Gordon Chang was a bit early when he wrote the book “The Coming Collapse of China” in 2001.

He predicted the collapse of the Chinese economy and the downfall of the communist party within ten years and his prediction is four years overdue.

However, the core arguments he made in the book are more valid than ever as Chang continues to provide us with an uncensored behind-the-scenes view of the Chinese political economy.  

Epoch Times spoke to Chang about a superficially stable China in 2017 and what is causing the real friction under the surface. 

Epoch Times: China managed to stabilize its economy in 2016, will the regime be able to continue in 2017?

Gordon Chang: China looks strong but it’s actually weak. It has passed the point of no return.

They put in an enormous amount of debt, and they did stabilize the economy. The manufacturing sector is a beneficiary; we are starting to see some inflation. But the cost of this is enormous. It’s the old tactics of using debt to generate growth. It shows desperation more than anything.

There are some things that China should do regarding reform in 2017, but they won’t get it done because of the political imperative. This year we have a half a decade event, the party congress in the fall of this year, where they will either announce a new leader or Xi Jinping remains in control. That is a critical one.

I think they will be successful holding the line through the party congress. After that, they are going to fail.

So they are going to try and hold the line. Xi Jinping has relentlessly taken the economics portfolio from Li Keqiang. He gets the credit, but he also gets the blame. He is not going to want to see a major disruptive event between now and the party congress. It should be obvious, but a lot of people take this into account.

I think they will be successful holding the line through the party congress. After that, they are going to fail. They are going to prevent adjustments for as long as they have the ability to do so. Their ability to create jobs, holding the GDP growth close to 7, all of this stuff they are going to try and do.

Even if it was growing at the official rate, China is creating debt 5x faster than incremental GDP. Beijing can grow the economy with ghost cities and high-speed railways to nowhere but that’s not free, it’s not sustainable. 

After the party congress, China is going to go into free fall.

The only thing that can change the Chinese economy is fundamental economic reform. But they are moving in a regressive manner, Beijing is stimulating again. It’s taking China away from a consumption economy, toward the state, away from private companies.

China is not going to have another 2008, it’s going to be a Chinese 1929.

The Chinese dream wants a strong state, and it’s not compatible with market reform. Even if Xi were up for liberalize and change, it would be too little too late. Stimulus is going to increase the underlying imbalances. That’s going to make it more difficult to adjust.

Epoch Times: What is happening beneath the superficial stability?

Mr. Chang: Look at what happened last year, capital outflows were probably higher than 2015. And 2015 was unprecedented, somewhere between $900 billion and a $1 trillion dollars.

The Chinese people see what other people have seen and it doesn’t make sense anymore. They see the economy is not growing. People are concerned about the political direction of the country, and people see the end is not that far away, so they move their money out.

People are also leaving. Young Chinese used to come to America to get an education; then they went back. Now Chinese kids get an education, they try to work for an investment bank, and they try to stay. Things are not as good at home as Beijing maintains.

To stop the capital outflows and maintain stability, they put in draconian capital controls starting in October, November 2016.

They put some real limitations on outbound investment for corporates and multinationals. They can do this, but how much longer? They are disincentivizing people to put money into China because they don’t know they can take it out again. In spite of the controls, they had record outflows. Capital outflows in the second half, when the controls started, were higher than in the first half. 

They are going to continue to smooth things out after the Congress, but they won’t have the ability to continue the game. The whole thing is about confidence, and there is a failure of confidence in China.

Epoch Times: They are also using their foreign exchange reserves to manage the decline of the currency. The International Monetary Fund (IMF) for example says the $3 trillion they have is enough to run the economy.

Gordon Chang: They can just give you any number, and you don’t know whether it’s the right one, just like GDP. You cannot go to the State Administration of Foreign Exchange (SAFE) and look through their books. They can report anything, and you don’t’ know. They have a high incentive to fake that number.

We also know they have a synthetic short position because they are selling derivatives through the state banks. If you look at the estimates of foreign exchange reserves each month, they always outperform the surveys. China always outperforms, it doesn’t take a genius to figure out that the FX number can’t be right. Misreporting their FX reserve declines minimizes the problems, so people keep believing in the currency.

They can report anything, and you don’t’ know. They have a high incentive to fake that number.

So I think they don’t have the $3 trillion. They have done the trick Brazil pulled in 2014 of selling derivatives instead of actual dollars. According to my sources, there’s $500 billion dollars still to be accounted for.

Then there are illiquid investments in the Chinese foreign exchange reserves, around $1 trillion. According to my estimates, you are then down to $1.5 trillion in usable money to defend the currency. The FX reserves aren’t as big and as liquid as Beijing wants them to be.

Epoch Times: So they will have to devalue sooner or later.

Gordon Chang: I don’t think they are going to devalue before the 19th party congress later this year.

Then they are going to devalue, but not as far north of eight [current rate is 6.9 per dollar] as it needs to be. The insufficient devaluation will shake confidence; people think it’s not enough, it has to be more. Eventually, someone is going to figure out that their reserve numbers are wrong. But the one thing they need to defend their currency is foreign currency.

Xi Jinping says the Chinese dream is a strong China. So he is responsible for everything and depreciation never benefits the Chinese consumers. They continue to make stupid decisions. It’s the political system; the political imperative is too strong. It would be too embarrassing to do wholesale reform. He wants to appear strong. They have always tried to prevent natural economic adjustments—by doing that they have made the underlying imbalances bigger.

So in the end, China is not going to have another 2008, it’s going to be a Chinese 1929.

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Everybody knew it but it took a while to become official. 
In the case of overstated Chinese GDP figures, we now got confirmation from the CCP’s mouthpiece Xinhua that they have been made up for a long period of time, at least on the regional level.
This is just short of the National Audit Office admitting GDP numbers are basically made up. Actually, according to a report by China Daily, the National Audit Office did just that as well, but didn’t release the report.  
The Chinese economy clearly is not growing at anything like 7 percent.— Wilbur Ross, WL Ross & Co

“One county in Liaoning reported annual fiscal revenues 127 percent higher than the actual number,” writes China Daily.
Xinhua on on the other hand quoted an official saying: “If the past data had not been inflated, the current growth figures would not show such a precipitous fall.”
According to China Daily local officials also manipulated investment figures and overstated them by at least 20 percent in the case of Heilongjiang province.
They just pretended even unsigned contracts where actual investments, whether real money followed or not.

“The official statistics have deep methodological problems; the departments are under-resourced. But what’s really the key here, is that the GDP number doesn’t really tell you much about growth across the economy,” says Leland Miller of China Beige Book, a research firm which interviews thousands of companies to keep tabs on growth and other metrics.
Well, according to official state media, a lot of that growth across the economy was made up, which is one of the reason why most investors and analysts also don’t believe the headline figure for the whole country. 
“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,” says Gordon Chang, author of “The Coming Collapse of China.”
GDP grew at 6.9 percent in the third quarter according to official figures.
Billionaire investor Wilbur Ross prefers to look at actual production and consumption data, rather than official data as well:
“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 how fast is China’s GDP growing after all? Nobody knows for sure, but here are the six best estimates.
 

Read the full article here

Gordon Chang was a bit ahead of the time when he wrote the book “The Coming Collapse of China” in 2001.

He predicted the collapse of the Chinese economy and the downfall of the communist party within ten years and his prediction is four years overdue.

However, many of his arguments are still accurate today. And with China’s political economy becoming ever more volatile, Epoch Times spoke to Chang about China’s past and increasingly uncertain future. 

We are going to see leaderless revolution in China.

EPOCH TIMES: What about the economic reform that’s being talked about?

Mr. Chang: The only thing that possibly could work would be fundamental economic reform but they can’t do that in Beijing because the political consensus is against it. Xi Jinping, his idea of change is actually regressive, going back to the semi-command Maoist-type model.

When their last tools fail the economy will go into freefall and I think it’ll take the political system with it.

EPOCH TIMES: How does that work in practice?

Mr. Chang: The Chinese people, they may not be revolutionary in intent. Once they start taking to the streets the situation will just get out of control. People in China, I think, do not believe that a one-party system is appropriate for China’s modernizing society.

They may not oppose the Communist Party because they’re intimidated, because of the repressive mechanism, very coercive state. But when they see hope of change, I think things could change very very quickly.

So I think when the Communist Party starts to show signs of failure, people will actually demonstrate and those demonstrations, whether they have revolutionary intent or not, I think will just go beyond control.

EPOCH TIMES: Similar to what happened in Eastern Europe at the end of the 1980s?

Mr. Chang: If you go back to 1988, nobody—maybe one person—thought the Soviet system would fail. Then all of a sudden you have the problems in Hungary which radiated out to all of the satellites in Eastern Europe, you had the fall of the Berlin Wall. And still American policymakers were saying, “Well that’s Eastern Europe, but the Soviet system can’t fail.”

Indeed many Soviet citizens themselves couldn’t see how their government was going to fall. But these things are almost leaderless in the sense that you don’t have leaders in these revolutions, it’s not organized.

You know, Václav Havel [the former President of Czechoslovakia] said this, “Nobody can understand a society because what’s important is not the buildings, it’s not the repression from the state, but it’s really what is in people’s minds.”

The CCP has become one of the most corrupt organizations on Earth so it can’t survive.

People in Eastern Europe wanted something different. They may not have been able to articulate it, they may not have always been protesting, but they wanted the communist system out of the way.

I think it’s the really same way in China. Where you have people just sick and fed up, especially when the system is no longer delivering prosperity. When you have real serious economic problems, I think people are going to say, “I’ve had enough.”

Remember, the Communist Party’s primary basis of legitimacy has been that continual delivery of prosperity, that’s been from the days of Deng Xiaoping when he started to move toward a looser economic model and without prosperity the only remaining basis of legitimacy is nationalism. That’s probably not enough to keep the Communist Party in power and that’s why they’re so insecure.

Gordon G. Chang author of “The Coming Collapse of China,” in New York on Sept. 30, 2015. (Benjamin Chasteen/Epoch Times)

EPOCH TIMES: Why did you write the book?

Mr. Chang: One of the reasons I wrote the book is that I was practicing law in Shanghai. My clients would cruise into town, they’d stay at the Grand Hyatt that was in Pudong which is really one of the most spectacular hotels in the world and they would say “China’s not communist anymore.”

I said the same things when I arrived in China, but if you just sort of go to China for 3-4 days well of course that’s the view you’re going to have. I felt the system just wasn’t really going to work and that’s why I wrote the book, because I felt it was unsustainable and eventually it would fall apart.

We are seeing the first signs of a crisis and I don’t think the Communist Party has the ability to get out of this particular jam and we are going to see this as a final crisis for communism in China. Chinese people will figure out something, but it won’t be the Communist Party in control.

EPOCH TIMES: What about some other players who oppose the Communist Party, like Falun Gong practitioners?

Mr. Chang: These groups are really interesting. You talk to Falun Gong practitioners—and I’m not one—and you get a sense that they believe something, they really believe it and they believe it to the point that some of them, many of them, have given up their lives for their beliefs. You’re not going to find Communist Party members who feel that way.

That sense that the part had in the 1930’s and the 1940’s; it’s all gone. It’s become one of the most corrupt organizations on Earth so it can’t survive.

 

It’s big, it’s rotting, it might, because of inertia, take a long time to fail, and it has taken longer than I thought.

Nonetheless, it doesn’t have that sense and you see this not only among Falun Gong practitioners, but you see it among Tibetans and Uighurs. You see it among house Christians. People who are willing to give their lives because they believe in something.

All it takes is just for one person to change his mind.

The Communist Party, it has made enemies of all these groups. These groups didn’t start out by saying, “I want to bring down the Communist Party”, but the Party has forced them into opposition.

Practitioners of the spiritual discipline Falun Gong call for an end to the persecution of the practice in China, in front of the Waldorf Astoria in New York where Chinese Communist Party leader Xi Jinping is staying, on Sept. on Sept. 27, 2015. (Larry Dye/Epoch Times)

Practitioners of the spiritual discipline Falun Gong call for an end to the persecution of the practice in China, in front of the Waldorf Astoria in New York where Chinese Communist Party leader Xi Jinping is staying, on Sept. on Sept. 27, 2015. (Larry Dye/Epoch Times)

The problem for the Party right now is that they can prevail over Tibetans or whatever but it can’t prevail over all of these groups at the same time and at the same time that the economy is falling apart and people no longer believe in the communist system.

We know how fragile it is because the Communist Party has become so much more coercive, so much more oppressive and that means so much more insecure. They wouldn’t be doing this if they felt that they had a long lease on power, but they know they don’t. That’s the important point.

EPOCH TIMES: They are losing the battle for the minds of the people.

Mr. Chang: Absolutely. This is a hearts and minds struggle. Although you have small groups of dissidents who don’t look like they can bring down the state, they can. We have seen this in so many different place and it’s not just Eastern Europe and the Soviet Union.

We saw this in the Philippines, we saw this in Peru, we saw this in so many different countries where people, when they get to the streets, they bring down governments. All it takes is just for one person to change his mind.

The best example might be in the Philippines. You had one person ten years ago who sent out a text: “Wear black, go 2 EDSA [People Power Revolution]”. The crowd just grew and grew and eventually President Estrada had to resign in the middle of his term because the crowds in the street were too large.

Chinese people will figure out something, but it won’t be the Communist Party in control.

Nobody organized that demonstration. The military, the Philippine military were judging how big the crowds were and eventually the crowds got so big and they looked like they were going to stay there for so long that the military just switched sides.

The political establishment in Manila just switched sides. Nobody organized this demonstration and I think that’s the model for China itself.

We are going to see leaderless revolutions in China. People say, “How can you have this? They’re dissidents, they’re not organized, they’re not funded.”

Political scientists don’t get it. That’s really the problem for the Communist Party. Yes, they have 80 million people in the Party but that’s not really a signal of their strength; they’ve got a weak Party right now. Very few are willing to give their lives for communism in China.

It’s just not there anymore. It’s a rotting, corrupt organization that will melt away like so many other Communist states have melted away.

You have a modern people who want something better, who are not as afraid of their government. You put that all together with economic failure and that’s a very combustible view for the Communist Party.

Gordon G. Chang is the author of “The Coming Collapse of China.” Chang holds an undergraduate degree from Cornell University and also completed his law degree there. Before becoming a writer Chang practiced law in the United States and China. 

This interview has been edited for brevity and clarity.

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Original Article click here

NEW YORK—Gordon Chang was a bit ahead of the time when he wrote the book “The Coming Collapse of China” in 2001.

He predicted the collapse of the Chinese economy and the downfall of the Communist Party within ten years. As of 2015 his prediction is four years overdue.

However, many of his arguments are still accurate today. And with China’s political economy becoming ever more volatile Epoch Times spoke to Chang about China’s past and increasingly uncertain future. 

EPOCH TIMES: You wrote your book “The Coming Collapse of China” in 2001. Where are we now?

Gordon Chang: In 2001, I said it would take ten years for the Communist Party to fail. So I’m about four years out of time. But what we’re seeing right now really are the early stages of the collapse not only of the economy but also the political system.

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.

The most important thing: Money is coming out of the country at unprecedented rates. Bloomberg, which tracks this stuff, talked about $144 billion coming out of China in August. Goldman Sachs said, no, it was $178 Billion. That’s a real sign of the way things are going in China.

The problem for China’s leaders right now is that they cannot stop the descent of their economy. They can maybe slow the pace of decline, but they can’t change direction because everything that they’ve been using up to now—monetary stimulus, fiscal stimulus, the stock market boom, devaluations—all of these tactics have failed.

It’s not inconceivable they lose their position as No. 2 to Japan. Japan doesn’t have to grow, all it has to do is stay the same. I think China’s going to shrink.

— Gordon Chang

EPOCH TIMES: What is the root of the economic problem?

Mr. Chang: Everyone says, “Oh, it’s got the world’s biggest pile of foreign exchange reserves, how could it have problems?” Well yes, China is not going to have a foreign debt problem. It’s not going to be an Argentina.

But when you go back and look at the history of financial crises, the worst financial crises are not external, debt-driven crises, they’re internal crises, and that’s what China has.

They have a lot of debt, perhaps as much as 350 percent of GDP—when GDP is properly stated and when all debt is counted.

McKinsey said at the end of June 2014 that the debt-to-GDP ratio was 282 percent. Obviously it’s gotten worse since then. I think that they were undercounting it then. Right now it’s extremely serious, especially for a developing country like China.

EPOCH TIMES: Can the regime use policy to remedy the problem?

Mr. Chang: Since November you’ve had five reductions in benchmark interest rates, four reductions in reserve requirement ratios, no appreciable effect.

Fiscal stimulus—if they built another ghost city or another subway line in Beijing, well okay, you do create some GDP, but you create debt. Because of the malinvestment and low efficiency it’s just not a solution for them.

They had the stock market boom, which they talked up recklessly. This was a way of saving themselves, well, that’s a bust right now.

The state really can’t create growth on a sustainable basis.

— Gordon Chang

And the devaluation in August, which is still puzzling. Who knows what they were trying to do? Obviously it caused them real problems because it shook confidence; not only inside China but around the world as well.

So you look at all the things they’ve been trying to do and in the past they’ve created growth with these techniques. They can’t do it now and that really means they are in jeopardy; you’re going to have more and more protests.

EPOCH TIMES: You can only improve the situation by giving the people more freedom.

Mr. Chang: How many times have you heard, “The Communist Party lifted 400 million, 500 million people out of poverty?”

No they didn’t. Deng Xiaoping loosened up a bit and the Chinese people ran ahead. Deng Xiaoping realized they had to change agriculture a little bit, so they went to the Household Responsibility System, you know, where families could tend plots.

But under central government rules these plots could not be just run by one family. Families decided they didn’t like that idea, they wanted their own plots, so local officials just ignored that, they created this boom in agriculture. Not because of Deng Xiaoping, but because people ignored Deng’s rules.

When their last tools fail, they’ll go into freefall. And I think it’ll take the political system with it.

— Gordon Chang

Very plucky entrepreneurs, some ex-government officials, some people who were beggars, decided they were going to go out and be entrepreneurs. They created this wealth. It was the Communist Party that was holding them back. The state really can’t create growth on a sustainable basis.

You need to have a sustainable model and under the Communist Party’s desire to control too much, they end up with an unsustainable economy.

Gordon G. Chang, author of “The Coming Collapse of China,” in New York on Sept. 30, 2015. (Benjamin Chasteen/Epoch Times)

EPOCH TIMES: You also wrote in your book in 2001 that people said that China is going to be the world’s largest economy in 2010. It’s not; it’s going to be the largest economy by 2020. One problem is that China is just not innovating. They don’t have the capability to innovate and compete on a global market.

Mr. Chang: To avoid the middle-income trap, to get beyond cheap manufacturing as a basis for an economy, they need to have innovation. It’s not like the Chinese people are dullards, of course they’re not. They can be as innovative as anybody else in the world, but they can’t in the system in which they operate.

Because of control of education, control of everything, it inevitably affects the ability of entrepreneurs to innovate.

When you have real serious economic problems, I think people are going to say, ‘I’ve had enough.’

— Gordon Chang

There are some real restrictions, which are important. For instance, since the beginning of July, in order to support the stock market, Beijing has eliminated IPOs. I know Premier Li Keqiang talks about his Internet-plus economy, but you can’t have that economy if these companies can’t get cash.

By closing off IPOs it means that they are choking off the ability of really innovative small businesses to get bigger. That’s the history of Silicon Valley in California, where you take so many businesses that are now iconic; they started in a garage. Most famously Apple, but also Hewlett-Packard.

These are garage businesses that became multi-nationals because they were able to operate in California’s free-flowing environment, where they could get money, they could get expertise, they could get whatever they wanted, and they grew. But you can’t do that in China right now because of the restrictions imposed for political reason by the state.

Until they change that system, China is not going to have that innovative developed economy anyone hopes to see.

EPOCH TIMES: Tell us about risk taking, you lived in China for a long time.

Mr. Chang: They have a bankruptcy law but you can’t fail because you’re a state-owned enterprise. You can’t get capital or it’s very hard to get capital if you’re a smaller, private business.

China has a lot of very good businesses. Venture capitalists go there. Their problem is that they just can’t grow. They don’t have that same environment you have in Silicon Valley, where people can try to create a business, fail, dust themselves off, and try again.

The greatest story is Disney. Walt Disney failed so many times. All of these people who we think of as iconic, most of them have failed. Unfortunately that’s not the system in China.

Money is coming out of the country at unprecedented rates.

— Gordon Chang

It’s much too rigid, much too state-dominated. Unfortunately state enterprises are becoming so much more powerful politically, they’re really able to prevent the change that is necessary in China today, so you don’t have that culture that is in Silicon Valley.

They would love to replicate it, they can certainly build the buildings, but they can’t replicate the culture, because the culture is really one that thrives in an open and free and liberalizing society. That’s not China on any of those counts.

EPOCH TIMES: Many people who made a lot of money don’t want the system to change.

Mr. Chang: In the 2008 downturn, China decided it was going to reject the whole concept of a recession so what they did was create the world’s biggest stimulus program. Five years from 2009, they had added an amount of credit that was equal to the entire U.S. banking system. Even though at the end of 2008 the Chinese economy was not even a third the size of America’s.

So yes, they created growth, but they also put too much money into their economy and essentially what they did was create all of these asset bubbles, which they cannot unwind. That has made state enterprises enormously powerful.

They were able to capture all that money that was lent by state banks. They were able to get all that stimulus out of Beijing so they became extremely politically powerful and they’ve been to use that power in the last couple years to essentially shut out foreign enterprises as we’ve seen and also make it for Chinese domestic companies.

This is a political problem because the forces that could change China for the better, they don’t have the political power to do that. In China’s very political system, that’s what counts.

EPOCH TIMES: The country needs the entrepreneurial spirit of its people to become the largest economy, which is should be, given its size.

Mr. Chang: Absolutely, and right now China’s economy, they say it’s a $10 trillion-plus economy, we really … don’t know how big the Chinese economy is. We know that the numbers especially recently, overstate economic performance.

It’s probably not the $10 trillion Chinese leaders talk about. There’s so many indications that it is growing at a far slower pace and so therefore China might be an $8 trillion, might be a $9 trillion economy, we really don’t know, but it’s certainly not on a path to overtake the United States.

It’s not inconceivable they lose their position as number 2 to Japan. Japan doesn’t have to grow, all it has to do is stay the same. I think China’s going to shrink.

Gordon G. Chang is the author of “The Coming Collapse of China.” Chang holds an undergraduate degree from Cornell University and completed his law degree at Cornell Law School. Before becoming a writer Chang practiced law in the United States and China. 

The interview has been edited for brevity and clarity.

Read the full article here

Original Article click here