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The China house of cards - Part II

By Arthur Thomas - posted Wednesday, 4 February 2009


China's stimulus package included a strategy to unlock China's massive personal savings. This reliance on domestic demand to help pull it through the global economic downturn and reduce civil unrest is ill founded. China's problems differ greatly from that of developed nations, and can have serious ramifications.

China's consumer economy cannot be compared with that of developed nations. Its economy is reliant on exports and ongoing construction of infrastructure to meet demand from ever increasing global consumer economies with no provision for a decline. It was always bound to fail.

The stimulus package

China’s stimulus package is equivalent to US$856 billion and includes about US$4.5 billion in subsidies over two years to promote sales of domestic appliances and other items including cell phones, computers, cars, and motor cycles.

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But the strategy is not just to drive domestic demand. China's overcapacity is producing massive inventories of consumer goods unwanted by export markets, translating into billions of dollars and looming corporate failures. These inventories include many electrical appliances incompatible with China's electricity supply. Many vehicles for export incorporate engines that risk damage if using China's low quality fuels.

Beijing's aim is to convert inventories into cash to prevent embarrassment for the government and the failure of some of China's new brand icons and state-owned enterprises.

China's savings

China's Ambassador to the United States, Wu Jianmin, proclaimed that China's domestic savings total US$3.5 trillion and that this massive source of disposable income will help China overcome the impact of the global credit crisis.

Simply averaging the savings equates to the equivalent of about US$3,000 for every man, woman and child in China, but in China averages can be meaningless and misleading.

Overlooked was the fact that China's rural sector had the biggest level of savings while the urban sector had vigorously embraced the western consumer's obsession with self-indulgence, credit cards, and debt.

Urban sector savings plummeted as debt ramped up in response to the promise of fuqiang (wealth and power). The vision of this highly leveraged urban sector was shattered; first by the stock market crash and then the recession, decimating substantial proportions of the aspiring nouveau riche wealth and leaving many in a sea of debt.

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The target of the subsidies is the vast rural sector.

A government out of touch

The 13 per cent, US$4.5 billion subsidy intends to give farmers and lower income earners the opportunity to afford household appliances.

It is misguided and ill informed.

The reason for the high level of savings in the rural sector is not frugality; it is survival. Savings are insurance against health and old age, offsetting the rural sector's lack of a social security net.

One senior government official displayed his ignorance of the real situation facing China's rural sector and the poor, when he arrogantly proclaimed:

Migrant workers and low-income groups save less than rich people, and they will spend more to meet previously unsatisfied needs as their incomes rise.

Impact of a widening wealth gap

Finding Beijing's much trumpeted "400 million Chinese that have been lifted [out of] poverty" is like finding Noah's Ark. China's outward appearance of wealth is questionable.

The Chinese Communist Party (CCP) disclosed that:

... the rural and urban poor have become a bottleneck to domestic demand and has[sic] impaired a safe economic structure.

World Bank reported:

... 0.4 per cent of the population controlled 70 per cent of China's wealth’ and ranked China No 1 in terms of wealth concentration, the worst wealth [and] polarization found anywhere in the world …

The UN reported:

... more than 300 million Chinese in some of the poorer regions of China live on US$1or less a day, six times more[people] than that [sic] reported by Chinese authorities.

While China's open-door policy produced 900 per cent growth in its economy, only a few appear to have benefited.

Wage gap

On average, China's low income families spend approximately 50 per cent of their total household income on food, minimising individual personal saving in the poorer sectors.

To estimate the level of real disposable income, it is crucial to factor in the impact of the "urban-rural wage gap" that has been increasing annually over the past 11 years. At the end of 2007, urban workers earned more than three times that of rural workers: this gap continued into 2008.

Average annual urban income for 2007 was about US$2,000, while the average annual rural income was about US$700 a year. This gap widens when factoring in inflation, at 4.5 per cent for urban but 5.4 per cent for rural. It widens even further when factoring in the lack of a pension scheme and exclusion of the rural sector from unemployment benefits.

Health also plays a crucial role in the rural sector where the average hospital stay costs the equivalent of two years’ wages.

China's class structure

Regardless of the philosophy of the Communist State, five distinct classes exist throughout China:

1. the wealthy;
2. the government officials;
3. the middle class;
4. the urban; and
5. the rural.

Some farmers in the rural sector are now in the middle class, but their numbers are negligible.

An internal report on family assets and wages of local officials revealed that the leaders of local CCP committees and the high-ranking officials are part of the privileged strata of Chinese society. Local officials had an average annual income eight to 25 times that of urbanites, and 25 to 85 times that of farmers and peasants.

Low income earners

Construction and rural workers are on the bottom rung of the wages ladder. Construction workers average US$85 a month while the rural worker earns up to US$125 a month, when work is available.

In China's poorer regions however, rural villagers are only earning between the equivalent of US$1 and US$2.50 a day.

China's statistics confirm 800 million are classified as peasants, with the income gap having the potential to "destabilise social harmony".

A review of China's savings

Only a percentage of China's 1.32 billion people contributed to amassing the private savings treasure chest.

The official working age in China is 15 to 59. The 0 to 15 and the 60s to over 85s are classified as non-working. Child labour "does not exist". This suggests that 894 million workers support China's total population of 1.321 billion.

This changes when factoring in the official urban rural population differential of 42 per cent to 58 per cent in which the 378 million urban workers earn three times that earned by the 516 million rural workers. Then factor in the real numbers of unemployed, underemployed, mentally and physically impaired, non-working married women, and children. Official numbers exclude several other sectors.

The rural sector suffers further by a side effect of the single child policy.

The single child policy's “1-2-4 problem”

This policy created a major financial load on low-income families throughout China.

The “1-2-4 problem” translates as, one worker supporting two parents and four grandparents.

While increasing unemployment exacerbates the problem for the urban sector, the 1-2-4 problem increases the financial burden throughout the rural sector. China's economists and central planners ignore the existence of the 1-2-4 problem.

The lust for mianzi (or “making face”)

China's leaders continually remind the world of China's economic progress as if China was an inanimate object, rather than representing the mass of humanity making up the trumpeted harmonious society. The grand monuments to central and local government power contribute nothing to China's poor who are there only to provide cheap labour.

The CCP is obsessed with grand visible symbols of size, expense, and grandeur as a projection of its power and wealth. It is the sacrifice to the god of mianzi and supersedes the duty of care of a responsible government to use the windfall revenues from globalisation and the efforts of its low paid people toiling in sub standard conditions to improve the welfare of the population in general.

Beijing officially spent $42 billion preparing for the Summer Olympics, but the real cost will never be known.

This official amount does not include the massive expenditure on the emergency canal for the South to North Water Diversion Project to ensure Beijing had adequate water for the 2008 Games. Nor did it include the economic hardship it imposed on the Hebei and Shanxi farmers, denied irrigation water during the critical growing season. Then there were the unknown hundreds of thousands of underpaid construction workers and many more who remain unpaid, despite their wages being included in the money their bosses received from Beijing.

China's achievements

There is no denying that China can lay claim to a host of the world's biggest, highest, longest, heaviest, extravagant, spectacular, and most ostentatious symbols, which bear witness to Beijing's willingness to go to extremes to project mianzi.

Beijing however, has other major achievements that it is not so keen to highlight and these reflect the CCP's failure to exercise due diligence of care for its population, and failure to recognise the rural and urban poor, without whose enduring hardships and cheap labour, its grand edifices could not have been constructed.

These milestones, to name just a few, include world records for the largest number of polluted cities, most polluted rivers, biggest number of dried up lakes, highest casualty list of pollution related mortalities and debilitating illnesses in adults and children, horrific cancer villages, and of course, the world's biggest wealth gap and the world's major polluter.

Missed opportunities

If the CCP had focused more on the welfare of all China's people and less on its "favoured sons and daughters" and the ostentatious monuments to its own greatness, the consumer society from which it is now seeking to help revitalise the economy, may have become a reality.

How much cash would be available to revitalise China's 2009 declining consumer economy if mianzi was traded back into cash?

China is an enigma

Despite record economic growth and its emerging claim as a global economic, industrial and military power, China remains an enigma.

At a time of global economic crisis, the CCP, claiming five consecutive years of increasing double-digit growth from responsible economic management, demanded a place at the global economic management table to plan the way forward.

Despite the symbols of aggrandisement in Beijing, Shanghai, and across the country, China would be a poor choice for such a position. It is a country close to running on empty when offsetting the huge levels of the country's real "national debt" and "special national debt" against its foreign exchange and gold reserves. This is evident in China's wealth distribution where the top 0.4 per cent of China's population comprising government officials, ex-officials in businesses associated with the government, and "favoured sons and daughters" continues to amass and hold control of more than 70 per cent of China's wealth at the expense of the disenfranchised and rural sector.

The CCP's approach to boosting consumer spending by the rural sector is callous, cynical and out of touch. It has dumped the responsibility of helping to revitalise China's economy on the heads of those who can ill afford non-essential spending - China's more than 800 million peasants. Beijing wants them to spend their hard won insurance against illness and old age on household appliances for which many have no suitable electricity supply, and vehicles for which they have no use, or cannot afford to run.

The 0.4 per cent of the population who controls 70 per cent of China's wealth appear to have been over looked. A pro rata level of spending from this sector with that of the rural sector would solve China's economic problems.

While one may envisage the disenfranchised rural sector rising up, the trigger may in fact, be also related to the effects of China's single child policy reflected in the new rapidly rising middle class. These are the confident, ambitious, under 35, educated consumer generations comprising 80 per cent of the urban sector. They have only experienced increasing prosperity and the growing dominance of China on the world stage and are impatient to grasp the mantle of fuqiang.

The highly leveraged good life came to an abrupt end as September 2008 reverberated around the world. They lack the memories of the horrors of the Great Leap Forward, the Cultural Revolution and reliance on the bicycle. Their memories are debt, the credit card, and mianzi. There is rising outrage in this technology savvy sector as their dreams shatter. The urban children of the single child policy are now joining China's rural and disenfranchised to demand change.

China had a chance and missed the boat.

Those nations leaders who believe China will contribute to the recovery of the global economy are chasing rainbows.

China is about numbers, big numbers, and those willing to look deeper into those numbers will see the real problems facing China's unsustainable dream to become a major global economic, industrial and military power.

Beneath the surface lies growing turmoil that has the potential to collapse the China house of cards, unseat the CCP, and trigger a new global crisis.

We may yet witness the fear expressed in a People’s Liberation Army document referring to the possibility of another “Peoples war fought on Chinese soil ...”.

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About the Author

Arthur Thomas is retired. He has extensive experience in the old Soviet, the new Russia, China, Central Asia and South East Asia.

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