It would not be too far from the truth to say that China is not all that it says it is. Many of its military and diplomatic actions have gone against norms and messages propagated by its own government. Retracting its own statements and even concealing the truth comes naturally to a government that maintains a monopoly over all information in circulation within the country as well as that which leaves it. Recent statements from the Chinese government have painted a colorful picture for the coming months, with it soon to “regain the economic growth it lost” and maintain its internal strength. How much truth can actually be accorded to such a statement though? Is China’s economy truly in a good shape or is such a statement to be seen as a mere façade, shadowing a highly unstable country?
If recent trends emanating from the country were to be analyzed, one could indeed point to the latter. At the beginning of the year, China’s economic growth had already begun a steady decline, falling to its lowest in 27 years, a mere 6 percent in the 3rd quarter of 2019. Predictions during the time, from both within and outside, projected the growth rate to fall further, with an economist at the Chinese Academy of Social Sciences predicting a drop below the annualized 5 percent. Additionally, reports questioning the accuracy of the data released by China have also emerged. China’s national accounts are based on data collected by local governments who are rewarded for meeting growth and investment targets. In this regard, it has become apparent through outside observation as well as internal admittance that many of China’s provinces have had an incentive to skew local statistics, some by nearly 20% a few years ago.
Such manipulation of data can have serious ramifications on the calculation of national data, especially since China’s GDP is based on input data rather than real performance. It is also to be noted that in addition to local governments manipulating data, there is a discrepancy between underlying economic activity and GDP figures, which has allowed the government to ignore bad investments and project only the figures it approves off. Based on such an understanding of the Chinese economy, reports from 2019 show that both GDP as well as GDP growth in China are far below official predictions and statements. It must also be understood that the Chinese government itself has always had an incentive to project greater growth during its developing years. Claiming higher growth rates and lying about recessions has allowed China to retain or even increase investment. With that being said, it has become increasingly evident that the statistics and figures released by China cannot be wholly relied upon.
While the above highlights the concealing factor behind China’s economy, it also points to the possibility that China’s economy is currently in a bad state. With the shuttering of businesses across the country, it is evident that the Covid-19 crisis dealt a devastating blow to China’s already floundering economy. Reports published by China’s National Bureau of Statistics in April showed that the country’s GDP had fallen by 6.8 percent, a contraction the likes of which, China has not seen since at least 1992. However, with lockdown measures now ending and policymakers stepping up stimulus to combat the massive economic shock, the country is now set to return to a modest growth rate according to its government. This may be true as China has begun on a path of recovery, however, its economy may have to face another looming crisis soon.
Over the past few months, it has become increasingly evident that not only is foreign investment fleeing the country but there is increasing unrest among local investors as well. China’s economic downturn which began with the trade war and culminated in the COVID-19 economic crisis has frightened investors across China. Since the beginning of the trade war with the US, many international companies have begun shuttering business and departing from the country. The pandemic has seen that number only increase over the past few months with potentially disastrous economic outcomes. Additionally, fears within China have surfaced as well, with many attempting to send their capital abroad. The recent political turmoil now plaguing Hong Kong is also reviving fears over massive capital outflows from the country. China’s new national security bill and the retaliation promised by the US and others has stoked significant concerns. The first instance of this is seen in the immediate aftermath of China’s announcement of the Bill on May 22 when Hong Kong’s benchmark for local stocks plunged by 6.9%. Essentially, with tensions rising, further turmoil and capital flight may soon be in the cards.
Only time will tell whether the government will be able to reduce the possibly disastrous consequences of such capital flight or even reverse the same. In 2015, when similar fears of capital flight occurred, it spurred the country to spend nearly US$1 trillion of its reserves. However, with the current economic downturn in China, it would be highly unlikely that the Chinese government will be able to muster the funds needed in countering such consequences. The Chinese government has seemingly taken cognizance of this fact though and has therefore introduced measures aimed at ensuring Chinese investment and capital remains within China. Not only has China already put a cap on the amount of money allowed to leave the country but also cracked down severely on its underground banking system. Additionally, the government has been attempting to woo the fleeing investors back with promises of economic stability and recovery. China’s current projection of post-pandemic recovery and growth must therefore be viewed through a critical lens, and seen as merely a tool through which it attempts to influence and reassure investors.
On the government’s attempts at ensuring investment though, it has not merely acted in the field of rhetoric and promises though. Since the beginning of last year, the Chinese government has put a cap on the maximum amount allowed for withdrawal from its economy. According to new rules, individuals will only be allowed to withdraw a maximum of the equivalent of around $15,000 and carry transactions up to only $50,000 abroad in a year. Any Chinese citizen found to be withdrawing in excess of that amount will be barred from making any withdrawals for two consecutive years. Additionally, any Chinese citizen leaving China with an excess of RMB 20,000 in cash require a permit issued by the bank that provided the same. In enforcement, the State Administration of Foreign Exchange (SAFE) has already begun its crack down on capital flight. In November of last year, the agency fined Chinabank Payments $4.2 million for moving money overseas. In the following month, SAFE fined the Bank of China $6,000 for breaking a government rule and allowing a customer to withdraw over $50,000 in cash according to reports. One can be sure that the situation in China is indeed serious, when its government has become overly concerned over a mere $15,000 being withdrawn from the economy.
This concern has also been extended to the new surge in China’s underground banking system. China, in its efforts to counter threats to its economy, has begun a serious crack down on all capital outflows, whether legal or illegal. The Supreme People’s Court recently introduced stiff penalties for any and all illegal currency exchanges. According to new rulings, the government will introduce jail terms of five years or more for those operating ‘underground banks’, which currently facilitate illegal foreign exchange and cross border trading. Through this process, the Chinese government has effectively sought to stop tens of thousands of Chinese from funneling millions out of the country through these services. Since the government has put a cap on the amount of money being withdrawn from the country, people have sought other mechanisms through which they can transfer funds overseas, either for the purpose of investing in property or making other significant foreign exchanges.
The requirement for such mechanisms has motivated the creation of an Informal Value Transfer System (IVTS) known as ‘Underground Banking’. The IVTS involves the transfer of funds to a bank account controlled by a Chinese IVTS provider who then transfers the same into an account of the remitter’s choice. This allows for the transfer of large amounts of funds out of the country without the knowledge of the Chinese government. The stiff penalties now being imposed on such transfers are once again indicative of the governments need to retain capital within its own economy. Any large capital outflow can result in a fall in exchange rates, negative spiral of declining confidence and finally, no buffer for government debt. For a country currently facing a debt to GDP ratio of nearly 300%, capital outflows could result in serious consequences for its economy, especially during a time when mechanisms like the IVTS has seemingly gone into overdrive.
The government is currently doing everything within its power to paint a picture of recovery, provide opportunities for investment and crack down on individuals attempting to evade its rules and directives. While the crackdown on capital outflows and underground banking is evident, there has also been significant actions taken on the digital currency front. Within China, there has been a surge in both the transaction as well as mining of Bitcoins over the past few years. Many experts have stated the need for three factors in ensuring effective cryptocurrency mining, i.e. low-cost electricity, colder weather and reliable internet. The availability of all these factors in China has facilitated massive incursions into the usage of cryptocurrencies, with reports showing between 35-37 variants of the same currently available in the country.
With the property market currently being viewed as inflated and the stock market as a scam, cryptocurrencies provide an alternative to Chinese citizens who wish to make investments that are not riddled with problems or subject to government scrutiny. Many middle- and upper-class Chinese have thus begun making investments and transactions through Bitcoins and other cryptocurrencies. With the government being unable to shutdown Bitcoin accounts or monitor transactions made through the same, this mechanism effectively allows individuals to subvert it. It is estimated that this medium alone has accounted for transactions ranging in billions of dollars over the past few years. With the Renminbi (RMB) essentially losing its transactional value, the number of people now adopting these mechanisms has seen a significant increase, putting the government on alert. However, the only action the government can undertake in this regard, is accelerate the launch of its own sovereign digital currency and hope its citizens will give up on Bitcoins and other cryptocurrencies (a highly unlikely prospect).
It is evident that the government in China may soon have an economic crisis on its hands, one which it may be unable to counter. Extremely high debt to GDP rates and possibly massive capital outflows has put the government in a precarious position. It has therefore sought to curb high debt and also put out reports that its digital currency would be a game changer for Asia, allowing for more RMB demand in the region. Undoubtedly these reports are another one of its propaganda activities, aimed at retaining investment. According to reports, China’s economy will face two major shocks, a pandemic stimulus and a post-pandemic economic fallout.
It must also be noted that China depends on the global economy for its own recovery and if this does not occur soon enough, its economy will have to face serious consequences. The reasons for this are manifold. Most importantly, China, the world’s largest exporter, relies on the United States, Japan, South Korea and others for its economic activity. Exports to the US, are currently facing a shortage of demand as well as disruptions across global supply chains. Additionally, China needs to ensure continued implementation of its Belt and Road Initiative in order to continue a majority of its overseas economic activity. Currently, from Europe to Asia, trade as well as infrastructural projects across the BRI, which accounts for around 17 percent of China’s exports, have been put on hold.
It has therefore become apparent that China’s economic growth is not all that it would seem. While it is the second largest economy in the world and has shown spectacular growth in the past, it would seem like China’s glory days are behind it. Forces that once drove China’s economic growth are now withering. China’s economy can no longer rely on a trade surplus or foreign investment to boost growth and will probably see increased capital outflows in the coming months. Additionally, China is now on the verge of a debt crisis and the massive foreign reserves it has repeatedly used as stimulus in the past have been slowly declining. In this context, it is imperative to question the narratives propagated by the Chinese government. If the Chinese economy is truly on the path of economic recovery, then why has there been an increase in the lack of confidence shared by its own civilians? And if such are the woes facing the country, is the future of its’s economy truly as promising as it’s government would have the world believe? One would think not.