Chinese Economic Disaster in the Making?

        [COMMENT:  This is the first time recently I have seen warning signs of trouble in China.  It has been a "success" story most of the time.  Whether this trouble (if true) will bring more violence and repression in China remains to be seen.   E. Fox]
 

CONNECTING CHINESE DOTS -- 

Dr. Jack Wheeler   --   Thursday, 19 January 2006


It’s an interesting exercise to connect the dots between news stories – especially when the dots are hidden. Take the headline story appearing last Friday, China Gains $60 Billion in Foreign Investment in 2005. Reuters opened the story with this line:

BEIJING (Reuters), January 13, 2006 - China attracted more than $60 billion in foreign direct investment in 2005 for the second year in a row as firms flocked to take advantage of the country's low wages and fast-growing market of 1.3 billion people.

Every news outfit from the Financial Times to the Wall St. Journal to CNN crowed about how “foreign investors” and “multinationals” were pouring their money into China to get a piece of China’s “booming economy.” None of them revealed the story is a sham.

None of them told you that over half of that $60 billion in “foreign investment” is laundered money from China, not foreign investors.

Foreign companies investing in China pay 15% in corporate taxes while domestic companies pay 33%. So Chinese businessmen set up a “foreign” corporation in Hong Kong or some other tax haven and cycle their money through it, saving cumulative billions in the process. The game has been going on for years.

None of these stories told you that Western investment in China has been flat for years. Total Western (Europe-US-Australia-Canada) investment in China was ab out $6 billion in 1995 and a little over $8 billion in 2004. Last year, 2005, EU countries’ China investment increased by 22% while American investment dropped by 22%.

Chinese FDI from 1995 ($35b) to 2000 ($37b) showed little increase at all. It took off starting in 2000 due to Asian investment (primarily Japan, South Korea, Taiwan) and a tremendous increase in the Chinese money laundry cycle. It doesn’t come from us.

If the story on China’s “$60 Billion FDI” had revealed these dots, you could easily connect them to an item appearing in yesterday’s (January 18) Wall St. Journal: Unrest in China Begins to Worry Businesses. You would think that the “businesses” in question were foreign ones investing in China, right? But all the WSJ reporters talked about were local Chinese companies worried about the impact of anti-government demonstrations in their area.

It never occurred to the reporters that there might be a connection between “the growing number of large-scale violent protests” the article describes and the 22% drop in US investment in China last year.

Directly below this WSJ article was another: Chinese Personal Savings Reach Record Level. Chinese families put an average of 40% of their yearly income in savings – the world’s highest. The article notes that Chinese “put most of their savings in banks.”

What the article does not note is that most of the banks are broke – that is, they have more uncollectable debts than they have assets and loans. This is because the government forces the banks to constantly loan money to state-owned enterprises (SOEs) which will never be paid back.

There are over a quarter-million SOEs employing over 100 million people. The government has to keep the SOE scheme afloat, and it’s doing so with the private savings of its citizens.

Now come the fun dots. Neal Asbury (author of TTP’s Asbury’s World) is going to love this.

The Beijing government has constructed a shell game called AMCs to try and wiggle out of their bank crisis. The Chicoms created a series of “Asset Management Companies” that take over the banks’ bad debts, giving the banks clean balance sheets, then allow foreign financial institutions to purchase a minority interest.

They are driven to do this because China has become a member of the WTO, the World Trade Organization, which obligates it to open its banking system to foreign competition. This is going to result in two things that will bring satisfaction to Neal’s soul.

The desperate move by the Chicoms to scrub their banks clean with AMCs notwithstanding, starting this year Chinese families and workers will be able to put their savings in foreign and privately owned banks paying good interest, prompting them to take their savings out of banks owned by a government they despise and which pays them little or no interest.

Thus the AMC gambit is in Short Run City, and the state-owned banks are soon to be in more trouble than ever.

And it gets worse.

Scrubbing the state banks with AMCs and allowing foreign shareholders means the state banks can no longer be a bottomless piggy bank for the SOEs. These SOEs are what local corrupt officials all over China live on, and provide the subsidized paychecks for a hundred million folks.

It’s a Ponzi scheme that holds China together, and when it falls apart, China becomes unglued.

The scheme can’t work for much longer. This dot is one reason: China’s portion of consumption for the entire world is 12% of energy, 25% of aluminum, 28% of steel, 42% of cement – and yet China produces only 4.3% of the world’s total economic output.

This is an astounding ratio of economic inefficiency. It cannot be sustained, yet the ratio is getting worse.

Connect all these Chinese dots and you get a dark picture of collapse and chaos. Maybe the Chicoms will be able to finesse their way out of this picture for a while. But they cannot erase the dots. The dots spell out their doom, a doom which they may delay but will not be able to evade.

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