An elderly Chinese farmer stands outside her home on farmland backdropped by a new housing development outside Beijing on Nov. 21, 2014. (Kevin Frayer/Getty Images)An elderly Chinese farmer stands outside her home on farmland backdropped by a new housing development outside Beijing on Nov. 21, 2014. (Kevin Frayer/Getty Images)

The size of China’s government is enormous. By 2007 China’s fiscal revenues had reached 5.1 trillion yuan ($770 billion), which accounted for 21 percent of GDP and was equivalent to 370 million urban residents’ annual disposable income — or the annual net income of 1.23 billion farmers.

Imperial China’s Fiscal Revenue

How does China’s fiscal revenue under Communist Party rule compare with the era under imperial rule? In 1766, during the mid-Qianlong era, the government’s fiscal revenue was 49.37 million taels of silver.

The Dutch East India Company conducted detailed investigations around 1760 on income and consumption of people in Beijing and Guangzhou. According to historical archives, the annual income of an ordinary Beijing citizen was about 24 taels. Therefore, 49.37 million taels of silver was equivalent to 2.05 million ordinary Beijing citizens’ annual income. The income of just 2.05 million Beijing citizens was sufficient to support the entire Qianlong government. Obviously, it was a small government.

Of course, some people might say that we cannot compare any country’s government revenues and spending with a period of the past, because those were traditional agricultural economies, and government revenues were therefore low. Modern economies, however, are complex and depend on various kinds of government assistance. This reasoning makes a certain amount of sense. So, let’s use a different example.

United States’ Fiscal Revenue

Let’s use the United States, a modern country, as comparison with today’s China. The U.S. financial securities markets, intellectual property sector, and private enterprises are the most developed in the world. In addition, it also plays the role as world police. Therefore, its government spending would not be lower than any other country’s.

In 2007 the U.S. federal government’s fiscal revenue was $2.4 trillion, or 18 percent of GDP, and was equivalent to 85 million average American citizens’ annual disposable income. That is to say, in order to support the U.S. government’s spending, it took 85 million Americans’ disposable income. This is far lower than the 370 million Chinese urban residents required to support the Chinese government in 2007.

China has 540 million urban residents, and 800 million farmers. Their total disposable income last year was 10.7 trillion yuan ($1.62 trillion). The Chinese government’s fiscal revenue was 50 percent of Chinese citizens’ total disposable income.

By contrast, total disposable income in the United States was $8.4 trillion. The $2.4 trillion government fiscal revenue was equal to one quarter of U.S. citizens’ disposable income.

Thus, the Chinese government is much larger than the U.S. government in terms of fiscal budget.

Private Wealth Structure Comparison

Chinese citizens do own wealth, including real estate, corporate equity, financial securities, bank deposits, and so on. But these citizens are mainly urban residents. Chinese farmers do not own land, nor do they have much savings. They have little wealth.

According to a National Development and Reform Commission (NDRC) estimate, by the end of 2005, the total asset value of Chinese urban residents was 20.6 trillion yuan ($3.11 trillion). If adding 15 percent to adjust for inflation, it would have been 27.6 trillion yuan ($4.17 trillion) by the end of 2015, less than one third of the 88 trillion yuan worth of state-owned assets and state-owned land.

The total of China’s private and state-owned assets was 115.6 trillion yuan ($17.5 trillion), equivalent to 4.7 times of GDP. In contrast, the U.S. government basically does not own income producing assets. It only holds a small amount of land. By the end of 2007, total private assets in the United States were $73 trillion, 5.4 times of GDP and slightly higher than China’s ratio of total assets versus GDP.

Although the ratio of total assets and GDP of the two countries is roughly the same, wealth distribution between the people and the government is completely different. In China, more than 76 percent of assets are owned by the state, with people owning less than a quarter. In the United States, assets are basically in the hands of the people.

Of China’s 115.6 trillion yuan of wealth in 2007, only 27.6 trillion ($4.17 trillion) belonged to people, the remaining 88 trillion yuan ($13.3 trillion) was owned by the state. If in 2008, China’s asset value and GDP increased by 10 percent, then private citizens earned 2.76 trillion yuan, and the government earned 8.8 trillion yuan. The government’s share of asset appreciation from economic growth was three times greater. This is the reason why asset appreciation has so little effect in driving China’s domestic demand or raising internal consumption.

Where Did the Government’s Money Go?

I mentioned above that the government’s fiscal revenue was 5.1 trillion yuan ($770 billion) last year, and state-owned assets and appreciation of land was at least 9 trillion yuan ($1.36 trillion). State-owned enterprises had profits of 1.6 trillion yuan ($240 billion). The government had a total income 15.7 trillion yuan ($2.37 trillion). How was the money spent?

According to former Finance Minister Xie Xuren, in 2007, the Chinese government’s direct spending on people such as healthcare, social security and employment benefits totaled about 600 billion yuan ($90.6 billion). This was equivalent to 15 percent of total expenditures and 2.4 percent of annual GDP. Divided by 1.3 billion people, the per capita of social expenditures was 461 yuan ($69), which is equal to 3 percent of urban residents’ per capita disposable income.

In the United States, government spending on the same three categories in 2015 was about $1.5 trillion, or 61 percent of total federal spending, and 11.5 percent of GDP. The per capita spending was $5,000 when divided by the 300 million U.S. population, and it was equivalent to 18 percent of Americans’ per capita disposable income.

It is not that the Chinese government does not spend money, but that it lacks real oversight of the budget process. The Chinese government tends to waste money on high-profile infrastructure projects and government office buildings, and invests in industries with high resource consumption, high pollution and low job-creation. In addition, this all provides a breeding ground for corruption.

Because in China there is too much asset wealth and income in the hands of the government, it is difficult for the masses of people to earn more and consume more, and for service industries to develop around people’s livelihoods. Thus, where would demand and investment for tertiary industries come from?

Chen Zhiwu is a professor of finance at Yale University. This is an abridged translation of his Chinese-language article posted on the website Aisixiang, and widely republished on the Chinese-language internet.

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People work at an offshore oil engineering platform in Qingdao, Shandong province, July 1, 2016. Because of too much debt, a Chinese engineering company has recently transformed itself into a bank.  
(STR/AFP/Getty Images)People work at an offshore oil engineering platform in Qingdao, Shandong province, July 1, 2016. Because of too much debt, a Chinese engineering company has recently transformed itself into a bank.  
(STR/AFP/Getty Images)

China is desperate to solve several problems it has due to its debt to GDP ratio being north of 300 percent. It may have found a pretty unconventional one by letting companies become banks, according to a report by the Wall Street Journal.  

With profits headed south, heavily indebted Chinese heavy-machinery giant Sany Heavy Industries said this week it won approval to set up a bank in the Hunan Province city of Changsha. With 3 billion yuan ($450 million) of registered capital, it will be a relatively large institution as Chinese city-based banks go. Sanyplans to join forces with a pharmaceutical company and an aluminum company.

Sany already operates an insurance and finance division with the goal of internal financing and insurance services for clients. 

Sany Heavy Industries already operates a Finance and Insurance arm, although it's unclear what gold has to do with it. (Company Website)

Sany Heavy Industries already operates a Finance and Insurance arm, although it’s unclear what gold has to do with it. (Company Website)

Debt Problem

One problem is that companies are defaulting on bond payments and there is no adequate resolution mechanism for bad debts, at least according to Goldman Sachs.

“A clearer debt resolution process (for example, how debt restructuring on public bonds can be achieved, how valuation and recovery on defaulted bonds are arrived at, the timely disclosure of information and clarity on court-sanctioned processes) would help to pave the way for more defaults, which in our view are needed if policymakers are to deliver on structural reforms,” the investment bank writes in a note. 

It would not be the first time China tries a circular financial arrangement to solve some structural issues.

By becoming or owning banks, the companies can just shift debt around different balance sheets to avoid a default, although this is probably not the resolution that Goldman Sachs had in mind when talking about structural reforms.  

Another problem is that the regime has more and more difficulties pushing more debt into the economy to grease the wheels and keep GDP growth from collapsing entirely.

China needs 11.9 units of new debt to create one unit of GDP growth. At the same time, the velocity of money or the measure of how often one unit of money changes hands during a year has fallen to below 0.5, another measure of how saturated the economy is with uneconomical credit. If the velocity of money goes down, the economy needs a higher stock of money to keep the same level of activity.

(Macquarie)

(Macquarie)

So if companies can’t pay back loans, old banks don’t want to give out loans, and consumers don’t want to circulate the money, you can just let some companies become banks to prevent them from defaulting and maybe even issue new loans to themselves. It would not be the first time China has tried a circular financial arrangement to solve some structural issues.  

Sany Not Alone 

According to the Wall Street Journal report, the Sany Heavy Industries case is only one of a few. Other companies in the tobacco and travel sectors, for example, have taken over banks or formed new ones. 

ChinaTopix reports that the China Banking Regulatory Commission (CBRC) has already awarded five licenses for private banks and received another 12 applications during the past year. It also mentions that industrial firms are behind this move:

“One bank, Fujian Huatong Bank, which has a registered capital of Rmb3 billion ($450 million), was promoted by 10 Fujian-based companies in different sectors, including retail, manufacturing and real estate.”

We don’t know if the regulator had this in mind when they launched the initiative to boost private banks in China in 2014 in order to improve lending to the technology sector, but it did explicitly mention that private companies should form banks.  

“Qualified private enterprises shall be encouraged to set up private banks. The innovation of products, services, management, and technology by private banks will inject new vitality into the sustainable and innovative development of the banking sector,” the CBRC states in an undated report.

It remains to be seen whether this is a long-term sustainable solution. 

Follow Valentin on Twitter: @vxschmid

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Last year the Chinese government coined the phrase “New Normal,” but didn’t explain what it meant. In fact, the “New Normal” means “farewell to prosperity.” It implies that the rapid growth seen in China over the past two to three decades is not likely to continue into the future.
The Chinese people may not even be aware of the causes behind China’s rapid growth over the past two to three decades. I will summarize it here in two stages. The first was the export boom, the second the construction boom.
Export Boom
The “export boom” mainly refers to the trend of many countries going to China with large investments, and transferring their manufacturing to low-wage countries as a result of economic globalization after China formally joined the World Trade Organization in early 2002. This led to China’s rapid export growth, five or six years in a row, of more than 25 percent and sometimes even 35 percent. Such growth was indeed astonishing.
The question is whether a country as big as China can sustain a continuous export growth rate of 25 to 35 percent for two decades. Looking at it rationally, we know it’s impossible. China has a large population and a quarter of the world’s labor force. If China maintained such an export growth, all factories in the world would have to close down, because the size of the world market has an upper limit.
In 2008, China’s export boom was halted by the subprime mortgage crisis in the United States. Consumption in developed countries shrank rapidly. This stopped the boom after nearly seven years. At present, it is obvious that the golden era of China’s export growth has ended. A couple of years ago, China’s export growth dropped to 6 or 7 percent, and in 2015 it fell to 3 percent—the boom was completely over.
Construction Boom
With declining exports in recent years, how did China’s economy manage to sustain a high growth rate? The Chinese government, fearing that growth would dry up, released a four trillion yuan stimulus package after the 2008 subprime crisis. One of its key consequences was authorizing local governments to engage in real estate development using bank loans. This strategy was also adopted by China’s state-owned enterprises.
This move transformed the country into a big construction site. The Chinese economy went through a huge change from export oriented to real estate oriented. Related industries, such as steel, aluminum, building materials, cement, glass, and so on all flourished. China’s steel production, which supported large-scale domestic construction projects, more than doubled in a few years, reaching nearly a billion tons per year.
This real estate boom saved China’s economic prosperity for another several years. But can it be sustained? Not likely. Despite so many houses having been built, if they cannot be sold, the local governments and real estate corporations who borrowed money to build them will go bankrupt. This is exactly what China is facing right now.
According to a survey conducted by Peking University last year, over 60 percent of urban households in China already own one residence, 20 to 30 percent of whom own two or more residences—and then among them, several tens of millions own more than six residences. Yet these people purchase houses as an investment, not to live in. In the end they hope to sell their properties at a higher price than they paid for them.
When houses are sold not for people to live in, but for rich people to hold as investments, this is of course a very unhealthy real estate market. This deformity of supply and demand has led to a short-lived real estate boom. Buyers plan to sell houses eventually, but who will buy them? Not many people can afford such expensive residences.
When housing prices so far exceed income, the real estate market becomes saturated and houses are no longer marketable. Real estate investment companies began suffering losses that resulted in broken funding chains and disillusionment with the real estate boom—this is what happened last year.
In 2015, China’s real estate boom ran into a serious crisis, and one decade of positive export growth went negative. With these two factors combined, the Chinese economy has stepped into a difficult stage, which has been called the “New Normal” by the Chinese government.
‘The New Normal’
Specific factors and opportunities led to China’s past two decades of rapid growth. With all these factors now having gone away, China has entered a period of low economic growth from here on out. As far as how low it will be, we are unable to predict. Calamities, such as a real estate crash or further world economic turmoil, may cause the economy to slide down further.
Earlier in 2016, China’s National Bureau of Statistics announced that China’s 2015 GDP growth had declined over the previous year. In other words, the “New Normal” may imply that the decline of China’s economic growth rate has no bottom, while the ceiling will not rise higher than the current level. Perhaps the present economic state is the best that China will see for a long time.
Dr. Cheng Xiaonong was trained as a sociologist at Princeton University. This article is an abridged translation of a Jan. 25, 2016 interview with Radio France International.

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In economic analysis you have estimates and official data. Analysts estimate what they think the official number is going to be. They are successful if the estimate is close to the official target.
With China’s GDP it’s a bit different. The official number (6.9 percent for the third quarter of 2015) is more like an advertisement for the Chinese economy and has little to do with the situation on the ground. You can chose to buy the product, or you don’t 
So sometimes GDP estimates for China are more accurate than the official data. Here are Epoch Times favorite’s for the third quarter of 2015

Lombard Street Research: 1.5 percent annualized 

Rationale: “Net exports subtracted a bigger chunk than first estimated. Quarter on quarter, we reckon growth was just 0.4 percent. Banks are saddled with bad debt, so cutting the lending rate will have a mutedeffect on growth.”
(Lombard Street Research)

Gordon Chang: 1-2 percent annualized

Rationale: “Right now they’ve got an economy which isn’t growing at the 7.0 percent, it’s more like 1 or 2 percent. In Beijing they’re even saying privately 2.2 percent.”

Li Keqiang Index: 3 percent annualized

Rationale: Premier Li probably wishes the 2007 memo from the U.S. state department never got leaked. In it, he said official data was unreliable and rail cargo, electricity consumption, and new loans more accurately describe growth. 
(World Economic’s Li Keqiang Index)

JP Morgan: 5 percent

Rationale: “We estimate every 1 percent slowdown in China takes about 0.5 percent off of global growth. That impact on emerging markets is more severe than on developed markets [around 1 percent],” J.P. Morgan’s head of research Joyce Chang said at a panel discussion at the Council on Foreign Relations on Sep. 16.
Since most of China’s trading partners like Japan and Russia have slowed more than 1 percent in recent quarters, even the five percent start to look questionable. 

Wilbur Ross: 4-5 Percent

Rationale: Billionaire investor Wilbur Ross has investments in China and closely follows what happens on the ground. 
“The Chinese economy clearly is not growing at anything like 7 percent. We have felt for a couple of years that those figures were very, very generous. If you look at physical indicators—electricity consumption, natural gas consumption, oil consumption, cement consumption, steel consumption, telecom consumption, retails sales—if you look at all those indicators, none of them were growing at a rate that was equal to 7 percent and neither were the exports.”
“So we have felt for some time that the real growth is something less than 5 percent, probably nowadays something less than 4 percent.”

China Beige Book: No Change

Rationale: The independent research institutions doesn’t put a number on GDP but notes corporate profits were roughly stable in Q3. 
“Those touting China’s sudden fragility are either exaggerating current problems or have entirely missed the slowdown of the past several years,” the report says. 
 

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Chinese Communist Party’s decision last week to abandon the “one-child policy,” a draconian mandate dating back to 1979, was a necessary pivot in the face of heightening social and demographic challenges.
But the about-face was also economically motivated. Concerns over China’s “old economy” of resource-intensive manufacturing and infrastructure development have long dogged Beijing. China’s official third-quarter GDP readings of 6.9 percent annualized was met with skepticism. Economists suggested that metrics on power consumption, consumer spending, and the central bank’s moves to cut interest rates all pointed to a much deeper slowdown.
It desperately needs a spark to reverse recent economic trends. The elimination of the “one-child policy”, along with lowered GDP growth goals, are two of the biggest changes to surface from a broader policy shift planned for the next five years.
Consumer Spending
Credit Suisse estimated last week that removing the “one-child policy” would introduce 3 to 6 million more newborns each year, starting in 2017.
More importantly, those extra babies would generate around 120 to 240 billion yuan (US$19 to 38 billion) in additional direct consumer spending annually, according to Credit Suisse calculations. The report estimated that it costs 40,000 yuan (US$6,330) per year to raise a baby. These amounts do not include indirect incremental spending on energy or infrastructure development due to increased population.
The figure would boost China’s annual consumer retail spending by 4 to 6 percent. Consumer spending is a major part of a developed economy, and consists of between 70 and 80 percent of the U.S. GDP. In the first half of 2015, consumer spending contributed around 60 percent of China’s GDP.
Market Impact
The news out of China was a boon to New Zealand’s dairy industry on expected greater demand for milk powder, a major export product for New Zealand. The New Zealand dollar gained 1.7 percent over the last two days since Oct. 28.
The baby products industry saw the biggest increases. China Child Care, which manufactures children’s healthcare products, rose 40 percent on the Hong Kong Stock Exchange on Oct. 30. Baby food and formula makers such as Mead Johnson and Danone saw their shares surge. Japanese and Korean makers of children’s products were also big gainers last week. Japanese and other foreign brands enjoy high demand in China as they are perceived to have higher quality than domestic brands.
Among the losers? Condom makers—Okamoto Industries, a leading Japanese rubber product manufacturer, saw its shares drop 10 percent on Oct. 29.
Longer term, the biggest impact of lifting “one-child policy” will be felt in the services, travel, and technology industries. Today’s young people in China are huge consumers of technology services, smartphones, gadgets, and travel.
But some analysts caution that the effect of having more children won’t be immediate. The Washington-based Population Reference Bureau projected that China’s fertility rate would gradually increase to around two children per woman by 2050.
China effectively lifted its “one-child policy” in 2013, allowing couples who themselves were an only child to have two children. But the impact has been gradual. Cost, China’s busy work culture, and the desire to keep small families meant some couples were still reluctant to have more children.

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