China’s Economic Recovery Propaganda and the Latent Crises
China has recently declared that its economy is once more on the path to recovery after dealing with the shocks of the Covid-19 pandemic. However, with the Chinese government being known for its want to propagate false information and conceal the truth, one must critically analyse all that it says. Throughout much of its recent history, China has projected itself as a strong country and sought to cover-up any and all of its flaws. From military actions, to epidemic disasters, China’s government has concealed the true scenario within China as well as its own true motives. In this context, can one truly believe all that the government says about its supposed economic recovery? One would think not.
While the opening-up of businesses and industries within China after the Covid-19 crisis may symbolize a step towards economic stability, one must also take note that China’s economy had already shown signs of economic decline before the pandemic set in. As of 2019, China’s economic growth had already begun a steady decline, falling to its lowest in 27 years, a mere 6 percent by the end of the 3rd quarter of last year. Predictions would show at the time that it could drop further, perhaps even below the annualized 5 percent, according to an economist at the Chinese Academy of Social Sciences. It must therefore be understood that the economic crisis which China may soon have to face has been long in the making and the coronavirus pandemic merely added to the problems. A significant debt crisis, possibility of massive capital outflows and depleting reserves are only a few of the issues its economy will face. Yet, China’s government still chooses to project an image of growth and recovery to the rest of world.
Reports questioning the accuracy of data released by the Chinese government have been in circulation for a long time. China’s actual GDP and GDP growth projections are in fact not all that it seems. The country’s national accounts and statistics are based on the cumulative data collected by local governments. It is common knowledge that these local governments are rewarded for meeting growth and investment targets and therefore have an incentive to manipulate their data. According to reports, a few of China’s provinces have skewed local statistics by nearly 20 percent a few years ago. If such manipulations have occurred on a regular basis, one can be sure that it has had serious consequences on the calculations of the national data. And while one could pin the blame of this on local governments, it is also to be noted that the government in Beijing as well, has always had an incentive to project greater growth and larger economic figures. By only projecting the figures that it approves off, the government has been able to retain or even increase investment in the country. This has allowed for a certain discrepancy between the underlying economic activity and GDP figures, making it increasingly evident that the official figures released by China cannot be trusted.
With that being said, there is a high possibility that the Chinese economy is teetering on the edge of freefall decline. While the trade war with the US had already inflicted damage, the Covid-19 crisis has caused further problems. The shuttering of Chinese industries and flight of capital has dealt a devastating blow to China’s already floundering economy. The country’s National Bureau of Statistics reported a fall in the country’s GDP by 6.8 percent in April, a contraction the likes of which China has not seen since 1992. Additionally, disruptions in global as well as regional supply chains has meant that the world’s largest exporter has had to suffer on the trade front as well. However, with lockdown measures ending in China, the government has announced that the country is set to regain a modest growth rate in the coming months. Nonetheless, it would seem that these statements merely attempt to cover up the deep-seated problems within China’s economy, which are plentiful.
The biggest crisis that the Chinese government has to now face is that of capital flight. Along with international companies shuttering business and departing from the country, many local investors and businesses have also seemingly lost faith in the economy. Many have thus attempted to circumvent government restrictions and invest their capital abroad. Through the use of cryptocurrencies, underground banking and other such mechanisms, many are currently moving their money out of the country in millions. Therefore, while the government is attempting to overshadow it by stories of “economic recovery”, it would seem like China may soon have a massive economic crisis on its hands. If the Covid-19 crisis had not already spelt trouble for its economy, the recent political turmoil in Hong Kong has done so. Once a major financial capital, Hong Kong is now being financially damaged by China’s new national security bill. The taxes levied under the new bill as well as the retaliation promised by the US and others, has stoked significant concerns. This has not only seen a large number of companies depart from Hong Kong but also its local stocks plunge by 6.9 percent. With the Hong Kong crisis still unfolding, it is possible that the coming months will see massive capital flight from region.
In retaliation though, China has sought to crack down heavily on any individual attempting to move big sums of money out of the country. It would seem that the government has learnt from past experiences of the damages that massive capital outflows can deal to its economy. In 2015, when similar fears of capital flight occurred, the government was forced to spend nearly $1 trillion of its reserves. However, with the current state of affairs, it is highly unlikely that the government will be able to spend as much on bolstering its economy as it did in 2015, not to mention that it requires a massive stimulus in combatting the damages left behind by the pandemic. Not only has it therefore put a cap on the amount of money allowed to leave the country but also cracked down severely on illegal mechanisms which allow for the same. And while it cracks down on its citizens on the one hand, it continues in its attempts to lure fleeing investors with promises of “economic recovery” on the other. The rhetoric that the Chinese government spouts must therefore be viewed through a critical lens and seen as a mere tool through which they can retain and reassure investors.
Besides the rhetoric, the government has also cracked down heavily on the outflow of capital from the country. In doing so, the government has introduced new rules as of last year which allow individuals to withdraw a maximum of the equivalent of $15,000 and carry transactions up to only $50,000 abroad in a year. In enforcing this rule, the government bars any individual who attempts to exceed the limit for up to two years from making any withdrawals. Additionally, the government has not only cracked down on individuals but also on organizations who facilitate such withdrawals. Last year, the State Administration of Foreign Exchange fined the Bank of China $6,000 and Chinabank Payments $4.2 million for allowing withdrawals and transactions of $50,000 and beyond. In the governments urge to crack down on withdrawals, it has also made it mandatory for Chinese citizens to have a permit issued by a bank if they wish to travel abroad with an excess of 20,000 RMB, which is less than 3,000 USD. With China inflicting such measures on its citizens, a certain sense of paranoia has come to the forefront. It would seem like the situation in China is indeed serious, if the government has found the need to monitor the withdrawals of a mere $3000.
In its crackdown on capital outflows, the government has also sought to curb the illegal mechanisms currently operational in China. Over the past few months, mechanisms like China’s underground banking system as well as cryptocurrency activities have seen a sudden surge in usage. Tens of thousands of Chinese citizens currently make use of China’s underground banking systems so as to funnel millions out of the country. The requirement for mechanisms through which Chinese citizens can subvert the government and yet channel funds out of the country has led to the creation of an Informal Value Transfer System (IVTS), more commonly known as China’s ‘Underground Banks’. The IVTS involves the transfer of funds to a bank account controlled by a Chinese IVTS provider who will then transfer it into a bank account abroad, allowing for the transfer of funds without the government’s knowledge. The Supreme People’s Court of China recently introduced stiff penalties for any illegal currency exchanges taking place through this system. The penalties could result in a jail term of five years or more for those operating ‘underground banks’ and heavy fines for those found to be using them.
Many Chinese citizens regularly transfer money abroad, either in business ventures, investing in property or even paying tuition fees in foreign universities. With the Covid-19 crisis though, there are apparently also those who have lost faith in China’s economy, resulting in massive capital outflows estimated to be running into millions. While the IVTS is one method through which many middle- and upper-class Chinese send their money abroad, there has also been a significant surge in the use of cryptocurrencies by many. Cryptocurrencies serve as the perfect means for those wishing to invest abroad without the knowledge of the government. Over the past few years, due to favorable conditions, there has been a surge in both transaction as well as mining of Bitcoins in China, with reports showing nearly 35 to 37 variants of the same. Bitcoin presents a perfect platform through which individuals can move large sums of money as well as invest in business or property abroad. Since the Chinese government cannot shutdown Bitcoin accounts or monitor transactions, it has become a perfect medium through which individuals can subvert the government.
With China’s property market being seen as inflated, the stock market as a scam, and the economy as currently unstable, many have thus begun using alternatives mechanisms like cryptocurrencies and ‘Underground Banking’ to move or invest their capital abroad. While the government has sought to either crack down or incentivize people against the use of these mechanisms, it is highly unlikely that they have been successful. Lately, the government has been floating the idea of its own sovereign digital currency. However, with the main purpose of the cryptocurrencies in China being to subvert the government, those who seek to use alternate mechanisms apart from state control will continue to do so.
It won’t be too far from the truth to say that China may soon have a serious economic crisis on its hands if such activities continue. Reports of the current capital outflow from China show figures ranging into billions of dollars, putting China in a highly precarious position. Large capital outflows can negatively affect exchange rates and investor confidence as well as provide for no buffer against government debt. Currently, with a debt to GDP ratio of nearly 300 percent, China has much to fear from such outflows. The government has sought to curb high debt and increase investor confidence through the promotion of its digital currency as “a game changer for Asia”, as well as release statements highlighting to its economic recovery. However, much of what China says cannot be taken at face value and must be seen as mere propaganda activities adopted by the government in retaining investment.
While China’s propaganda shows its economy to be recovering from the effects of the pandemic, it must also be noted that the country is intrinsically tied to the global economy. Its recovery would therefore also depend on the recovery of the global economy itself. Being the world’s biggest producer and relying heavily on exports for economic growth has shown to have serious consequences for China. The pandemic has not only disrupted global and regional supply chains but also reduced demand for exports from China. Exports to the United States, Japan, South Korea and others are therefore suffering. With the three afore mentioned countries accounting for more than 30 percent of all of China’s exports, this could be highly problematic. Additionally, China’s trade along the BRI, which also makes up for around 17 percent of China’s exports, has also suffered. From Asia to Africa, projects and trade across the BRI have stalled, contributing towards China’s current economic vulnerability. It must therefore be noted that without the global economy recovering, China’s economy cannot hope to do so on its own.
It has become increasingly evident that China’s propaganda has always sought to portray a picture of strength and growth, however, there are many factors currently pointing towards crisis. Not only are there chances of massive capital outflows, a possible debt crisis and a post-pandemic economic fallout, but there are also minimal reserves in combating the same. While China still owns around $3.3 trillion in reserves, it is a sharp decline from the $4 trillion it once held and may not be substantial in lieu of the costs the country is set to incur. Forces that once provided for economic stimulus and propped up China’s economy are now floundering. On the one hand, the country can no longer rely on a trade surplus, increased foreign investment or its reserves to boost its recovery, and on the other, it has also seemingly lost the confidence of many of its own citizens. If the Covid-19 pandemic hasn’t already dealt a devastating blow to the country, capital outflows and the ensuing economic crisis surely will. China’s propaganda may be able to spread falsehoods, but it will not be able to prop up an economy.
Pic Courtesy - Jamable Chan at unsplash.com)
(The author is Research Assistant at Cescube. The views expressed are personal.)