No Soft Options for Debt-ridden Chinese economy

Malladi Rama Rao

The Year 2018 is the Year of the Dog, according to Chinese Zodiac; it has brought for the Chinese a host of superstitions that will have a bearing on how the coming days unfold.

For instance, bad luck will haunt a Chinese throughout the year if he or she cleaned clothes, used scissors or sweep floors on the New Year Day (Feb 16 this year).  How many Chinese had set aside these chores on that day is unclear. It is certain that the number could be substantial.

Whether guided by one such superstition or goaded by the compulsions of the market place, the Chinese economy managers have undertaken spring cleaning of the books of the debt ridden banks just days before the New Year Day. And slapped fines as frauds tumbled out of bank vaults.

The Shanghai Pudong Development Bank, for instance, has been slapped a fine of $72 million (462 million yuan).

This is the penalty for ineffective internal controls that had resulted in a major shell company fraud at its Chengdu branch.  Interestingly, the branch had long claimed to have “zero” non-performing assets (NPAs) or bad loans. But in reality it advanced 77.5 billion yuan to 1,493 shell companies. Inspectors of the China Banking Regulatory Commission have found that the pile of bad debts could run to 10 billion yuan in losses.

The scandal has renewed concerns about the quality of lender’s loan data and that of the broader Chinese banking system, Mandy Zuo reported in the South China Morning Post (SCMP) on 22 January. Bad loans are not new to the Chinese lenders. Nor hiding them by falsifying accounts.

Take Shanghai Pudong Development Bank case itself. Days before it was engulfed in the scam, the bank reported a net profit of 54.2 billion yuan for 2017, up by 2.2 per cent from 2016. Its NPAs ratio increased to 2.14 per cent in 2017 up from 1.89 per cent in 2016, 1.56 per cent in 2015, and 1.06 per cent in 2014. The banking regulator has now found that the Chengdu branch “dressed up financial statements and made up profits”.

Another bank, China Guangfa Bank, was found offering illegal guarantees for defaulted corporate bonds. The regulator asked the bank to pay 722 million yuan as fine. In all more than 1,800 banking institutions were found guilty of various frauds resulting in bad debts. And they were asked to fork out a whopping 2.9 billion yuan in fine last year.

Accumulated financial mess is one of the three problems confronting President Xi Jinping regime, who is seeking to find nirvana for the Chinese economy through the OBOR way.  Pollution, poverty and resultant social problems are the other challenges for which Beijing has no magic wand. Well, the GDP registered a modest growth in 2017 but it came after a steady downslide that became manifest from 2011. The growth has come on the back of strong showing by exports, construction and consumer spending.

The old economy — heavy industries and property sectors are slowing. The new economy — services and part of the manufacturing sector such as high tech is not yet strong enough to overwhelm the old economy. Xinhua says that the Chinese economy is going through a phase of “creative destruction”. Will this enable the China’s economy to hit its sweet spot in 2018?  Opinion is divided since the growth rate is due to cyclical factors and an improved global economy.

The short point is that the unfolding months of the Year of the Dog may not provide the space President Jinping needs to restructure the economy with least pain. If any, it can complicate matters going by the mood in the countryside, which is often not in the radar of Beijing watchers.

Like in the past, now also there are question marks on the quality of official statistics, as the New York Times said in early January, “the Chinese official figures have become implausibly smooth and steady, even as other countries post results with plenty of peaks and valleys”.

The problem has become compounded in the past few weeks with a host of provinces and counties publicly confessing to doctoring their accounts. Why did they talk up the economy? To please the masters in Beijing! It is not a new development. What is new is admission of the guilt as never before.

Nikkei Asian Review attributes the rush of confessions to “Central government subsidies for coming clean”. A growing number of Chinese local governments are owning up to having faked economic data and are moving to correct their doctored numbers, responding to a major shift in Beijing’s economic policy toward the quality of growth, it says.

Future thus may become rosy for number crunching. But what about today. Can we take the Chinese growth data on face value? My answer is a resounding no!

Liaoning, the northeastern Chinese province bordering North Korea, reported an unusual 2.5 per cent drop in gross domestic product last year; it admitted cooking its books between 2011 and 2014 through forgery, tax refunds and taxation calendar adjustments; these admission followed probe against Wang Min, the provincial party boss.

Another province, Inner Mongolia has revealed that two-fifths of the industrial production it reported for 2016 did not exist.   The unvarnished truth from the above is what has been suspected all along that many, if not very substantial number, of Chinese provinces are exposed to what Xinhua reporter grandly terms as “house ugliness”.

China’s National Audit Office (NAO) also did some searches. Its Dec 8, 2017   report says five city or county governments in Jiangxi, Shaanxi, Gansu, Hunan and Hainan provinces had incurred 6.4 billion yuan of debt through financial guarantees.

Wangcheng district in Changsha, the capital of the central province of Hunan, faked the ownership transfer of local government buildings to increase local fees revenue by 1.2 billion yuan ($181 million). Six counties in Jilin province listed 110 million yuan in project funding and hospital revenue as revenue from administrative fees.

Tianjin, a sprawling metropolis, briefly posted on its official website in January that previous data had been inflated. The post was quickly deleted though. No surprise China’s GDP numbers invite disbelief and pointed jokes.

What would be the level of China’s local government debt? Some estimates put it around 16.47 trillion Yuans ($2.56 trillion).

There is another flip-side to the Chinese miracle. Just four cities, Shanghai, Beijing, Shenzhen and Guangzhou are the growth engines. Last year, these four cities together generated nearly an eighth of the country’s economic output ($ 1.56 trillion in all). It means that Jinping regime is depending on the big four for growth. It is not a healthy trend since China lives in its villages, and semi-urban pockets.

Speculators are having a field day across China offering instant riches with a wide variety of pyramid schemes. The housing market has become a casino, as a New York Times headline puts.  Real estate makes up nearly three-quarters of the assets of Chinese households.

Average Chinese has no trust the country’s stock exchange. And has turned to the housing bubble to make a quick extra buck. Going by local media reports, a vast number of apartments in many cities are unoccupied. Many buyers have no intention of moving in or renting out; they bought them to sell once prices go up. In many cases speculators are said to have built homes that nobody wants”.

Whatever be these ifs and buts, the fact is that household debt, mainly in the form of mortgage loans, is growing.  At the end of June last year, its ratio to gross domestic product was 46.5 per cent, up from 37.3 per cent at the same point in 2015 and 18.6 per cent in 2008. The value of medium and long-term loans to households rose to 5.3 trillion yuan ($823.27 billion) in 2017, accounting for 39 per cent of all new loans, says data released by China’s apex bank.

No doubt President Jinping and his aides are committed to further opening of the economy. They are not lifting the bamboo curtain though. It is this reality check that gives very little room for optimism about a quick turnaround for the debt-ridden Chinese economy. Well, without hiccups!   Syndicate Features

(* This is the edited version of a commentary by the author that appeared  on the website,, of Centre for Asia-Africa Policy Research,  Hyderabad -based independent think-tank)

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