In our previous article, Global Financial Crisis (GFC) is real in China, we mentioned an interesting conversation with a retiree in China regarding his opinion on whether China can succeed in navigating its way out of the GFC. He believes that this local Chinese perspective on that matter is not well appreciated and understood by those outside China.
Firstly, we will introduce some background understanding. With the Chinese export industry declining significantly, its economy is facing a major crisis. Therefore, it is generally accepted that the way forward for the Chinese economy will be for it to develop its own internal consumption demand instead of relying on the over-indebted US consumers.
Here comes one problem.
The majority of the Chinese are still very poor (we add that the vast majority is poor when measured in terms of Australian dollar purchasing power). For example, we were told that some families in the nearby Anhui province are so poor that each member of the family takes turn to wear a trouser. As we mentioned before in Two faces of the China growth story,
Then there?s the other face of ?China?- the backwater rural regions. They have yet to experience much of the benefits of the prior economic growth. These rural regions still form the majority of China?s population. In other words, the majority of Chinese has yet to fully benefit from the two decades of economic boom.
How can China ramp up its own internal consumption when there are still vast numbers of poor among themselves? For these people to consume, the government has to at least somehow put cash on their hands.
Then, even if the government succeed in doing so, there’s another problem. Unlike all of us here who live in the Lucky Country, there’s hardly any safety net (e.g. Medicare, unemployment benefits, etc) in life for these people. Even in the major cities like Shanghai, their ‘medicare’ still has a lot more to be desired. Put it simply, if you are poor in China, you cannot afford to be sick.
As a result, unlike the perennially spendthrift Americans (and British, Australians, etc), the average Chinese tend to save as much as they can, just in case the proverbial rainy day comes. Given the recent history of wars, civil wars, revolutions, invasions, civil unrests, hare-brained programs and natural disasters of the past couple of centuries, this prepare-for-rainy-day idea is probably deep in the psyche of many Chinese. That explains the high savings rate of China. Therefore, stuffing cash into the pockets of the poor rural Chinese will not be enough to persuade them to spend and consume.
Then, even if the government overcome these two problems, there’s a third one- corruption. There’s where it gets interesting.
That retiree told us that in the area where he lives, the district chief was caught for corruption. That district is a very low-level one, which we understood to be equivalent to the level of a village. The amount of money involved was in the amount of around 100 million yuan, which is around AU$20 million.
Guess how did that chief hide his dirty money? The accounts clearly showed that he stole the money. But that money could never be found. Then one day, someone noticed that the floor in his house was suspiciously high. It turned out that this corrupt chief hid the money as thick sealed stacks of physical cash underneath the floorboards!
Now, here comes a crucial question: If corruption in such tiny low-level district involves so much money (100 million yuan), then how much corrupt money is still floating around in the entire country? This is a very critical question because the effects of any Chinese economic stimulus will be dampened by corruption. As stimulus money flows down from the central government to the provinces, counties and districts, corruption will siphon it away. How much will be left for the poor masses? If corruption at just the district level involves $100 million yuan, how much more is involved at the higher levels?
That retiree told us that this is the perspective of China not well understood by foreigners. He also added that the future prospect of the Chinese economy will depend on the outcome of 2009. If signs of recovery can be seen in 2009, then there’s hope.
Tags: China, corruption
