Against the backdrop of the ongoing trade war between the US and China, Chinese Premier Li Keqiang delivered his annual government work report on March 5 during the opening of the 13th People’s Congress. Displaying confidence in China’s military might, Li noted that China’s 2019 defense spending will amount to 1.19 trillion yuan (US$177.61), a 7.5% increase over last year. This number is higher than China’s targeted economic growth rate, and roughly four times bigger than Japan’s defense spending for 2019.

　　　　　Despite the fact that the Chinese government is targeting lower economic growth of 6.0% to 6.6%, Li boasted: “The year’s main targets for economic and social development were accomplished…We made major progress toward a decisive victory.” Li proudly made this declaration, although “guo jin min tui”—an economic structure under which government enterprises are favored and private businesses are squeezed—remains the major reason behind the economy’s slowdown. Li proclaimed:

　　　　　“Our economic structure was further improved…Institutional reforms of both the State Council and local governments were implemented smoothly.”

　　　　　No state financial system is so precarious as China’s. But Li asserted that China’s financial sector was “generally stable” and continued “alleviation of poverty made significant progress,” pointing out that per capital disposable personal income “grew by 6.5% in real terms.” Although domestic economic management has generally been satisfactory, he noted China’s external environment has changed profoundly, singling out the adverse effects of “the China-US economic and trade friction” as one of the primary causes of its many domestic problems.

　　　　　The varied numbers Li cited in his address are deceptive, however. Trade friction with the US has negatively affected China up to a point, but hadn’t China landed in serious trouble of its own making long before then?

　　　　　Nowadays, it is not unusual for Japanese as well as American and European corporations to make downward adjustments of business forecast as a result of the drastic economic downturn suffered by the world’s second largest economic power, which is a major trading partner for many nations. And yet, Li reported that China achieved 6.6% economic growth last year.

　　　　　Chinese specialists themselves question this. Professor Xiang Song Zuo, Deputy Director of the Center for Monetary Research at Renmin University in Beijing, for one, has raised the possibility of China’s growth rate having actually been negative. A 6.6% growth rate would seem highly improbable.

Price to Pay for Bubble Economy

　　　　　Chinese statistics are generally viewed as lacking in credibility. The difficulties the Chinese economy faces are discernible from its “zeng zhi shui” (value-added tax) statistics, which are considered relatively trustworthy. The Chinese value-added tax, which varies slightly from industry to industry, is generally set at 17%. But last fall the consumption tax revenues of the Chinese government registered a minus growth from the year before. There was also a 70% decline in special tax revenues from luxury items, such as automobiles.

　　　　　Chinese leaders, including Li, adamantly blame the trade friction with America for the downturn of the economy, but that is nothing but an excuse to cover up their failed leadership. In point of fact, China had already been saddled with two major problems prior to locking horns with the US over bilateral trade. Experts point these out as far more serious causes of China’s economic ills.

　　　　　Firstly, China has had to pay dearly for its bubble economy. In 2008, when the world was badly shaken by the Lehman shock, China hammered out a hefty 4 trillion yuan (US$520 billion) economic stimulus program centering around public sector investment that benefited the world significantly. No country, including Japan, has ever implemented an economic stimulus package on so grand a scale.

　　　　　China would have stopped there had it been a nation capable of making sound decisions. Obviously getting carried away by its initial success, however, it continued to forge ahead with a succession of large-scale investments, in effect misusing tax payers’ money in irresponsible investment projects marked by low efficiency.

　　　　　Nobody in China can object to a policy such as this pushed forward by an autocratic administration led by bureaucrats and the Communist Party that disdains a free economy. In his lengthy address this time, Li repeatedly lauded “the firm leadership of the Party Central Committee with Comrade Xi Jinping at its core.” Li’s position wouldn’t be secure without singing the praises of “Emperor Xi” whenever possible. Under the leadership of the new despot, China has adopted a series of mistaken economic measures.

　　　　　These measures have included investment in public works, wasteful infrastructure projects, facilities and equipment for state-owned corporations, and real estate programs for housing complexes and commercial buildings with no actual demand. The accumulated cost of these projects has surpassed a whopping 400 trillion yuan (US$52 billion) in the ten years since the Lehman shock, according to Chinese statistics on fixed asset investment.

　　　　　With such an enormous sum having been invested, it is only natural that China managed to maintain high economic growth. But the problem is that most of the funds invested are loans bearing high interest.

　　　　　Naturally, capital must be repaid with interest. But it is important to question what is the return, if any, for the projects that obtained loans, be they real estate or infrastructure. The answer is self-explanatory if one recalls reports that some cities have turned into ghost towns after huge new apartment complexes failed to find new occupants.

Saddled by Non-Performing Loans

　　　　　The investment efficiency quotient in the Chinese market rose from “1 to 6.5” in the nine years between 2007 and 2016, when the countermeasures against the Lehman shock were worked out.

　　　　　What this means is that, while 1 yuan invested generated 3 yuan in returns in 2007, 6.5 yuan needed to be invested in order to secure 1 yuan in returns nine years later, in 2016.

　　　　　In other words, one was able to profit from the earlier investment projects in China, as they made capital recovery speedily and yielded returns efficiently—like Japan’s Shinkansen “bullet train” and Tomei Expressway schemes of the early 1960s. But that of course is a thing of the past. In today’s China, where investment efficiency has gradually come down, investment has become a business in which efficient capital recovery is no longer a walk in the park.

　　　　　Experts take a harsh look at the present state of the Chinese economy, pointing out that China is following the path Japan took during the course of its bubble economy (1986-91). China is saddled with a huge chunk of non-performing loans, which is the primary problem facing the world’s second largest economy.

　　　　　China’s second problem is its economic structure under which state-owned enterprises are preferentially favored over private businesses, as mentioned earlier. In China, private businesses are said to account for 50% of the government’s tax revenues, 60% of its GDP, and 70% of urban employment. Without doubt, private businesses are the major players in the Chinese economy. In terms of distribution of wealth, however, state-owned enterprises take the lion’s share. Land resources are overwhelmingly under the control of state-owned corporations or the government. A look at the fund procurement, i.e., debts, of approximately 3,000 listed Chinese companies shows that China’s 50 leading corporations account for 52% of the total. Most of them are gigantic state-owned enterprises.

　　　　　These enterprises can have funds diverted on a preferential basis, much of which is then siphoned into shadow banking. This enables them to earn comfortable profits under the existing circumstances.

　　　　　The reality of China’s stock market is harsh. The total number of stock exchange accounts is no less than 200 million, only 0.03% of which control some 70% of the total market value. China’s trade war with the US broke out against such a backdrop.

　　　　　The difficulties the Chinese economy faces today have not been caused by pressure from the US. The pressure from the US has simply added impetus to an already deteriorating state attributable to a host of problems of China’s own making. The full-fledged pain of an economic downturn will now unfold, affecting Japan significantly too. Japan must cope with the aftermath by steadfastly implementing a speedy and wholesale expansion of its domestic demand. (The End)

(Translated from “Renaissance Japan” column no. 844 in the March 14, 2019 issue of The Weekly Shincho)