林保華

Economy should concern China
By Paul Lin 林保華
Taipei Tomes 2016.4.13

On March 31, international credit rating agency Standard & Poor’s lowered its outlook for China’s credit rating from “stable” to “negative.” Moody’s had already done this on March 2.

On April 1, General Yao Yudong (姚余棟), the director the People’s Bank of China’s (PBOC) Research Institute of Finance and Banking, said in a speech: “From the first quarter of 2016 to the first quarter of 2018, China will enter a new normal of prosperity.”

How exactly does one get from “negative” to a “new normal of prosperity?” Was this an April Fools’ Day joke?

On April 4, crntt.com, a Chinese-language digital media outlet controlled by the Chinese Communist Party (CCP), republished a comment piece from China Economic Weekly — also controlled by the CCP — which quoted from a speech made by Chinese Premier Li Keqiang (李克強) at the end of last month at the annual Boao Forum for Asia conference.

In his speech, Li said: “Whenever I make a speech at an international forum, I am always able to give the world economy hope and confidence.”

However, instead of aiming this speech at the world economy, Li should have directed it at his own people. The Chinese public has lost confidence in the nation’s economy and this has led to capital flight on a vast scale. The motive for crntt.com posting the article on its Web site was to increase confidence in Taiwan toward China’s economy and to continue pulling the wool over the eyes of Taiwanese investors.

Since Chinese President Xi Jinping (習近平) took office, China’s “new normal” has been economic downturn. In the past few years, property prices in Shanghai, Beijing, Shenzhen and other tier one cities have rocketed skyward — the result of officials’ attempts to restore confidence in the economy by lowering the downpayment requirement and reducing property transaction taxes. Meanwhile, the PBOC has also been enthusiastically pumping up China’s stock market.

Last year, property prices in Shenzhen rose by 40 percent from the previous year. In Liaoning Province’s Shenyang, officials are even offering zero down payments on house purchases for anyone who has graduated from university in the past five years. Currently enrolled students can get an additional incentive of 200 yuan for every square meter of property purchased, with the entire subsidy being tax exempt.

Following last year’s meltdown of the Shanghai Composite Index, the Chinese government has been aggressively trying to prop up the stock market. In January, the stock market fell back to below 3,000 points, although in recent days it has climbed above 3,000. The government has exhausted a huge amount of capital to achieve this.

While leaving the final press conference at the end of this year’s Chinese National People’s Congress and Chinese People’s Political Consultative Conference in Beijing, a reporter asked Li: “Premier, do you still have confidence in the stock market?”

Li paused and replied: “If you have confidence in the market, then so do I.”

There are currently 100 million shareholders in China; for Beijing to maintain stability it is imperative that their confidence is given a boost.

Where did the money come from for the emergency rescue of China’s stock market?

In a report written by David Cui, head of China equity strategy at Bank of America Merrill Lynch, Cui made the surprising revelation that the PBOC’s department of foreign-exchange reserves made direct purchases of Chinese equities in the fourth quarter last year. This move has broken at least two conventions.

First, the PBOC does not normally make direct purchases of equities — because its job is to keep a hold on the balance sheet. Second, the foreign-exchange reserves might be needed by the Chinese State Administration of Foreign Exchange to purchase stocks or shares.

Beijing has used means both fair and foul to increase confidence in China’s economy, but has not paused to consider the consequences.

In the space of last year, Xi burned through almost US$1 trillion of the US$4 trillion of foreign-exchange reserves accumulated by former Chinese presidents Jiang Zemin (江澤民) and Hu Jintao (胡錦濤), and so far this year there are no signs that the situation is improving.

China’s banks are also a mess. China’s four largest commercial banks are sitting on a mountain of bad debts. China still has to come to terms with what is the world’s largest debt bubble, estimated to be in the region of US$30 trillion. Chinese exports in US dollar-denominated terms fell by 25.4 percent year-on-year in February, while a new wave of unemployment is looming.

Xi has previously warned Taiwan that if it does not accept Beijing’s so-called “1992 consensus” the “ground will shake and the mountains will tremble.”

In fact, Xi needs to pay more attention to matters closer to home to prevent a political earthquake.

If Xi tries to shake up the cross-strait relationship, he will only inflict pain on China. The epicenter of the earthquake lies on China’s side of the Taiwan Strait.

Paul Lin is a political commentator.

Translated by Edward Jones