From the U.S.A to Chile, many protesters have occupied key districts of their respective cities and expressed their passionate concerns over their failing economies. The Economist made an informative diagram that indicated the “occupied” countries and compared their levels of economic recession. Due to government repression, citizens of some countries cannot take their anger onto the street. But that does not mean they do not have their own under-reported economic problems.
Aside from farcical marches consisted of old, retired Maoists in support of Occupy Wall Street, the Chinese people seem to be very content with global capitalism. Yet a closer look into Chinese events would change that superficial understanding. The crisis of surging bankruptcies in Wenzhou, a small southern city known for its ingenious entrepreneurs, small and medium-sized businesses have defaulted in startling numbers on high-interest loans provided by private lenders in recent years. The popularity of private, high-interest loans points to the policy discrimination in China, where larger banks usually refuse loans to smaller enterprises.
While medium and small businesses that cannot access to capital, the Chinese government’s ability to invest in costly projects in order to sustain GDP growth poses a stark contrast. For example, China’s four biggest banks recently took a beating on the stock markets and was only saved by the government’s indirect financial support. According to The Economist’s report Chinese banks: The A-share team from August 1st to October 7th, the Industrial & Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China together lost over $109 billion in market value. Fortunate for them, Central Huijin Investment, a government agency that owns controlling stakes in the big four banks, came to rescue and said it would buy more “A” shares in all of the four banks on Oct. 11th. While the Brookings Institute indicated that the amount of the care package was small, the act boosted investor confidence and the Chinese banks immediately recovered some of their stock value the next day.
This event is merely one example of how the Chinese government timely uses its political power to support banks for the sake of sustaining growth figures, also known as state capitalism. Yet the state’s almost unlimited access to funds relies on the silent price paid by ordinary Chinese people. As Its Economy Sprints Ahead, China’s People Are Left Behind, an analytical report by New York Times’ Shanghai correspondent David Barboza, clearly shows that the central government relies on high household savings to support the government-run banks. China’s central banks also depend on the vast pool of consumer savings to help finance their investments in the foreign exchange markets, as a way to keep the currency artificially weak and export consumer goods. On the other hand, the absence of proper public social safety nets prompt Chinese people to save most of their money for costly private social services, such as housing and education. In my article Rate of sales’ rise in decline for China Daily, I also cover the same acute structural problem where Chinese people not only save their money in order to insure their future health or retirement through private options, they also cannot increase their capital due to the lack of quality investment options and the government’s deliberate negative interest rates.
In the New York Times article, Barboza observes that government’s reliance on consumer savings essentially mean that banks are taking money from private households. His report cites Nicholas R. Lardy, an economist at the Peterson Institute for International Economics in Washington, who said that the government policies exacted a hidden tax on Chinese households that amounted to about $36 billion in 2008 alone. Some economists believe (and hope) that the Chinese government will soon change their fiscal policies to restructure the economy. Barboza also cites Xu Xiaonian of the China Europe International Business School in Shanghai warned that “If we don’t change, we will follow those same footsteps (of Japan),” where it relied too long on a predominantly export economy and neglected domestic markets until the bubble burst.
Restructuring the Chinese economy will require self-motivated leaders with long-term visions from the top; yet short term negative effects of state capitalism are also rather unsettling. Due to overwhelming unpaid debts, there have been regular suicide attempts by company bosses in Wenzhou since April 2011, according to China Media Project. Since last month alone there have been 25 documented cases of bosses jumping from buildings or throwing themselves in front of traffic. Premier Wen Jiabao even flew in to address the crisis on Oct. 4th, but talking alone will not solve the structural problem in China’s economy. His State Council will have to push the Politburo to create fairer and sustainable economic policies, starting with relinquishing privileges for state-owned banks.