A troubling stasis (Yeung Wai Hong)

2020.07.07
A troubling stasis Yeung Wai Hong


The letters to the editor section, just like its obituaries, is one of the signature attractions of The Economist. This magazine, widely read in every corner of the world, is approaching its 200th anniversary. The letters published are all written by the erudite: terse and concise, informed and refined. Last week, a letter of 159 words enabled its readers to take a peek at the current economic situation of China and inspired associations and imaginations.


A while ago, an essay in The Economist commented on unusual movements in the financial and commodity markets: plagued by the Wuhan pandemic, the global economy has plunged into recession, yet the stock market keeps going up and the prices of iron ore and copper climb incessantly. Is this the result of perceptive investors foreseeing an economic recovery in advance or is there another reason? The writer of the letter does not believe there is any market prophecy, and maintains that the unusual pricing situation of the iron ore market reflects the characteristics of Chinese socialism. Why is this the case?


The writer points out that China’s steel output had been low, but it soared and broke the record this year. Since the beginning of this year, China has produced as much as 4.1 tons of steel. Also, China is almost the only buyer of iron ore. Ravaged by the pandemic, Brazil and other export countries have suspended their production of iron ore, leading to the supply failing to catch up with the demand of China and the increased price of iron ore. However, though the internal demand for steel in China has shrunk due to the pandemic, the production level has disregarded the market situation and climbed to a new height, with an expectation to exceed an annual steel output of 10 billion tons. As the domestic market of China is unable to consume all the produced steel, China will inevitably dump the excessive steel to other countries, bringing down the global steel prices. The iron ore prices are currently rocketing yet the following steel prices are hardly promising. The two phenomena are not causally related.


The memory is still fresh. When the U.S.-China trade war first started, Trump struck the first blow by imposing tariffs on China’s steel pipes, accusing China of subsidizing its steel industry to produce steel to be dumped in the international market for unreasonably low prices. New tariffs had to be raised in order to protect American steelmakers. In response to this accusation, China succumbed by reducing exports. This reduced level of production is what the writer has referred to. But that was before the outbreak of the Wuhan virus. As the party’s top instruction has changed from fighting coronavirus to resuming work and production, the strict obedience has led to the steel output hitting record high.


There are reasons behind China’s desperateness in expanding her steel exports. The steel industry involves large-scale investment. At a time when GDP indicates political performance, investing in steel mills is specifically encouraged in provinces and municipalities only for the sake of governing achievement, disregarding the market demand. As a result, both the steel mills and steel output were oversupplied. Consequently, some local officials broke contracts as they could not pay the capital or interest of the bonds, whereas some others sought for bank loans to temporarily support themselves. It is inevitable that bad debts will accumulate and shake the financial system. If the writer is correct, the Chinese steel output will hit record high again, and China will “relapse into its old vices” and export as much as it can. The trade war will heat up without any doubt.


Regarding the current economic situation in China, the letter is apparently not merely alarmist. China’s Manufacturing Purchasing Managers Index (PMI) soared to 51.2 in June, hitting the highest level this year, obviously including the unprecedented quantity of steel output. Some analysts commented that it was due to the “supply-side” effect, while the “demand-side” was still trying to catch up. This was resulted from the steel mills echoing to the Central Committee’s call for returning to work and production, producing simply for the sake of producing. No wonder corporates are reluctant to hire despite quantitative achievements after production resumption, and the employment situation shows no signs of improvement. Among Li Keqiang’s pledges to ensure stability on the six fronts (employment, the financial sector, foreign trade, foreign investment, domestic investment, and market anticipations), employment came first, but the efficacy of the policy is too obvious to comment on.


Warren Buffett said, “Only when the tide goes out do you discover who’s been swimming naked.” When economic conditions are unfavorable, news coverages of overly leveraged companies going bankrupt mushroom. First came the Nasdaq-listed Luckin Coffee, which got kicked out because of its fabricated transactions amounting to 2.1 billion yuan. Then came the also Nasdaq-listed Wuhan Kingold Jewelry, which was alleged to have used fake gold bars valued at 30 billion yuan. Both cases have revealed that there is “huge room for improvement” in Chinese listed companies’ accounting practices, and companies unexpectedly escape inspection by engaging in fraudulent activities in times of recession and tightened cash flow. Fraud and corruption infiltrate every corner of the business world, the situation is beyond cure.


The whole country is plagued with scams and fraud. Whereas the officers at provincial and municipal level bid for promotion with fabricated transactions, private businesses such as jewelers and coffee chain stores also cheat, with the former colluding with banks and appraisal institutes swindling money with tons of fake gold and the latter defrauding investors with deceitful accounting. The filthy mess can be temporarily overshadowed by the economic boom, but once the tide turns and cashflow becomes insufficient, problems will outnumber solutions, and all the naked swimmers will be exposed. The economic performance will wither from maintaining the GDP growth at 10%, 8%, to 6% and eventually none. Recession is inevitable and irreversible by paying lip service, and the consequences are self-evident.


The Luckin Coffee and Kingold Jewelry scandals were exposed only because they are U.S.-listed. But I wonder how many Chinese companies not listed abroad are operating in China in this manner in China, and how many factories of steel, concrete and automobile are producing at full speed without orders. What will the situation in China become? I would rather not reveal too much because of the newly enacted National Security Law. Judging by your common sense, you will know: a troubling stasis.


Click here for Chinese version.


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