Unemployment, Bankruptcies Headline Concerns During Chinese Economies’ Decline Amidst Trade War

After the Trump administration announced that it would raise tariffs to 25 percent on $200 billion of Chinese goods, the outside world is observing how the new tariff policy will affect the Chinese economy.
Unemployment, Bankruptcies Headline Concerns During Chinese Economies’ Decline Amidst Trade War
Containers outside the Kwai Chung Customhouse Cargo Examination Compound in Hong Kong on Feb. 1, 2019. (Anthony Wallace/AFP/Getty Images)
After the Trump administration announced that it would raise tariffs to 25 percent on $200 billion of Chinese goods, the outside world is observing how the new tariff policy will affect the Chinese economy.
So far, economic indicators are pointing negatively. According to data released jointly by the National Bureau of Statistics (NBS) and the Federation of Logistics and Purchasing, the official manufacturing purchasing managers' index (PMI) fell to 49.4 in May from 50.1 in the previous month, hitting a three-month low and falling into the sub-50 point contraction range.
China’s official PMI was lower than market expectations of 49.9; the non-manufacturing PMI was 54.3, unchanged from the previous month. Overall PMI of 53.3, down 0.1 points from the previous month.
PMI at large enterprises was 50.3, which was 0.5 points lower than that of the previous month and still above the critical point. The PMI of small and medium-sized enterprises was 48.8 and 47.8, which were 0.3 and 2.0 points lower than the previous month.
In response, the China Finance Network says that the manufacturing boom showed fluctuation and that demand slowed down. In terms of demand, the new order index was 49.8, down 1.6 points from the previous month, and manufacturing market demand weakened. Both imports and exports fell. The new export order index and import index were 46.5 and 47.1, down 2.7 and 2.6 points respectively from the previous month.
In May, the manufacturing industry index fell to 47.0, the lowest level in at least the past year; the expected index of production and operation activities fell to 54.5, the lowest level since January.
Hong Kong Economic Times quoted Zhang Liqun, a special analyst of the Federation of Logistics and Purchasing, as saying "The PMI index continued to decline in May, and the decline increased, indicating that downward pressure on the economy has increased. In May, the PMI index fell back below the 50 level (which denotes a contraction). It shows that the foundation for economic stability has yet to be established."
According to the Hong Kong Economic Times, the data shows that domestic and foreign demand is weakening, pressure is resurfacing, and industrial production has slowed down; combined with a significant increase in external uncertainty due to the ongoing China-U.S. trade war, and China’s economic growth momentum may weaken in the second quarter.
The latest data released by the NBS shows that the profits of industrial enterprises above a designated size in April was 515.4 billion yuan ($74 billion), an annualized reduction of 3.7 percent.
This is the biggest monthly decline since December 2015, and analysts believe that domestic industrial companies' profits will continue to decline.
China is also facing the problem of large companies leaving the country. Recently, the United States announced a survey report in the American Chamber of Commerce in China where 40.7 percent of the 250 U.S. companies polled have or are considering withdrawing from China. A survey by consulting firm Bain & Co. found that about 60 percent of the 200 U.S. companies it surveyed will reassess its global supply chain in the coming year.

14 Million People May Be Left Unemployed

At the Political Bureau of the Communist Party of China’s mid-year meeting at the end of July 2018, Xi Jinping called for six stabilities: "stable employment, stable finance, stable foreign trade, stable foreign investment, stable investment, and stable expectations.” Having undergone a lengthy period of indoctrination by the Chinese Communist Party (CCP), the Chinese people have a sensitivity toward Chinese official discourse not shared by the outside world allowing them to understand its underlying meaning.
The point of introducing such six stabilities is that these six aspects are likely to have problems. Of these, unemployment is the biggest problem China will face in the next two years.
American Economist Xia Yeliang told the Epoch Times that the new tariff increase will directly affect China's GDP growth, and may cause 14 million people in China to lose their jobs. “Some institutions estimate that it will affect 0.4% or 0.5%; others say it will affect 2%. I personally prefer the latter judgment.”
"If it affects 2% of GDP growth, it means that China has a large number of people who are unemployed. In the past, there was a calculation that every GDP percentage increase would carry 7 million jobs. If its 2 percentage points, then it is 14 million; in turn, if you lose two percentage points, it means that the number of unemployed people in China will increase by 14 million."
China’s economic growth figures have fallen to their lowest since 1990. The low value-added processing industry that has supported the Chinese economy for the past 20 years is currently facing great difficulties.
Dongguan, Guangdong Province, dubbed the “manufacturing capital” of China by having led China urban economic growth for 20 of the past 30 years, is a typical example of the Chinese economy.
About 60 to 70 percent of its Hong Kong, Taiwanese, and Japanese-funded processing enterprises have moved to Southeast Asia, and the number of workers employed in these factories have decreased significantly. In the various towns under Dongguan’s jurisdiction, the total resident population has decreased by 20 percent in the past year, and the maximum reduction is nearly 40 percent.
Though according to official data the city grew by 7 percent during 2018. But most of the growth came from rising real estate prices, the government's large fixed-asset investment, and investment formed from downstream industries that moved in from Shenzhen.
Currently, the unemployed population in Dongguan has not caused any stability issues, due to the fact that the majority of unemployed are so-called migrant workers who are forced to leave the city and return to the countryside or other places where they can find work. But when all of China faces similar problems, this accumulation of pressure will become a huge problem facing the government.
According to the CCP’s official documents, the focus of employment stability will be resolving the employment issues of college graduates, migrant workers, and retired military personnel. Chinese university graduates will reach 9 million this year. Retired military personnel who need to be resettled, including from the current year and from prior, total nearly 10 million.

Baoshang Bank Foreshadows Wave of Bankruptcy

Financial stability is the second of the six stabilities raised by Xi due to the fact that through two decades of expansionary fiscal and monetary policies, Chinese banks have accumulated a large amount of debt. Today, this has basically reached an unmanageable state where alongside the sharp increase in debt, banks also eventually face the problem of repayment. This has led Beijing to predict that a large number of banks will fall into “technical bankruptcy”.
On May 24, The Central Bank and the China Insurance Regulatory Commission jointly issued an announcement that Baoshang Bank will be taken over by the Banking Insurance Regulatory Commission for one year. The announcement was subsequently uploaded to WeChat, but was immediately deleted by authorities. Bank practitioners allege that this is the first bank in China to be taken over by the China Insurance Regulatory Commission due to credit risk. As to the reason for the takeover, insiders close to the Baoshang bank told Xiaojinjie website that "there are too many bad debts that cannot be recovered."
Baoshang was formerly one of the first seven city commercial banks to receive the lowest risk rating from the China Banking Regulation Commission. Within the field, “taken over” is a placeholder term for “bankruptcy.” For a model bank to meet with such an outcome, the outside world predicts that a wave of small bank bankruptcies could soon follow.
This is due to the fact that Baoshang Bank’s takeover is a microcosm of the mainland bank problem. For a long time, equity structure, chaotic corporate governance, illegal lending, asset and liability inversion, and asset quality deterioration have been common problems in the development of many small and medium-sized banks. When the economy declines, such risks are exposed.’
Businessperson Wen Li told to Free Asia that most rural commercial banks and city commercial banks use the former credit cooperative system, and there have always been problems with personnel and operations. However, in the past, the flow of funds brought about by the economic upswing covered up this problem. But as the economy declines and cash inflows slowdown such problems will become exposed.
According to Free Asia, "the city commercial banks and the rural commercial banks are closely connected to the regional economy because of the strong regional nature of their business. As the downward pressure on the economy increases, city commercial banks and rural commercial banks in some regions with poor economic conditions can go bankrupt at any time. At the same time, because the major shareholders of these banks are either local governments or private enterprises, the general governance structure and risk control have been weak for a long time, and many banks have become cash machines for local governments or private enterprises."
On May 29, Quanshangcn, the official public WeChat account of news outlet Securities, cited information from financial regulators stating that due to serious credit risks, a group of rural and urban commercial banks are now on the verge of technical bankruptcy. Citing the “Central Bank Financial Stability Report (2018),” in the first quarter of 2018, the People’s Bank of China completed the first central bank financial institution rating for over 4,000 financial institutions, of which 420 institutions scored between the ratings of 8 and 10, the classification for a high-risk financial institution. The report was later deleted.
In fact, many banks in the mainland have long gone bankrupt if measured by the standards of international practice. In the early years, when bank assets were stolen by a few high-ranking CCP officials or bank executives, such banking loopholes could be covered up by the illusion of prosperity created by the government.
Today, corrupt officials are omnipresent, and non-high-ranking cadres and bank employees also engage in underhanded practices. With the Baoshang Bank that was taken over this time, the two department managers of its Beijing branch illegally provided loans of 200 million yuan in order to receive 532,000 yuan in benefits. Starting from loans released in November 2013, none of the bank's principal amount has been recovered, with only a portion of the interest being recovered.
The two department managers’ illegal lending could be just the tip of the iceberg for Baoshang bank. Baoshang Bank is believed to have connections reaching all the way to the highest levels of the CCP.

Solutions China May Adopt

According to experts, China may try to solve existing problems by continued use of loose monetary policy.
Economist Mr. Cheng said to Free Asia that authorities’ methods for reparation are still limited to that of capital injection. He also believes that, including trade wars, if a certain degree is reached, the government will still rely on exporting financial subsidies irrespective of cost to exchange for foreign exchange. He believes that like the tens of millions of people who have starved to death, officials will not take heed of the harm that inflation brings to the people.
According to Liao Shiming, such policies include “cutting interest rates and lowering RRR (reserve requirement ratio), as well as expansionary fiscal policies, such as issuing bonds for large-scale government investment. This is exactly what China did in 2008. The final result is inflation. A large proportion of increased investment, on the one hand, stimulates economic expansion to solve the unemployment problem. On the other hand, it can also dilute the debts of government and financial institutions through inflation. Of course, the final cost will be burdened by ordinary people.”