Hidden Chinese Economy
China has been the wonder of the economic world over the last forty years. With growth rates often exceeding ten percent per year China has moved too first place in the world in value of exports. However, China ranks sixth in gross national income due to its heavy reliance on exports to the neglect of its domestic markets. Along the way Chinese banks have been very free in lending money, especially to high ranking members of the Communist Party and their friends and families. The suggestion of large pools of loans invisible to the outside world is reminiscent of the situation in Japan in the late 1980s. Just as Japan seemed set to conquer the world economically it went into economic stagnation and deflation that lasted over two decades and is just now emerging. This hidden Chinese economy of loans has the potential to kill the Chinese economic miracle, at least for the foreseeable future. Another hidden Chinese economy issue is the large number of empty buildings that Chinese investors believe are repositories of wealth. When the Chinese real estate bubble bursts many investors will find that the money that they borrowed to buy real estate is still due but that the value of the real estate they purchased is nowhere near what they owe.
Trying to Fix the Hidden Chinese Economy
The People’s Bank of China has been tightening up on its lending in an attempt to clean up loan portfolios without killing all economic growth. A major issue for foreign as well as domestic investors is the accuracy of Chinese economic data. The many hidden loans in Japan were not visible and were a rot at the core the Japanese economic miracle. Is this the case with a hidden Chinese economy of bad loans, inflated housing values and doctored economic figures? Fundamental analysis can be misleading even for investment in a China with lower growth targets if the basic data is not accurate. In a democracy the government derives its power and authority from the consent of the governed. Chairman Mao, the founder of Communist China, said that political power came from the barrel of a gun. Today the Communist elite in China are often the main beneficiaries of the economic miracle via preferred loans and ownership/management of businesses with preferential connections. China has prospered because it has let up on the strict controls of the early days. But it needs to maintain growth and a certain level of prosperity in order to avoid civil unrest without reverting to the gun barrel approach to power. Thus the People’s Bank of China needs to reduce the money supply without killing the economic miracle. In a sense only the folks on top of the ruling pyramid in China know the whole story and the hidden Chinese economy and just how dangerous things are at the moment.