Just a few days after the glory, the hidden truth was revealed. The spectacular giant footprint fireworks were computer-generated, the little girl sang in lip-synch, and even the 56 children dressed in different ethnic clothes were all ethnic Han Chinese.
The same is true for China’s economy. Ever since its “reform and opening up” policy was adopted 1978 in the wake of Deng Xiaoping’s proclaimed support for market economy theories, the mainland economy has developed at a record-breaking pace before the eyes of a world increasingly alarmed by China’s rise.
Some reputable scholars have suggested that this growth is likely to continue until 2020. So many people have accepted their views at face value. Let us take a look instead at the real face of China’s economy.
Stock exchanges in crisis
The Shanghai Stock Market index fell dramatically from 6,124 points in October 2007 to 2154 on 8 September 2008, a drop of 64.8 per cent.
About 100 million Chinese shareholders are currently tied up in the market and are paying quite a heavy price. So much so that even the rich have seen their dreams shattered.
The “weatherglass” stock market is experiencing sharp drops, a sign that China’s economy is facing difficulties. Last year for example China listed companies showed a strong rise in profits; this year they are facing either profit surges or heavy deficits. They have become the government’s tool to circle money.
According to government sources, about 67,000 small- and medium-sized enterprises collapsed in the first half of the year, pushing some 20 million people into unemployment. Of course, the actual number could have been worse.
The size of this collapse shows that in the course of rapid economic development some serious problems were neglected and are only now coming to the fore. And there are few doubts that the chain effect will soon hit even large-sized enterprises.
The appreciation of the yuan, the increasing price of raw materials, higher labour costs, lower exports, fewer migrant workers and power shortages are cutting into corporate profits. And the difficulty in earmarking large funds and high-interest loans is driving enterprises to the edge.
The deltas of the Yangtze and Pearl Rivers (respectively near Shanghai and Guangdong) have been the “factories” of the world upon which China founded its initial economic growth. Nowadays they are almost on their way towards bankruptcy as many foreign companies pull out and many Chinese companies go under.
With the US subprime mortgage crisis unfolding and expected to last till 2010, consumer demand is down in Europe and around the world with the net result that China’s exports are going through tough times.
Real estate bubble bursting
China is a socialist state where land is state property. As landowners local governments have sold land to real estate developers at very high prices, allowing them to pay off 80 per cent of the cost through bank loans. Ordinary people have been able to borrow from banks as well in order to purchase their home. This has become common place in China’s real estate market.
With US$ 500 billion in profits from exports, China has bought large parts of US debt. More than half of bank loans, or about 1 billion US, has been invested in joint-ventures with real estate developers. This sparked a real estate gold rush, pushing prices through the roof, five to six times higher than what they were just a few years ago.
The building frenzy that took hold of the construction industry can be seen in the buildings and skyscrapers that propped up everywhere in China.
Real estate developers have come to represent more than half of the people ranked in the “China Rich List”, and have not shied away from using the power of different local governments to seize land and resources from weak communities and peasants.
They have often resorted to violence to divert large amounts of wealth from the population at large into the hands of a few people. Their power is such that more than half of local government revenues depend on the real estate industry.
With demolitions taking place all over China, many people are becoming homeless. For example, in Shi Jiazhuang (Hebei), the local government adopted a policy dubbed “Big changes in three years”.
At the same time low salaries and high housing prices have forced many people to work hard for their entire life just to get a small apartment.
Now the real estate market seems to be a bubble ready to burst. Flipping properties to push up prices is coming to an end as agents are forced into various gimmicks to prop up sales. Still one survey indicates that only a 50 per cent cut in prices might revive the real estate market.
Just like the stock market China’s real estate market is facing an inevitable and steep decline. This in turn is going to negatively impact the banks and thus lead to an economic crisis.
Environment, natural disasters and the Olympics
Against this economic backdrop other major problems must be addressed.
– During 2008 China endured all sorts of natural disasters—from snow storms to the Sichuan earthquake, from hail and heavy rainfalls to floods—and its economy has been damaged. According to government’s estimates, the cost of rebuilding Sichuan alone will add up to a trillion RMB (about US$ 140 billion).
- Decades of fast-paced development have also put severe strains on the environment. The weather is getting warmer and dangerously high levels of pollution are affecting the quality of the air and the country’s rivers.
Although reports about global warming have focused on the melting of the ice-cap in Antarctica, it is likely that the future will have even more critical consequences in store. China will have to pay a very hefty price to clean up its environment and will have to get used to working with other countries.
The Beijing Olympic Games were not only a waste of labour and money but have wrecked China’s economy. According to official figures China invested 300 billion RMB (more than US$ 40 billion) on Olympic infrastructures. The 2008 Games will go down in history as the most expensive in history. By comparison, eight years ago the Sydney Olympics were a net cost to the public of US$ 1.5 billion. The Los Angeles Games cost no more than 500 millions.
Due to tight security, the Games attracted only 400,000 foreign tourists, far below the two million tourists that had been expected. Although all 5-star hotels were fully booked, the occupancy rate in four-star hotels or below was only 30-40 per cent. Similarly, many businesses suffered as a result of the Games; restaurants lost up to a third of their custom. Now the question is what to do with the new Olympic venues.
The looming recession in the United States, stagnation in Europe and negative growth in Japan are tale-tell signs of a coming worldwide economic recession, which might even be worst than that of 1929.
In Mao’s time millions of people died of hunger; today many “die” of bankruptcy.
In the end as an integral part of the world economy China is bound to be sucked into the whirlwind of economic depression.