Reference Material: The Truth Behind China's Economic Boom

(Clearwisdom.net) Excerpts from a speech by Caoan Jushi, Vice Chairman of the Board, Pan American Bank Group, at a seminar on the Nine Commentaries on the Communist Party.

On the Influence of the Chinese Communist Party (CCP)

One fact is clear -- in dealing with the tendency of the entire economy, the Chinese government failed to take a flawless and holistic approach. They are not interested in establishing a social welfare system, considering political reform and constructing legality and law. To the Chinese leaders, the top priority is to perpetuate their own power. The biggest worry is the collapse of the Communist Party. Secretly they are praying that the conflicts don't explode now; not in my term, please; wait until I retire; then you can do whatever you want. The last government led by Jiang Zemin and Zhu Rongji was like that. They thought: Hu Jintao and Wen Jiabao administration, do whatever you want to fix the leftover problems; that's your business.

A country's economy is not something you can magically change however you want. Economic reform takes time and patience. We can thereby see a phenomenon [in China]: no matter who is in power, the person's top interest is to keep things under control and strengthen his personal power; he doesn't care about what happen next. The person will do whatever he feels like; there is no continuity and long-term stability in his policies. The Chinese government is still in the same pattern under the current situation. As long as the CCP is in power, this trend will not change.

We see another phenomenon from China's economy: the CCP is taking advantage of the economic boom to legitimize its rule of dictatorship. For instance, the CCP often boasts about how hugely it benefits the people; how much it contributes to the advancement of Chinese society; but if we see through the propaganda, these claims are completely bogus. The CCP is very good at using false, spurious things to hide its true nature.

I want to clarify another point: many people believe that China is practicing capitalism. But the fact is that many people don't even know what capitalism is about. Recently, the Chinese government is pushing the U.S. to accept China as a free market economy. The U.S. has refused. Why? Because the definition of a free market economy is not arbitrary. The dictionary says: a market economy must have free and fair trade.

To be fair, there must be a just legal system; everyone has the right to appeal; everyone enjoys fair protection. But is there any fairness under the CCP's dictatorship laws?

Now let's talk about freedom. Let me give you an example. In the U.S. people have to pay taxes. Why? because the government hires a group of people to maintain the society's order. If today the officials in our city do a poor job and mess things up, we could refuse to pay taxes. We could also vote them out of their offices. This is a trade-off. Why shouldn't we expect satisfactory services from the officials using our tax money? In China, people also pay all kinds of taxes, but they do not have the right to vote in any election. There is no freedom, no fairness. The people do not elect the Chinese government officials. They manage to stay in power and refuse to go. There is no freedom, no fairness and thus no free trade could be reached.

Today people believe in Christianity and practice Falun Gong. If they don't even have this little bit of freedom [in China] there is no way to develop a free market economy. How could a market economy be built on a dictatorship government? The so-called Chinese capitalism espoused by the CCP's propaganda has nothing in common with a true market economy in overseas capitalist countries.

Many people had the wrong understanding that the CCP is willing to accept capitalism. Wrong. The CCP only adopted the appearance of capitalism, not the real substance. Just as Professor Lang Xianping from Hong Kong said, "How come all the state-owned companies in China were embezzled by a small group of people? These companies belong to the people on surface. This is like a son wanting to sell his father's house without telling his father." Is this fair? Not at all! How could you sell your dad's house? It's not yours! In the U.S., could you sell your neighbor's house? Could an employee sell the company? In China, the people own state-owned properties; how could a few people sell them? The owners [the Chinese people] don't even know about the sale. Even if they found out, they can't oppose it. What kind of society is this? Isn't this robbery? How is this different from a street robbery?

The bottom line is, under the Communist rule, all the established systems are hypocritical. On the surface they are learning and adopting capitalist ideas. In fact, it's not true at all. The CCP can be extremely deceiving. These days, the Chinese economy appears very prosperous on the surface: they build lots of tall buildings; people's living standards are improving. But all this is illusive. The Communist government deployed huge public social resources to maintain a fake thing but have damaged the people's fundamental interests.

Nowadays the Chinese government encourages people to buy housing property. People are working hard to buy their housing property. But think about it; who owns the houses and land? The Constitution says the land belongs to all the people in China, but the government actually owns the land. Even if you bought your house, after 70 years the government can drive you out from your home. Government regulations say people only have the right to use the land for 70 years. I heard that the CCP is considering levying a housing property tax. Since the property owners don't own land, the government does; they cannot tax the land like it is done in the U.S. The CCP wants to tax the housing property, collecting a 7-8% property tax, just like in the U.S. and Hong Kong. Let's think about this deal: I don't own the land; I can only live in the house for 70 years, yet I have to pay property taxes on the house for 70 years. What kind of government is this? In the USA, no one dares to pass such a law requiring people to pay property tax on a 70 year land lease when buying a house! The CCP is cheating people to buy houses and figure out another way to cheat people out of their money one more time, robbing them over and over again, and then uses this money for government expenditures.

In 2004, the Chinese government has so far collected over 2,000 billion yuan of fiscal income. The 2004 annual plan is for a total of 3,400 billion. We know that China's GDP for 2004 is only 12,000 billion; the profit on the GDP might only be between 10% - 20%, even if the profit is 20%, the total income is only 2,400 billion. How much does so the CCP take from taxes? It is 3,400 billion; then, what a huge portion of GDP is from taxes!

Think about it, everyone. In the U.S. the government also collects a lot of taxes. The U.S. government, though, spends about two thirds of its tax income on government expenditures, and one-third on social security. In China, almost all the taxes are spent on government costs, and the social security tax allotment is next to nothing. Do you know the size of the social security fund in China? In the past four years, the central government spent only 9.2 billion yuan to help the most impoverished population, while the government's total fiscal income in the same period amounted to 8,000 billion. Only 9.2 billion yuan was used to help poor people, but 15.1 billion was allocated for local governmental expenditures. Government officials have spent the lion's share! Where did they spend the money? We all know it is very popular in China for officials to wine and dine; many such events also involve young girls, for entertainment. Ten years ago in Beijing I once attended a banquet hosted by a friend in the government with a vice premier among the guests. It was a business activity, so I had to attend it. It is hard to imagine: for two tables of twenty guests, the cost was 270,000 yuan, that is US$30,000! In the U.S., I never spent money like this, US$30,000 to buy dinner for twenty people. In the United States this would not be possible, but it is considered commonplace in Beijing, in China! The Chinese government spends huge amounts of money on these kinds of activities. That is why, when talking about the economy, we have to look at the actual happenings. Today's distorted Chinese economy is because of the CCP. They have guzzled all the wealth that the Chinese people have accumulated over numerous generations.

On China's Economy from an Economist's Perspective

Nowadays, China's economic data is very unreliable. In fact, the Chinese government has been covering up China's real crisis with false economic data all along.

Let's use some statistics as an example. In 2003, the Chinese government claimed that China's daily foreign currency outflow was around US$100 million. But figures for the first half of 2004 from China's Foreign Exchange Administrative Bureau announced that over US$60 billion had left China during that time. If this is true, then the foreign currency outflow was almost $200 million per day, double the earlier claim.

How much was the foreign investment in China? In fact, in the first half of 2004, the total foreign investment was only US$40 billion, but the amount of outflow in the same period was US $60 billion. Where did all the money go? Corrupt Communist officials had stolen the money.

About two years ago, I predicted that China would certainly head for inflation. At that time I said that the U.S. economy had come out of the slump caused by "the September 11" incident, but China was going downhill; downhill means that China's economy was headed for an inflationary period. In November 2003, during the second round of a meeting between China and the U.S., the "Sino-U.S. Relations Conference," the appreciation and depreciation of China's currency was a hot topic. Many economists and financial experts from around the world were specially invited to attend a seminar on the RMB's appreciation and depreciation. I attended the seminar and publicized my opinion, "Inside China, the RMB should not appreciate, it should only depreciate." Most of them disagreed; they believed that it was high time to force the RMB's appreciation; how could it possibly depreciate? They challenged, "What makes you think that China is headed for inflation and the RMB would be devalued? What is your rationale behind your prediction?"

Simple. China's international trade uses a fixed exchange rate at 8.28 [RMB yuan to the dollar]. Let me give you an example: I have 100 bottles of water; if I sell them to you and make more U.S. dollars than what I can get by charging you RMB, then the RMB is supposed to appreciate, relatively. But China keeps the 8.28 rate fixed. In fact, the RMB can exchange more U.S. dollars because China is floating with the U.S. dollar exchange rate, the Chinese RMB follows the dollar's up and down value. In fact, there should be an adjustment between the U.S. dollar and RMB according to the actual value of the currency. Who has seen the price of any commodity remain the same for years?

Fifty years ago, every country in the world printed their currency based on the gold standard, meaning a country's total cash reserves depended on the amount of gold they had. Later on, the U.S. dollar was reformed according to the state credit basis, national standard. The U.S. now prints cash based on the state credit and national capital. However, China today uses neither gold reserves nor state credit. They value their currency based on the U.S. dollar. The Chinese RMB follows the U.S. dollar's up and down valuation. Think about it, China's foreign trade and exports are earning U.S. dollars. As the amount of U.S. dollars earned increases, the RMB should also appreciate. For instance, if I have 1,000 yuan and I made US $15 in profit, of course the RMB should appreciate. This is common sense.

But why didn't the RMB appreciate? The Chinese government worries about China's credit. Once China's exchange rate becomes market driven, the currency will be traded freely and the U.S. dollars will circulate freely, leading to a high possibility for the dollar to replace RMB in China. As a consequence, foreign banks will open regular businesses in China. Then, Chinese citizens will not likely put all their savings in RMB and may deposit some of their money in U.S. dollar accounts instead. At that time, a great amount of RMB will be exchanged into U.S. dollars, resulting in a great amount of RMB reserves drawn from China's state-owned banks, completely disclosing the losses of Chinese banks to foreign debt as well as the domestic debt. The bad debts in China's big, four state-owned banks are as high as 70%. If individual Chinese citizens exchange half of their savings into U.S. dollar accounts, China's state-owned banks will not be able survive and will collapse. But, the Chinese government will not let the big four state-owned banks go down; otherwise the entire Chinese society would collapse. What would they do then? The government would decide to print more cash. This in turn forces the RMB to devalue. China's economy is now based on this strategy. That is why China would rather bear the pressure of the RMB to appreciate rather than freeing the exchange rate. They worry that the true mess of China's financial situation will be exposed, and the entire society will be destabilized as a result.

Actually, there is another reason, which is CCP's deceptive nature. It seems that the RMB is appreciating in the eyes of foreigners, but actually it is depreciating for the Chinese people. Why would it depreciate? It is caused by a fixed currency exchange rate. All commodities are traded equally in a free market, including the exchange between the U.S. dollar and Chinese RMB. If there are more dollars, the RMB would appreciate. If there are fewer dollars, the RMB would depreciate. This is a process of the free exchange. However, once the exchange rate is fixed, this equally makes a dividing line. This line makes all the trade between China and foreign countries an unfair trade, which is under China's monopoly and control.

The reason why the Chinese government wants to use this strategy is because RMB is actually a U.S. dollar-based currency. For instance, as China's foreign currency reserve increases by one dollar, the government prints RMB 8.28 yuan. When the dollar reserve goes up, the government issues more RMB. According to the data in 2004, between January and October, the government printed RMB 4,000 billion yuan. What kind of concept is 4,000 billion? China's GDP in the year 2003 was 10,000 billion yuan. In 2004, the GDP is expected to reach 12,000 billion. With a GDP of 12,000 billion, the government still printed 4,000 billion cash. You tell me, isn't the RMB devalued? It is definitely devalued. When foreign currency reserves increase, all the foreign money in China must be converted to RMB for circulation; hence, the government must print more RMB. Then, what is the consequence? Let us look at the Chinese government's M2 data [M2 is broad money, it includes exchange currency (M1), savings accounts, and other substituted capital similar to cash]. M2 jumped from 18,000 billion to 22,000 billion yuan, a net increase of 4,000 billion to the market. People would observe the most obvious phenomenon, which is a price hike for all commodities.

According to the official data published in October 2004, China's inflation rate was 4.3%. According to traditional economic theory, an inflation rate within 5% is considered moderate and normal. However, the government's data also showed price increases in grain, petroleum, coal and steel. The basic industry price hike was as high as 24.1%, but the government stated the inflation rate was 4.3%. Obviously, the number is not accurate at all. In fact, the price hike is not limited to grain, petroleum, coal and steel; other basic needs such as clothes, plastic bottles and many other goods also have seen a price increase. Considering the price hike as high as 24.1%, how could the inflation rate be as low as 4.3%? According to the numbers the Chinese government claimed, China's Engle Coefficient is 37. In other words, Chinese people spend 37% of their total income on food. Now that 37% of their total spending sees the inflation increase of 24.1%, even if all other prices had remained unchanged, 4.3% inflation would still be impossible.

I have no way to believe this data [produced by the Chinese government]. If the inflation rate were accurate, and because the price of raw material could only go up, mostly, the only other possibility is that the people's income of the whole nation had been shrunk. Even if this were true, the total salary couldn't go down as much as 20%. In China, salary costs only represents 15%-20% of the total. If the total cost went down 20%, then people would not get paid at all. Without income, how would they survive? So this is impossible. That's why I said the 4.3% inflation was a lie.

In reality, China's inflation is very serious. We all see that prices in China are going up very quickly, particularly for real estate. But this high inflation is good for the Chinese government. Printing more money means RMB depreciation. By doing this, the government is stealing money from its citizens. Chinese citizens ended up paying for the 20% inflation. As a result, the government's bad debts would diminish. Bad debts (defaulted loans) data based on 2004 figures has not yet been published. I predict we would see about 10% reduction in bad debt in China's financial system. Where does this 10% come from? I calculated it from the inflation data in 2004.

There are two reasons for the Chinese government to keep a fixed exchange rate with U.S. dollars. One is the fear of the collapse of their banking system; the other is to create inflation in order to eliminate bad debts, so as to sustain this CCP government and to eliminate the bad debt of the Chinese government itself.

According to Richard Kahn's economic theory (related to John Maynard Keynes' multiplier theory), an environment that creates inflation is a closed environment. In a fully open market, inflation won't happen. If the goods in this area become expensive, cheaper goods would come in from outside, and the prices will be forced down immediately. If some goods run short, foreign goods will come in at once. A true free market won't have inflation.

In fact, the world hasn't seen any runaway inflation in the past several decades. By contrast, due to globalization, we have seen quite a few scenarios of deflation. And in the future, the only situation that the world will face is deflation, not inflation. China's current inflation is caused by the government's insistence on a fixed exchange rate that blocks free trade.

After joining the WTO, the CCP government realized that tariffs are losing their effect. They used the exchange rate as a one-size-fits-all solution for their economic woes, including reducing their bad debts. As the RMB appreciates, national wealth increases. To buy an imported car, people used to pay 200,000 yuan; now they only pay 150,000 yuan; anything wrong with that? No. But the CCP doesn't care about people's interests; they only want to maintain their own power. Their top priority is to reduce bad debt; they don't allow privately owned banks to operate in China. They also protect those government-owned banks from collapsing. In the economic arena, the CCP's control and deceiving propaganda over people's minds is quite effective.

Everybody might have seen that, China's real estate prices are on the rise. Why? Recently some Chinese economists rumored a conspiracy theory. According to them, Morgan-Stanley was telling everyone that China' economy is doomed while on the other hand investing heavily in China's real estate. They believed that Morgan Stanley has a conspiracy against China; that they want to sabotage China's economy. Actually, they understood it wrongly. The Chinese Government believes that foreign capital was holding nearly US$100 million dollars to push up the price of the RMB. But in reality, anyone who buys RMB with dollars will lose money since the RMB will depreciate. The Morgan Stanley Bank is not stupid. Some investors from the West, such as Morgan Stanley, buy real estate in China because they are convinced that the RMB will devalue but the real estate will hold its value. If RMB depreciates, the real estate will appreciate; at least it won't devalue. Real estate is the most secure commodity in China. Under these circumstances, people buy real estate because they see the RMB going down, not because the overseas banks and financial capital try to force the RMB to appreciate. Even though the price of Chinese real estate is high, they believe that after the money entered China, it can't leave China, because a Chinese regulation says, "if the companies don't want to pay the tax for their net profit, the money should stay in China;" therefore they buy real estate with their net profit. The predicted appreciation for real estate is much better than that for the RMB. It is very blurring on the surface; common people can't see it; but if you do a study you will see that all the European and U.S. companies view the RMB as a seller. In other words, they foresee inflation in China. None of the foreign companies want to keep the RMB; they are converting the RMB into something more secure.

The biggest issue with inflation is that it temporarily alleviates the pain caused by the economy today but it pushes the real problems to the future. China is undergoing an economic reform without much planning and coordination. Inflation will have a severe impact on the Chinese economy and society in the future. Even though the current bad debts are resolved, the government encouraged inflation without a good social security system. This will hurt China badly in the next few years. It will induce social turmoil and economic troubles.

February 20, 2005
Chinese version available at http://minghui.org/mh/articles/2005/2/22/95903.html

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