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【#578(Special)】Fake Economic Growth Surrounded by Great Wall of Debt

Hideo Tamura / 2019.03.13 (Wed)

March 11, 2019

     At the outset on March 5 of an annual session of the National People’s Congress, China’s dummy legislature controlled by the Communist Party, Premier Li Keqiang announced to set a real gross domestic product growth target at 6.0-6.5% for this year. Such target must not be taken at face value. President and Communist Party General Secretary Xi Jinping as well as Premier Li is confident only that the target, even though being a fake failing to meet economic realities, would be attained statistically.

Statistical data being manipulated
     Premier Li, when serving as Liaoning Province party leader, told the then U.S. ambassador to China that he would not trust GDP data that were artificially manipulated. In a contribution to the People’s Daily, a Communist Party organ, in December 2016, a general director of a state organization under instruction by President Xi accused local statistical manipulation for running counter to law and the Communist Party’s ideology and discipline. Recently, local authorities have canceled the announcement of economic indicators other than GDP one after another. China’s local authorities cover up any inconvenient statistical data.
     The Chinese government views local economic statistics as problematic because the aggregate of local GDP data far exceeds China’s GDP announced by the central government, which does not meet the central government estimate, thereby causing doubts about local statistics. The result has come from the party leadership’s basic practice to fix an annual GDP growth target by the end of the year before and make it mandatory to attain the target announced at the annual NPC session.
     In the Chinese-type market economy system in which finance and investment are controlled by the Communist Party, it is easy to manipulate a GDP growth rate that usually depends on the market supply-demand relationship. China’s GDP roughly consists of fixed capital investment, household consumption and exports. While the party cannot control household consumption and exports, fixed capital investment accounting for more than 40% of GDP can be planned by the party.
     The party leadership leads the People’s Bank of China, the central bank, to issue money that flows into state-run enterprises and local governments via state-run commercial banks. Massive investment in infrastructure, production equipment and real estate development is implemented as planned by the party leadership. If fixed capital investment is increased by more than 20% from the previous year, GDP growth may easily exceed 10%. Chinese GDP surpassed Japanese GDP in 2010 after the financial crisis and is now almost three times as large as the Japanese level. However, most of increased concrete and steel structures are nonperforming bubble assets that do not generate profit. A Great Wall of debt bubble has been built throughout China.

Incoherent fiscal and monetary policies
     While Premier Li at the NPC session promised to stimulate the economy with infrastructure investment and tax cuts, the central government has requested local governments to cut fiscal spending by a uniform 5%, with quantitative monetary tightening being implemented. Fiscal and monetary policies are incoherent. If U.S.-China trade talks break down, the risk of China’s financial collapse will increase immediately.

Hideo Tamura is a columnist and a senior correspondent for the Sankei Shimbun newspaper.