World leaders have gathered in Brisbane, Australia, for the annual G20 Summit. (Andrew Taylor/G20 Australia via Getty Images)World leaders have gathered in Brisbane, Australia, for the annual G20 Summit. (Andrew Taylor/G20 Australia via Getty Images)

News Analysis

Inclusive growth, green energy, more trade, and a move away from financial crisis management to long-term planning—those are the official goals of the 2016 G-20 meeting in Hangzhou, China.

And wouldn’t it be great if the leaders of the world’s biggest economies could just flip a switch when they meet Sept. 4–5, forget about the huge economic issues, and focus on a prosperous future?

“China’s leadership steered the debate to facilitate the G-20 to move from short-term financial crisis management to a long-term development perspective,” U.N. Secretary-General Ban Ki-moon told Chinese reporters in New York on Aug. 26, according to state-run news outlet Xinhua.

But reality doesn’t work like that and huge frictions already lie beneath the surface, especially concerning the host. Aside from a very messy geopolitical situation in the South China Sea, the Middle Kingdom faces an economic crisis at home.

Neither the West nor China knows how to deal with China’s overcapacity and debt problems without ruining world trade and globalization altogether, let alone promoting inclusive growth and green energy.

“China is angry with almost everyone at the moment,” a Beijing-based Western diplomat told The Fiscal Times. “It’s a minefield for China.”

Global Effect

Despite China’s relatively closed financial system, the economic growth of many countries, like Brazil and Australia, depends on China’s huge consumption of commodities. Other countries, like the United States, are not vitally dependent on Chinese inflows of capital but have gotten used to trading Treasury bonds and New York real estate for cheap Chinese goods.

Ideally, the West would encourage China in its official quest to reform and rebalance its economy from manufacturing exports and investment in infrastructure to a more service- and consumption-driven economy.

The United States’ and most of Europe’s trade deficit with China would be reduced. The Chinese consumer would have more income to consume at home, importing Western goods and services instead of commodities.

There is no world after the tomorrow where China devalues by 20 percent.

— Hugh Hendry, principal portfolio manager, Eclectica Asset Management

“The necessary structural reforms would make it the largest consumer market in the world. Every other economy would benefit,” independent economist Andy Xie wrote in the South China Morning Post.

Chinese leaders and state media have repeatedly stressed they are behind this goal. “What is called for is not temporary fixes: My government has resisted the temptations of quantitative easing and competitive currency devaluation. Instead, we choose structural reform,” Xinhua quoted Premier Li Keqiang, who said the country has no Plan B.

Regime leader Xi Jinping again stressed the importance of reform in a meeting of the Central Leading Group for Deepening Overall Reform. “The country should focus more on economic system reforms and improve fundamental mechanisms that support these overhauls,” Xinhua wrote about a statement released by the group.

However, China has not entirely followed through with the reforms, which will cause short-term turmoil, and local governments are not prepared to handle worker unrest. Up to 6 million people will lose their jobs because of the regime’s rebalancing program, and the official unemployment rate could reach 12.9 percent, according to a report by the research firm Fathom Consulting.

For example, Hebei Province was supposed to close down 18.4 million tons of steel-producing capacity in 2016. By the end of July, it had only closed down 1.9 million tons, according to Goldman Sachs.

(Goldman Sachs)

Hebei province was supposed to close down 18.4 million tons of annual steel-production capacity and only managed to close down 1.9 million tons by the end of July. (Goldman Sachs)

The economies of Australia, Brazil, Russia, and South Africa—all major commodity exporters—are slowing because Chinese imports have collapsed, falling 14.2 percent in 2015 alone, according to the World Trade Organization. In 2015, world merchandise imports crashed 12.4 percent, while world merchandise exports crashed 13.5 percent.

Australian exports and imports (World Trade Organization)

Australian exports and imports. (World Trade Organization)

This collapse in world trade happened before China even started to implement its goals of reducing overcapacity, liberalizing the capital account, and floating its currency.

Instead, it has been buying time by pushing credit in the economy and spending it on infrastructure investment through state-owned companies and local governments, while private companies have thrown in the towel.

(Morgan Stanley)

(Morgan Stanley)

Debt Problem

China has also told banks not to push delinquent companies into default but instead to make their loans evergreen or swap debt for equity.

The real question the West and China should be asking is how much pain they can endure in the short term to reach the Chinese reform goals and achieve a rebalancing toward a consumer economy.

“To avoid a financial crisis that would be bad for China and the world, the government needs to tighten budget constraints, allow some firms to go bankrupt, recognize the losses in the financial system, and recapitalize banks as needed. … History shows it makes more sense to help the affected workers and communities rather than to try to keep alive firms that have no prospect of succeeding,” the Brookings Institution stated in a paper on the subject.

However, the proposed remedies, which in the long run would be good for China and the world, cannot happen without upsetting the global financial system in the short term.

Billionaire investor Jim Rogers pinpointed the main issue in an interview with Real Vision TV: “I would certainly like to see more market forces everywhere, including in China. If that happens, you’ll probably see more fluctuations in the value of the currency.”

What sounds innocent, however, will be even more detrimental to world trade and the global financial system. If China wants to realize the losses it accumulated through 15 years of capital misallocation, it will have to recapitalize the banks to the tune of $3 trillion.

It’s impossible to do this without heavy intervention from the central bank of the kind Li Keqiang wanted to avoid. On the other side, Chinese savers will try to move even more money abroad to protect the purchasing power of their currency.

In 2015 alone, China lost $676 billion in capital outflows, mostly because residents and companies wanted to diversify their savings, the majority of which are tied up in the Chinese banking system.

If China were to restructure corporate debt and recapitalize banks on a massive scale, the currency would devalue by at least 20 percent, according to most experts.

Trade Collapse

Because China is such a large player, exporting and importing $4 trillion of goods and services in 2015, a 20 percent devaluation of the Chinese currency would destroy the current pricing mechanism for importers and exporters across the world—a mutually assured destruction scenario.

“The world is over. The euro breaks up; there’s just no euro in that scenario. Everything hits the wall. There is no world after the tomorrow where China devalues by 20 percent. Their share of world trade has never been higher. … You would destroy global manufacturing,” Hugh Hendry, principal portfolio manager at Eclectica Asset Management, told Real Vision TV. 

Global trade for the developed economies is already in recession (World Trade Organization)

Global trade for the developed economies is already in recession. (World Trade Organization)

For China itself, a net importer of food supplies, a devaluation would make necessities even more expensive for the vast majority of the population, adding a layer of social unrest on top of the unemployment pressures.

So China is damned if they do and damned if they don’t. Even the West won’t favor a quick and painful devaluation scenario and isn’t in the best shape to offer many alternatives.

The other option, possibly discussed behind closed doors at the G-20, is a Japan scenario. China won’t realize bad debts, will keep zombie companies alive, and will prevent money from moving abroad, defaulting on its ambitious reform agenda.

“In lieu of a quick adjustment, a ‘gradual adjustment approach’ would leave us with the outcome of an extended period of excess capacity, disinflationary pressures, and declining nominal growth and returns in the economy,” investment bank Morgan Stanley stated in a note.  

China, the West, and Japan share the same problem of excess debt and no expedient way to get rid of it. By not naming the real issues at hand and choosing feel-good topics instead, the G-20 has already admitted defeat in finding a solution to the problem.  

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A billboard for the upcoming G20 Hangzhou Summit is seen at the airport in Hangzhou on May 21, 2016. (Fred Dufour/AFP/Getty Images)A billboard for the upcoming G20 Hangzhou Summit is seen at the airport in Hangzhou on May 21, 2016. (Fred Dufour/AFP/Getty Images)

With China’s being the host for the G-20 for the first time since the summit was first held in 2008, the regime has been pulling out all the stops to roll out the red carpet for dignitaries coming from around the world. And local citizens have been paying the price.

The G-20 will be held on Sept. 4 and 5 in Hangzhou, the capital and largest city in eastern China’s Zhejiang Province, and authorities have imposed “martial law-like” conditions.

“Here it is like martial law in Hangzhou. Helicopters fly over the roof every five minutes. Tanks and armored vehicles are seen outside a conference center,” said Mr. Fan, a resident of the city, in an interview with the New York-based New Tang Dynasty TV on Aug. 19. “There is like a check post every 50 meters and you need to show your ID, and people from out of town need to have a temporary document that permits them to stay.”  

The G-20, or Group of Twenty, is a financial forum for 19 countries and the European Union. This year, U.S. President Barack Obama will be attending the summit, marking his third visit to China as president.

Mr. Fan added, “Many hotels are closed for business because they have been taken over by police and the special police.”

Nearly two months ago, local police officers saw an upgrade in their firepower. Chinese news portal Sohu reported that in the Xiaoshan District in Hangzhou, police were handed new military rifles, semi-automatic crossbows, and anti-drone rifles. Photos of tanks and armored vehicles in the city have been appearing on China’s social media in recent days.

This is not the first time that the Chinese authorities have adopted draconian measures in preparation for international events.

The most well-known case was the Summer Olympics in Beijing in 2008. Some locals felt the measures were unbearable. Companies encouraged employees to leave the city, and citizens were made to sign documents promising that they would behave. Now, citizens in Hangzhou are feeling the crunch of the security measures.

In July, China’s State Council, the highest administrative body in the country, issued a directive that businesses and organizations in all districts in Hangzhou would observe seven nonworking off-days beginning on Sept. 1. In addition, educational institutes, from colleges to preschool, also saw their opening day pushed back to Sept. 8.

For people who might be interested in booking a sightseeing tour during the summit, China’s tourism bureau similarly has imposed a restriction—Hangzhou will not welcome any tourism groups beginning on Aug. 28, and the ban will not be lifted until Sept. 7, according to state-run Xinhua.   

Several companies, including a hardware store in China’s southern city of Huizhou and a seller on a Chinese e-commerce website (www.qjvip.cn), have posted notices on their websites asking potential customers in Hangzhou and nearby cities to adjust their purchasing plans, since pickup and delivery would be halted from Aug. 24 to Sept. 6, as truck service was completely suspended.

Chinese authorities apparently had no problem sacrificing a little GDP when it came to the summit’s security. According to a business website of the Henan provincial government, textile factories in 11 cities in Zhejiang, including Hangzhou, have been asked to suspend their production from Aug. 26 to Sept. 6, even though textiles are the second-largest industry in Zhejiang. The textile factories have also been known for both air and water pollution.

The city has undergone major renovations. According to People’s Net, the online version of the state-run People’s Daily, over 2,334 roads have been flattened and paved, over 5,600 outdoor billboards have been removed, over 10 million square meters of illegal buildings have been torn down, and over 9 million square meters of old neighborhoods and factories have been renovated.

Authorities have encouraged locals to go elsewhere, according to Radio Free Asia. Local tourism companies have offered locals cheap package deals, and 55 tourists sites in China have offered Hangzhou residents free admission from Sept. 1 to Sept. 7.

People move through a security check at the West Lake scenic spot in Hangzhou, China, on Aug. 20, 2016. (STR/AFP/Getty Images)

In addition, local authorities have reportedly offered a travel allowance of several thousand yuan (1,000 yuan equals $150)  to residents living near the Hangzhou Olympic and International Expo Center, where the summit will be held,  and near Xiaoshan International Airport, the principal international airport serving Hangzhou.

As with every international event in China, Chinese authorities have enforced a harsh crackdown on petitioners—people who might take the slim chance that their grievances might be covered by media, especially foreign media.

According to Weiquanwang.org, a Chinese human rights website, Ye Xueqing, a women’s rights activist in Yiwu, a city in Zhejiang Province, was placed under close surveillance after police showed up unexpectedly at her home on Aug. 12.

A petitioner from the city of Wuxi, Chen Aibin, who was once sentenced for rescuing petitioners from a black jail (an extralegal facility used to detain individuals without trial), was fined 200 yuan (about $30) and placed in detention for 10 days by the local security bureau for leaving his residence on Aug. 23.

Practitioners of Falun Gong, also known as Falun Dafa, an ancient spiritual practice with moral teachings and slow, meditative exercises, which has been persecuted since 1999, were also targeted by security officials in Hangzhou.

According to Minghui.org, a clearinghouse for reports about the persecution of Falun Gong, state security officials from Hangzhou have, since as early as May, repeatedly showed up at homes of practitioners and told them to stay home during the summit. As of Aug. 20, at least one practitioner has been thrown in a detention center in Hangzhou, while several others are suspected to have been put into brainwashing centers.

For those who manage to stay in Hangzhou during the summit, the local authorities have issued a notice, telling people to behave in a civilized manner, according to the state-run Hangzhou Daily. The notice came in eight phrases, including “being all smiles meeting people” and “being confident and calm in words and action.”  

“These phrases are simple and concise, and they are about some of the most simple things we do everyday. Everyone can do it,” said Xu Lianchong, a community Party secretary in Hangzhou.

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China's Minister of Finance Lou Jiwei arrives for a press conference held at the close of the G20 Finance Ministers and Central Bank Governors meeting in Chengdu on July 24, 2016. (Ng Han Guan-Pool/Getty Images)China's Minister of Finance Lou Jiwei arrives for a press conference held at the close of the G20 Finance Ministers and Central Bank Governors meeting in Chengdu on July 24, 2016. (Ng Han Guan-Pool/Getty Images)

A minor official from the coastal Chinese province of Zhejiang recently ran into trouble for criticizing the Chinese authorities for what he saw as excessive and unnecessary preparations for the upcoming G20 meeting.

“Hangzhou, Shame on You,” Guo Enming wrote to his WeChat account on July 10, proclaiming his displeasure with what authorities have done to his city in the name of security.

Guo revealed that the budget for the G20 preparations stood at 160 billion yuan (about $24 billion), or about 70 percent of the city’s income in 2015. He added that Hangzhou residents staying near the G20 venue were being paid 10,000 yuan (about $1,500) to go on a holiday for the duration of the meeting, while businesses and schools might be closed.

“You talk about image — but if the image is not true and loses its natural qualities, is it still meaningful?” he asked. “You talk about security. So are the citizens and businesses in the vicinity all terrorist suspects?”

Some classrooms in nearby schools had even been outfitted with surveillance cameras, he said. “Has this got nothing to do with the G20?”

The G20, or Group of Twenty, is an informal financial forum of 19 countries and the European Union. This year the meeting will be held on Sept. 4 and Sept. 5 in Hangzhou, the capital of Zhejiang.

“A pure innocent girl is being transformed into a coquettish whore,” he declared. “Without rhyme or reason, a vibrant, bustling metropolis has been made into an empty city.”

The article soon garnered 60,000 views after friends of Guo began circulating it online. The authorities took notice, too.

Ten days after the article was published, public security officers arrested him for “violating public order,” and sentenced him to 10 days in administrative detention, according to Xinhua.

On July 21, Guo was charged with “disorderly conduct,” transferred to criminal detention, and removed from his official post as deputy director of a subdistrict in Zhejiang’s Taizhou City. According to Radio France International, his punishment was ramped up on the orders of Zhejiang Party Secretary Xia Baolong.

In an interview with Radio Free Asia, Zhejiang internet activist Wu Bin said that he himself could technically be detained by the police for his past writings on Sina Weibo, a popular Chinese microblogging service.

Guo Enming’s article is “within the scope of free speech, so he hasn’t violated any laws and shouldn’t be receiving any punishment,” Wu said. “This seems very absurd from an international perspective.”

Chinese internet users on Sina Weibo echoed Wu Bin’s view.

“Is this a literary inquisition?” wrote “TUCSON-C” from Jiangxi, referencing the persecution of intellectuals in imperial China.

“[Guo] only mentioned some phenomenon. The reality is much worse than what he criticized. The Chinese regime has many times wasted manpower and resources, and will continue to do so,” wrote “Zhu Zhu Wen Qiang” from Beijing. That post was also soon deleted.

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