some estimates put it around 16.47 trillion Yuans ($2.56 trillion).  It may be within Beijing’s target of below 18.82 trillion yuan but it is no matter of comfort whatsoever, more so since the economy is gripped by rampant corruption as well.

There is another flip-side to the Chinese miracle. Just four cities, Shanghai, Beijing, Shenzhen and Guangzhou are the growth engines. Last year, these four cities together generated nearly an eighth of the country’s economic output ($ 1.56 trillion in all). It means that Jinping regime is not spreading out resources and is depending on the big four for growth. It is not a healthy trend since China lives in its villages, and semi-urban pockets.

Speculators are having a field day across China offering instance riches with a wide variety of pyramid schemes. The housing market has become a casino, to quote the New York Times.  Real estate makes up nearly three-quarters of the assets of Chinese households.

Average Chinese has no trust the country’s stock exchange. And has turned to the housing bubble to make a quick extra buck. It is not a buying spree. In fact, going by local media reports, a vast number of apartments in many cities are unoccupied. Due to a variety of reasons. Many buyers have no intention of moving in or renting out; they bought them to sell once prices go up again. In many cases speculators are said to have built homes that nobody wants”.

Whatever be these ifs and buts, the fact is that household debt, mainly in the form of mortgage loans, is growing.  At the end of June last year, its ratio to gross domestic product was 46.5 per cent, up from 37.3 per cent at the same point in 2015 and 18.6 per cent in 2008. The value of medium – and long-term loans to households rose to 5.3 trillion yuan ($823.27 billion) in 2017, accounting for 39 per cent of all new loans, says data released by China’s apex bank.

No doubt President Jinping and his aides are committed to further opening of the economy. They are not lifting the bamboo curtain though. It is this reality check that gives very little room for optimism about a quick turnaround for the debt-ridden Chinese economy. Well, without hiccups!

REFERENCES  

  1. China’s local government debt growth almost doubles in 2017, The Express Tribune, Karachi, Pakistan    https://tribune.com.pk/story/1611768/2-chinas-local-government-debt-growth-almost-doubles-2017/
  2. China must bring household debt under control, banking regulator says, South China Morning, 18 Jan 2018 http://www.scmp.com/news/china/economy/article/2128641/china-must-bring-household-debt-under-control-banking-regulator
  3. China begins campaign to eliminate online pyramid schemes, The Global Times, 21 Jan 2018    http://www.globaltimes.cn/content/1085776.shtml
  4. Chinese bank fined over multibillion-dollar bad-debt cover-up, South China Morning Post, 22 Jan 2018  http://www.scmp.com/news/china/economy/article/2129901/chinese-bank-fined-over-multibillion-dollar-bad-debt-cover
  5. China’s Housing Market Is Like a Casino. Can a Property Tax Tame It? The New York    Times, 22 Jan 2018   https://www.nytimes.com/2018/01/22/business/china-housing-  property-tax.html?rref=collection%2Fsectioncollection%2Fasia
  6. Four cities played outsize role in Chinese economy, South China Morning Post, 23 Jan  2018  http://www.scmp.com/news/china/economy/article/2130079/four-cities-played- outsize-role-chinese-economy
  7. China’s Economic Growth Looks Strong. Maybe Too Strong, The New York Times, 18    Jan 2018.  https://www.nytimes.com/2018/01/18/business/china-gdp-economy-          growth.  html?rref=collection%2Fsectioncollection%2Fasia
  8. China’s economy grows 6.9 per cent in 2017, first upturn since 2010, South China        Morning Post, 18 Jan 2018  http://www.scmp.com/business/china-                      business/article/2129574/china-must-lower-gdp-expectations-and-push-soe-reform-says
  9. China’s economic figures boost confidence, Global Times, 19 Jan 208  http://www.globaltimes.cn/content/1085545.shtml
  10. China’s economy accelerates for 1st time in 7 years, Xinhua in Global Times, 19 Jan 2018    http://www.globaltimes.cn/content/1085646.shtml
  11. China’s economy could hit its sweet spot in 2018; Xinhua in Global Times, 19 Jan 2018 http://www.globaltimes.cn/content/1085660.shtml
  12. Inner Mongolia economy to virtual reality: “downsizing” “debt relief” “squeeze water”  http://www.xinhuanet.com/2018-01/03/c_1122206020.htm
  13. Fresh warnings to debt-ridden China of living on borrowed time, South China Morning Post, 11 Dec 2017  http://www.scmp.com/news/china/economy/article/2123676/fresh-warnings-debt-ridden-china-living-borrowed-time
  14. Chinese local governments accused of faking economic data, South China Morning Post, 10 Dec 2017 http://www.scmp.com/news/china/economy/article/2123614/chinese-local-governments-accused-faking-economic-data
  15. Dilemma of growth and debt control to bedevil China in 2018, Moody’s says; South China Morning Post, 13 Dec 2017 www.scmp.com/news/china/economy/article/2124061/dilemma-growth-and-debt-control-bedevil-china-2018-moodys-say
  16. Fresh doubts raised over reliability of China’s latest GDP figures, South China Morning Post, 20 January, 2016 http://www.scmp.com/news/china/economy/article/1903425/fresh-doubts-raised-over-reliability-chinas-latest-gdp-figures
  17. Chinese province admits to cooking its books;  South China Morning Post, 19 January, 2017   http://www.scmp.com/news/china/economy/article/2063125/liaoning-governor-confirms-economic-data-faked-2011-2014

 

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