China: Not a Financial but an Economic Crisis

November 3, 2008 9:04 pm Last Updated: October 1, 2015 10:42 pm

Economist He Qinglian does not believe that the U.S. financial crisis is the reason for China's economic crisis. The Chinese crisis is homegrown. (Epoch Times)
Economist He Qinglian does not believe that the U.S. financial crisis is the reason for China's economic crisis. The Chinese crisis is homegrown. (Epoch Times)
Chinese economist Ms. He Qinglian, who resides in the United States, is convinced that although China was relatively spared by the financial crisis affecting the United States, Europe and other countries, China has been plagued by an economic crisis for more than half-a-year. This affects the real economy and is therefore more potent than the financial crisis in the United States.

"The cause for China's economic crisis arises from its economic structure and has little to do with the financial crisis in the United States," said He Qinglian, during the interview. The U.S. financial crisis is only responsible for reducing Chinese foreign exchange reserves, but in no way bears responsibility for the Chinese economic crisis.

China's economy has driven itself into a hopeless condition, given its system (political and economic), according to He.

Toy exports, given stricter testing requirements, are no longer profitable. Concerning the real estate and the stock markets, many years of inflation have already caused the bubble to break. China's citizens, given the extremely high inflation and terrible quality of food, are facing extremely harsh times.

Epoch Times (ET): You said during an economic symposium that a Chinese economic crisis preceded the worldwide financial crisis. This diverts quite a bit from the official position. Is there really an economic crisis in China?

He Qinglian (HQ): After the eruption of the financial crisis, China jumped immediately at the opportunity to blame its economic crisis on the U.S. financial crisis. In reality, this is far from the truth. Why? The Chinese regime used every opportunity during the 2008 Beijing Olympic Games to present "A Strong China." Alas, a recession already appeared throughout China in 2008.

With the slogan, "Everything for the Olympic Games" the Olympic euphoria affected the financial, real estate and stock sectors beginning in 2006. The Chinese regime tried very hard to present confidence to the outside world and claimed that the Beijing Olympic Games would bring in much money. Because of this "Olympic Confidence," everyone tried to jump on the "Olympic Economic Express."

ET: This sounds under the best premise as the formation of a "bubble."

HQ: The Chinese economy already presented, to the highest degree, the formation of a bubble. Although international investors already fearfully anticipated the danger of a bursting economic bubble at the beginning of last year, Chinese investors were full of optimism. They believed that the regime would use all its might to maintain stability in the real estate and stock markets. Therefore, they thought that because of the Olympics they could play recklessly in these markets.

ET: And what was China's economy like after the Olympics?

HQ: In reality, the Olympic Games had only limited influence on these markets, with the exception of investments in the Olympic construction projects. The stock exchange showed distress since the beginning of this year. China's continuous high inflation that has been around for a number of years and was responsible for lowered wealth for all Chinese citizens. Citizens from the lower levels of society are in a dire situation and have difficulties surviving. I already observed this situation at the beginning of this year.

Now, here we are in October. On March 13, the Shanghai stock exchange fell by 3,971 points. That day, 700 billion yuan were lost. Since that day, the stock market has not stopped falling. We have not seen any improvement since then. The sliding stock market in China has little to do with the U.S. financial crisis. It is China's problem. Even before the U.S. financial crisis, namely during the first six months of this year, the stock in China has been taking a nosedive. China's analysts also refrain from claiming that this situation has arisen because of the U.S. stock market.

ET: Companies no longer have access to funds to expand their production in China. Didn't this already result in many bankruptcies?

HQ: The continuing bankruptcies in China were also not affected by the U.S. financial crisis. Last year, toys from China were strongly boycotted in the United States, because they contained high levels of lead. Many millions of toys had to be recalled. The Li Da toy company in Foshan, Guangdong Province, was the worst affected. This company alone had to recall 967,000 toys sold through 96 brands. The chief in Hong Kong committed suicide by hanging himself in the company's warehouse on August 11.

The majority of "Made in China" products in the international markets are textiles, clothes, shoes and toys. Since this year, there are problems selling any of these products. On May 1, the American Toy Industry Association (TIA) and the American Standards Institute (ANSI) initiated a new "Toy Safety Certification Program." The toy manufacturers are being tested in stages and safety inspections are conducted. The cost has to be covered by the manufacturer. This increased the cost of exported toys to the United States by 25 percent, according to Chinese experts.

ET: What about the real estate market?

HQ: According to predictions at the end of 2005, the real estate market was going to collapse without any doubt. Let’s look at Shanghai. At that time, real estate brokers controlled 90 percent of all business in that area. If brokers control the real estate market, it definitely is unsound, because speculation dominated business transactions. This means that the market was not driven by demand, but through speculation.

But when did the crash begin? In October 2007, the real estate markets in Beijing, Guangzhou, Shanghai and Shenzhen began to collapse. The real estate market in Shenzhen experienced the greatest distress, reaching a 20 to 40 percent fall. Now, smaller cities—considered the second or third tiers—are affected, including Nanjing, Wuhan, Chengdu, Chongqing, Xiamen, Fuzhou and Zhuhai. Considering all cities, average real estate values fell by about 15 percent. The analysts call it the domino effect.

ET: China invested the majority of its foreign exchange reserves on Wall Street or in U.S. government bonds. Does this influence the financial crisis in the United States?

HQ: No. The U.S. financial crisis is homegrown. Why? The financial crisis in the United States only affected financial derivatives issued by the financial circles, such as the subprime loans. The affected areas are not considered to be of a large range. The real U.S. economy is still quite healthy. Consumer confidence is still high and the earning power of individual households is also quite good. Then, there are no problems in the high technology companies. Overall the financial institutions are in good condition. Only the investment banks were hard hit. Other banks did not suffer great damage. Americans also recognized that the greatest problem is the loss of confidence.

The American stock market has stabilized. The United States sold within 4 weeks more than $100 billion in government bonds. That clearly shows that everyone still has confidence in the United States. Under such circumstances, the U.S. financial crisis can be stabilized. I believe that one only has to digest the consequences. After that everything will work out well. The development in the Chinese economy has no direct influence on the U.S. financial crisis.

ET: In your opinion, what is the fundamental difference between the economic crisis in China and the financial crisis in the United States?

HQ: China became the world's factory, which does not play a leading role in technology, as England did during the industrial revolution. At that time, England was the technological forerunner, something that no one else had achieved yet. It is different in China. China is on the lowest level in global production technology. It only delivers labor intensive products that need little technological know-how. Many of the core components in electronic products "Made in China" are imported from other countries. China does not have any technological advantage. That is one of the main points.

There is a problem in the financial markets. Before 2006, the under-performing loans in the banks had already accumulated to quite a sum, and according to Ernst & Young ‘leaked’ information, it was estimated at as high as $900 billion. Also, the chairman of UBS AG [a global financial services firm based in Switzerland] estimated this same amount.

The Chinese regime bundled these banks very nicely and sold the stock on the stock market to reduce the percentage of under-performing loans. When it comes to under-performing loans, the Chinese regime evaluates them differently than the world outside China. Until the end of March 2004, the four largest Chinese state banks held 1,890 billion yuan (about 189 billion Euros or US$1 billion) in under-performing loans. These amounted to 19 percent of all Chinese held stock.

However, since 2006, the stocks of all banks were listed on the stock exchange. Therefore, the situation changed drastically. By end 2007, the combined capital of China's five largest banks was 2,096 billion yuan. The percentage of all under-performing loans is 8.05 percent and it therefore declined by 11 percent. All countries around the globe don't believe these numbers.

Corruption is rampant. Then, coupled with corruption, there is the real estate market and stock value crash. Also, under performing loans are still on the rise.

ET: Chinas exports are also in trouble at this time.

HQ: Even if there wasn’t a financial crisis in the United States, the United States would curtail its imports from China. The Americans were already suspicious of "Made in China" products for quite some time, as I mentioned earlier. The United States had already reduced toy imports substantially. Also the decreasing food imports from China have nothing to do with the financial crisis. The reason for that is the poisoned milk powder. Consumers lost confidence in China's food products. But, not only today's poisoned milk power, but also the poisoned animal feed in June of last year created quite a bit of anxiety in the United States. Does this have anything to do with the financial crisis? Do you truly believe that Americans want to import poisoned food and poisoned toys?

ET: In China, the financial crisis in the United States is publicized and celebrated as a sign of a failing free market economy and capitalism. It is suggested that the state-directed economy of socialism and the potent economic control exercised by China's regime fare much better when compared to capitalism and a free market economy. What is your take on this?

HQ: China took the opportunity to declare a failure of the free market economy model. This lie was spoken much too early, as at the time the Chinese regime thought that the United States would have difficulties overcoming this crisis. They did not realize that the U.S. economy would stabilize within a month.

The Chinese regime can say what it wants, because the media in China is state-controlled. Most of the Chinese lack the opportunity to read foreign newspapers and have no way to listen to information from outside of China. Also, Chinese newspapers published outside China do not publish many economic reviews. Even if there are those who can break through the information blockade and be read, he/she won't really be able to read much about the financial crisis in the United States.

ET: The Chinese regime wants to strengthen the inland economy to stabilize the economy. Do you think that such an effort exists?

HQ: The Chinese regime has not only talked about this recently, but for several dozens of years. The Chinese economy is characterized by a strong dependence on foreign countries. The dependency factor is about 60 percent. Inland consumption supported by the Chinese economy is in the area of 30 percent. Given that, the expansion of the inland consumer market has been desired by the Chinese regime for years. Why didn’t they accomplish that? The reason is simple. The difference between rich and poor is just too great. The ordinary Chinese citizen has very little money.

ET: Why do you think that the ordinary Chinese citizen has little money?

HQ: Even if the people have a little money, they have to use it for retirement savings, education, health insurance and rental expenses, since the comprehensive reform was adopted. Education, health insurance and rental expense are like three huge mountains that press down on the people.

That is the reason why China's savings rate is the highest in the world. The Chinese save for 1) children's education, 2) in case of sickness and 3) for a home. Under such conditions it is difficult to convince the ordinary citizen to spend their money on other commodities. Also, when establishing a market for one’s personal needs, one faces problems: firstly, pay increases can't keep up with outflows, and secondly, the three mountains have not moved. Under such conditions one has to question how personal needs can be satisfied. One also needs to remember that bankruptcies by companies will create more unemployed people. The numbers of unemployed are around 200 million people. 2009 will be even worse. This is the reason why the ordinary citizen wants to sit on his/her money.

ET: It is often asked if there is the possibility that China will collapse.

HQ: If one speaks about a moral collapse, this has been a reality for a long time. This is also shown in the poisoned milk powder scandal. The confidence of ordinary people broke down a long time ago.

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