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China’s Economy Is in a Deep Freeze and Unable to Recover (Part I) : Speech by former leader advisor

Posted by Author on January 5, 2009

By Cheng Xiaonong, Sound of Hope Radio, via The Epochtimes-

The following is Part I of Dr. Cheng Xiaonong’s report regarding China’s economy, broadcast on Sound of Hope Radio on December 17. Dr. Cheng was a former advisor to China’s past premier Zhao Ziyang. He holds a Ph.D. in sociology from Princeton, and is Editor-in-Chief of Modern China Studies.

Rich Own Majority of China’s Wealth

We mention polarized income distribution in society. The government, by all means, protects a small group of privileged people so that they own the majority of the wealth. At the same time, most of the working class have little purchasing power. So what does this small group of privileged people do with 70 percent of the money in the world’s financial markets?

First we see that a significant portion of this money goes into the stock and real estate markets. A large part of it was transferred overseas in various ways to support their family members overseas. Through money laundering, large amounts of money went to places people rarely hear of.

For example, in the British Virgin Islands, there are few residents or economic activities. The islands have become a major base for corrupt officials and rich people to hide their money. A lot of Chinese people set up shell companies on the islands and wired much money there. They don’t just put money there but turn around and use the money to invest in China as foreign capital. They then make money again in China’s markets.

Especially as the Renminbi appreciated over the past two years, this kind of ‘hot money’ flushed into China. According to some analysts, last year there might have been US$200 billion of this ‘hot money’ pouring into China. Almost all this ‘hot money’ comes from the 70 percent of national wealth that belongs to the corrupt Chinese officials and privileged people. What good does this kind of money do for China’s economy? Nothing, basically.

‘Hot Money’ Rushes Into China and Into Corrupt Officials’ Pockets

This kind of money is rarely used in long term investments. They are short-term speculations. For example, before the Renminbi appreciated, they put their money into banks in China so they could profit after the value of the Renminbi rose. Currently this ‘hot money’ is being pulled out of China, because the Renminbi has started to depreciate.

Another way of making money is to invest the ‘hot money’ in the stock and real estate markets. This causes a series of bubbles in the markets, which are not good for the real economy because the money is not invested, but used for speculation. In short, the government’s economic and social policies attract this privileged money. Commoners who make up over 70 percent of the population do not benefit much from the economic growth in China.

The result is the rich speculate with the majority of the wealth and this harms China’s economy. Since the poor do not have any purchasing power, they can not help China’s economic growth. The speculation from this ‘hot money’ causes inflation in China. It has become very serious all over the country, since the second half of 2007.

Inflation hits low to middle income families hard. Inflation brings up the average salary of the working force. Many foreign enterprises were unable to survive in China because the price of their exported goods rose an equal amount. Many countries, such as Vietnam, India, Sri Lanka, and Latin American countries, are competing with China in exported goods. China will lose its competitive edge once the prices of its exported goods rise.

Over-exportation increased the amount of foreign exchange. The government had to issue a large amount of currency into the market, which worsened the inflation and caused the Renminbi to appreciate. The appreciation of the Renminbi turned around and put pressure on exports. This is why foreign enterprises in China have started to pull out this year.

The appreciation of the Renminbi increased the price of exports. The rising wages and the price of raw materials results in an increase in operating costs. The result is a sharp decrease of company profits. At the same time, China canceled the export tax rebate for some exports and increased the income tax of foreign owned industries. Add together all of these factors—Renminbi appreciation, inflation, wage increases, more expensive raw materials, increased taxes—and you understand why the export sector in China plunged.

Government’s Rescue Plan Outdated

China’s economy walks on three legs: exports, public infrastructure projects, and real estate. We just talked about the ruptured real estate bubble. Now real estate companies have stopped building new houses and some even tried to return the lands they already purchased. The real estate approach for pushing economic growth has reached its end. In China, there is an excessive supply of over-priced real estate. Ordinary families can never afford to buy the houses. The real estate market reached the top and started to slide the first half of 2008. The first two of three legs supporting China’s economy—exports and real estate—are crippled.

The third leg is public infrastructure projects, ranging from building/repairing highways, government office buildings, and city construction such as various public squares, road expansion and public facilities. The purpose of such investment from the government is supposed to nourish industry and provide companies with opportunities for further advancement. However, when the economy and industry are shrinking and a large public construction budget remains, it becomes a waste. The only effect of such projects is to make cities such as Beijing and Shanghai look a lot prettier than before.

Such pretty cities aren’t good news to the Chinese people. The government’s enormous investment did not improve business conditions in general; the money is wasted in this sense. Also, all the projects for city developments that are supposed to be done in the next ten years are already completed. On the contrary, the government refused to implement a budget to improve the public’s living standard. For example, currently there are a large number of jobless people in many cities who can not afford to pay for basic insurance. If the government could pay for their insurance and shoulder part of their financial burdens, these people could more or less improve their living condition. Unfortunately the government would rather take the money to build skyscrapers and beautify the cities instead.

We can see Beijing is taking measures and holding a Central Economic Working Conference hoping to find all possible ways to save the plunging economy in China. But if we look carefully, to this day, all the government proposals are the same old plans that did not work in the past, such as: stimulating exports, expanding public construction investment, and attempts to stop the real estate market from falling further. All these proposals are exactly what caused the economic disasters today. Apparently they will not work and can only worsen the problem. The government will not tell its people the truth. Many people still believe that as soon as the government steps in the economy will recover. In fact, this is the illusion the government wants them to believe. (to be con’t)


– from The Epochtimes

2 Responses to “China’s Economy Is in a Deep Freeze and Unable to Recover (Part I) : Speech by former leader advisor”

  1. valery said

    This article very interesting!!

    I will come back again..:)

  2. valery said

    Very interesting

    I will come back again :)

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