apparently there are a few other problems lurking under the...

apparently there are a few other problems lurking under the surface.

Chinese economy heading for a recession?

Peter Zhang
BrookesNews.Com
Monday16 May 2005

When Zhu Rongji, was China’s Premier he promised to put the state sector on a sound economic footing. He failed dismally. President Jiang Zhemin also struggled with the problem. He too failed. Now President Hu Jintao is faced with the problem and it looks like it might be coming to a head.

These so-called state enterprises are economic black holes that are sucking in the nation’s savings. They are overmanned, suffer appalling productivity, swimming in oceans of red ink (despite heroic efforts at cooking the books), producing shoddy goods and building up astronomical debts. This is a fair description of the state sector.

Notwithstanding massive sacking and huge injections of scarce capital, these malinvestments exist in a zombie-like state, creating a gigantic drag on the rest of the economy. But that’s only a part of China’s economic woes.

There are reports that the ranks of the unemployed and underemployed are rapidly. I should like to make it clear that this is not strictly true. There was always massive unemployment under communism, only overmanning was used to hide it.

Now that the burden of overmanning is no longer possible on the same scale, the country is once again witnessing in the emergence of swelling unemployment as part of Mao’s atrocious socialist legacy that still burdens the country

Another problem is that China’s banks are broke. They are literally bankrupt. The banks, on instructions from the state, made colossal loans to the state sector even though they knew they would never be repaid. (I’ll still bank in Hong Kong but not on the mainland). It is no wonder their non-performing loans have been reported at over 50 per cent of GDP.

The only thing that’s keeping this jerry-built structure afloat is funny money policies. Monetary growth has been enormous over the last few years. However, as part of an effort to slowdown credit expansion the central bank recently raised the banks’ reserve ratio. Since January there has been a significant reduction in monetary growth. Unless monetary policy is reversed, it looks like the Chinese economy will go into recession

Another problem facing China is the sheer scale of corruption. Party officials have ripped the financial guts out state firms, literally pocketing billions of dollars earmarked for investment and subsidies.

That these funds would have been wasted anyway is no excuse for these party vultures to stick them in their personal Swiss bank accounts. The Chinese people have suffered a great deal and they certainly deserve something better than senile generals, venal officials and thieving party cadres.

China has a wealth of entrepreneurial talent and a people noted for their diligence, respect for learning and a high savings rate. Allow these virtues total freedom and I believe China’s progress would astonish the world. But before this can come to pass it looks like the Chinese economy and the political system might have to go through the wringer once again — more’s the pity.