The Coming Collapse of The Chinese Economy

The following is an edited version of the presentation "The Real Chinese Economic Miracle" given by visiting Taiwanese Economics Professor Ching-hsi Chang at a "China in the Spotlight" dinner-forum. Professor Ching-hsi is head of Economics at the National Taiwan University.

I must begin directly: China’s economy is going to collapse soon.

In saying China’s economy is on the verge of collapsing, I am not the first one, nor am I the second one. In fact, there are quite a number of people who have warned about this dangerous situation.

Although there have been repeated warnings, China’s economy has not yet collapsed. It is not only that, it actually “appears” to becoming more prosperous.

China’s economy looks fine based on official figures and what appears on the surface. It has the highest economic growth rate in the world; more than nine per cent in recent years. The Chinese government has not even been able to bring it down, while other countries are struggling to pump it up. Trade grows very rapidly. Foreign exchange reserve has been the largest in the world, except Japan. Foreign direct investment (FDI) is the largest in the world, except US.

China seems rich enough to offer high price bids for merging multinational companies. City and urban areas on the east coast have been built in a very remarkable and impressive way. World prices fluctuate sensitively to China’s economic happenings; up when it is over-heated and down when the Chinese government cools it down.

In fact, China has also built up its military power to the point where it could threaten world peace and has even been confident enough to threaten the US with nuclear war. Doesn’t China seem to be also so glamorous among many other nations? China is the sponsor of the world’s biggest hydroelectric project (the Three Gorges Dam), the site of the world’s highest railway (5,000 meters, to Tibet) and the first commercialised Maglev in the world (Shanghai), the host of 2008 Olympics (Beijing) and 2010 World Expo (Shanghai), etc. But it is truly a case of “beauty is only skin deep”?

While the positive side seems to have a long list, the list of the dark side is even longer. Basically, I divided China’s economic problems into two categories: macro-economic problems and socio-economic problems.

For macro-economic problems, there are issues of government budget, national income account, banking and financial market, and state enterprises. For socio-economic problems, there are issues of unemployment, income and wealth distribution, farmers and agriculture, mass corruption, declining social morals, failing education, huge environment and ecology problems.

Moreover, there are two more problems above these problems: one is that government official statistics are not reliable; the second one is that after the “reform and open” policy over the past 25 years the Chinese Communist Party (CCP) has not changed as a political system. The CCP has not changed its nature in the slightest way at all.

There are too many problems to explain one by one in so short a space. I will briefly introduce them, and then give you some examples.

Macro-economic Problems

Budget deficits: official deficits are not particularly big. But there is much “under the table” activity. National income account: the figures are made up and contradict each other on the website of National Statistical Bureau. In fact, it has become an international joke.

Banking and financial market:the bad loans are so large that the state banks should have already been sent bankrupt several times over. As for the stock market it has already collapsed (to record low levels).

State enterprises: the growth of state enterprises in China embodies the collapse of the economy. For examples:

1. Budget holes: there is no pension system in rural areas. For urban areas, the old system of “pay-as-you-go” is changing to “fully funded”. However, because of the lack of revenue, the funds of “fully funded” that should be saved for future use have been used to pay current payments, and resulted in a lot of so-called “empty accounts”. How much? 14 billion in 1997, 45 billion in 1998, 100 billion in 1999, 200 billion in 2000, and 470 billion in 2003. But it is still not enough, the government had to use its budget to finance the gap: 2 billion in 1998, and 20 billion in 2000. Those are government figures.

2. Economic collapse will be a result of the growth of state enterprises. Just think of the economy as being over-heated. The so-called “economy being over-heated” is due to an extremely inefficient use of investment and corrupt practices. Why there are too many wasted investments? It is because the communist government is involved in those investments. And we know this government usually does not care about cost-benefit analysis. Furthermore the Communist party has no monitor, no check-balance system.

Socio-economic Problems

Chinese society is in a very dangerous situation and has stepped into an un-stable period. The significant problems are: the largest scale of economic structure adjustment in the world, the largest scale of “lay-off flood” and “unemployment flood” in the world, the most significant urban-rural inequality, the fastest growth of income inequality in the world, severe corruption and economic loss and severe environmental problems.

Unemployment rate has been at least 20 per cent but more probably 30-40 per cent. The social morals in China are very low, everything can be copied or counterfeited, even a diplomatic document.

Then why has the Chinese economy not collapsed? I call this the “real miracle of China’s economy”.

I think that there are five factors for this real miracle:

1. Chinese people have the highest saving rate; more than 40 per cent of their income has been saved.

2. China absorbed the second-largest foreign direct investment.

3. The Chinese government has a tightly restricted monitoring system of information; millions were spent to build the so-called “Golden Shield” system.

4. The CCP is one of the most violent, bloodied, and corrupt governments in history.

5. The corrupt nature of the CCP will make all good things turn bad. For example, the Australian Government has been one of the most respected countries in observing human rights. But it is only caring about money in its dealings with China. France and Germany are also the same. Many multinational companies are also guilty. For example, Yahoo! agreed with the Communist regime to delete all information with key words that it does not like, such as human rights, democracy, and Falun Gong. Will the economic miracle last?

No. The reasons are simple. Firstly all problems in China, including economic problems, are political problems. Those problems will only be resolved through political reform. To say all problems in China are political problems, I provide an example: when the Chinese Prime Minister Wen Jia Bao wanted to cool down the economy, he said, the overheated problem is not an economic problem; it is a political system problem.

Why can the Communist Party do anything except political reform? This is because the nature of this regime is to lie and to be violent, and its sole purpose is to maintain political power. Anything that may cause the Communist Party to step down will be destroyed at the very beginning. Political reform may see the demise of the CCP, so this regime will not attempt to reform.

When we talk about the CCP’s “deceitful and violent” nature, we can talk about their denial of the Tiananmen Square massacre of 1989 and more recently the fabricated self-immolation incident of January 23, 2001 in Tiananmen Square which was staged to incite hatred against Falun Gong practitioners.

After 20 odd years of so called “Reform and Openness”, the CCP still uses brutal methods to mislead the Chinese people and the rest of the world.

The Communist regime will not undertake “political reform”, because this would endanger their ruling power. Therefore, all the problems in China cannot be readily resolved. As a matter of fact, the Chinese economy will soon collapse.

When will it collapse? Could be tomorrow, or it may drag on for another year and half, but not for long.

There are problems everywhere in China: little incidents are becoming major riots. In the media there were 60,000 large scale riots that happened in China during 2004 (average 164 per day); but in the book titled China Second Citizen published in Hong Kong, it states there were 100,000 riots that happened in the year 2000, and went on to say that this is only the official figure, implying there are many incidents unaccounted for.

Therefore, 2004 may not be just 60,000. Any statistic from China cannot be trusted. Many people describe the current situation of CCP as sitting on top of a volcano. We shouldn’t wait until things happen then regret it.

What shall we do in the future?

We should know that the “fall of China” is inevitable. Business people should have a plan to deal with the situation. Also, for the sake of Chinese well-being and world peace, we should be caring for the democracy movement in China.