The Fake Recovery of the Chinese Economy

The expected recovery of the Chinese economy is a “fake one” and this text will proof it. First I will let you know why figures would show a revival of the Chinese economy. Then, I will show you how this will negatively impact the economic long-term future of China. Last but not least I will explain the politics that lead to this destructive short-term thinking.

The Chinese economy is expected to grow up to 8% in 2009

While many Western economies are expected to contract with 2-3%, the Chinese economy is expected to grow with 8%. Well, most of this growth, as I read recently in some economic magazine, comes from a direct and indirect government spending. Estimates are that in case the government did not carry out the stimulus expected growth would be 3%, five percentage points lower. Then the next question would be: how is this stimulus composed? How can its effect be so big?

The effect of the stimulus is big because it is both direct and indirect. Direct by making sure the government spends more by hiring more people, providing more subsidies, spending more on healthcare and education, etc. Indirect spending is more interesting to mention. The Chinese government has forced its own state-owned banks to lend money like crazy. The banks have certain quotas on how much they should lend to companies! Currently banks are knocking on companies’ doors asking them to borrow some. The requirements for getting these loans are so few that the chances of getting the loans paid back are really small. Besides, most companies borrowing the money are state-owned, companies that have previously proven to default on their loans.

Let the next generation deal with it

The next generation will have to deal with two matters. First, it will face the government debt over which interest will need to be paid and which one will need to pay back. Secondly, they will have their money in banks that will not be able to pay them back their deposits. This is simply because the companies that are now borrowing will not be able to pay their loans back. Even if the banks will be bailed out (which has been done before in China), this will only lead to a limit on government spending in areas where it should be used (safety, clean environment) or this will increase government debt. In other words, we will not face the interest rates and government spending limits today, but they will definitely be faced in the future – say 20 years from now.

The political motive behind the huge increase in government spending

The goal of politicians in China is not to think about the long-term growth of their country, but to think about keeping people quiet. With keeping people quiet I mean making sure they do not start protests or go against the Party. This is the whole idea behind keeping this one-party dictatorship alive you see – as long as people are happy they will not bother the government. As long as the Chinese are focused on making money they would not be bothering the government. The Chinese government is keeping the economy going to keep the people happy, but with such short-term thinking a few years down the road problems will only be bigger, with the Communist Party directing its own failure.