Wednesday, 29 August 2012

China's Economic Woes

After the Beijing Olympic Games in 2008 we started hearing about the economy falling apart in North America, signaled by the demise of Lehman Brothers.

The Chinese government panicked and initiated a 4 trillion RMB ($586 billion) stimulus package.

Chinese officials explained this was the way to keep the economy chugging along as it needed to maintain that magic 8 percent GDP growth to ensure employment levels.

At the time, economists suggested this would be a good time to reform the Chinese economy, particularly the state-owned enterprises, these hulking large companies that are bloated with staff and bureaucracy. It would also be a good opportunity for China to reform its banking system and monetary policies.

But this did not happen.

Instead the 4 trillion RMB, most of the funds shored up by Chinese banks, was thrown into mainly infrastructure projects, roads, highways, government buildings, high-speed trains.

However not all the money went into all the right places.

Lots of it was siphoned off and used for joy trips to Macau and spent on the tables there, massive shopping sprees on properties overseas, luxury cars and of course mistresses.

The also thought they could encourage more domestic spending, but when there is no proper social safety net in place particularly with health care, people are still trying to save as much as they can. And besides there are only so many refrigerators and microwaves you can buy.

Banks wanted to ensure repayment so they only lent to state-owned enterprises making them even more bloated, while small- and medium-sized enterprises were struggling to get capital to expand and resorted to underground banks with hefty interest rates, resulting in some businesses going under, with their owners either committing suicide or fleeing the town or country.

Then in July 2011 there was the Wenzhou train crash that killed 40 people and injured at least 192. Later the Minister of Railways Liu Zhijun was sacked for corruption for his efforts in pushing the high speed rail network in the country.

And then most recently a newly-built bridge in Harbin collapsed and killed three and injured five. How can a bridge that was completed in November suddenly fall apart? Apparently it is the seventh bridge to collapse in a year.

These are all indications of a severely overheated economy where there was only thoughts of propping up the economy than taking the painful route of reforms to foster long-term greater efficiency but also more importantly innovation.

We are now seeing the Chinese economy slowing down with the producer price index (PPI) falling and hearing anecdotes of manufacturers stockpiled with goods and no sellers. Meanwhile inflation makes it harder for average people to buy food, and property prices continue to rise.

And then there are reports of local governments in huge debts. They cannot issue bonds to prop up the economy so they set up companies to borrow money from banks, but now they can't pay up because no money is coming back in, or not enough.

What is the government going to do to at least alleviate some of the financial pressures?

Nothing yet.

That's because the upcoming change of leadership in the next two months means Premier Wen Jiabao and President Hu Jintao are winding down their posts and it is assumed Li Keqiang and Xi Jinping respectively will take over their posts.

So that means it won't be until early 2013, probably after Spring Festival when new economic policies will be announced.

But something needs to be done now to start correcting China's financial picture because at this rate it is going from bad to worse.

Wen may be doing his tours of provinces these days as his final hurrah, but he's pretty much a lame duck now, handing over a pretty big economic mess for the future leaders to solve.

If only they'd had the foresight to fix things two to three years ago, because the next few years are going to be painful.

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