Misinvestment in China
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RAY SUAREZ: Now, our continuing series on the rise of China as a global economic power and its challenges ahead. We begin with a report on investment in China and the role of the government. The NewsHour’s economics correspondent, Paul Solman of WGBH-Boston, has the story.
PAUL SOLMAN: The Chinese economic miracle. You see it in the glitz and glimmer of the big cities, the hustle and bustle of new businesses. China’s economy grew a dazzling 9.5 percent last year, leading the world, as it has the entire past decade. But to MIT’s Yasheng Huang, the miracle isn’t how fast China is growing, but how far it still has to go.
YASHENG HUANG: If you look at the economies after the Second World War, which succeeded in catching up and overtaking the West, each single one of them is located in East Asia.
PAUL SOLMAN: Huang is talking about South Korea, Taiwan, Japan, Hong Kong, and Singapore.
YASHENG HUANG: Then there are two East Asian exceptions: North Korea and China. And this is a remarkable fact. And China today has about a per capita income of $1,000 instead of $15,000 in Korea and in Taiwan.
PAUL SOLMAN: Why? The obvious answer is Chinese communism, which, starting in 1958, led the economy’s great leap backward. Free market reforms begun 20 years later are credited with reversing China’s fortunes.
But critics like Huang think China hasn’t yet reformed its economy in the most important way: Fostering an open market not just for goods and labor, but for investment. And that’s because so many of the banks and businesses in China are still largely controlled or owned by the government, he says — a lousy recipe for success.
YASHENG HUANG: The ingredients of the right economic system are that you have an economic engine that relies mainly on private property rights geared toward supporting private companies, private entrepreneurs, and private producers. This is a fundamental difference between China and the rest of East Asia.
PAUL SOLMAN: And, says Huang, the reason why China’s major banks are on the brink of insolvency, its stock market’s reeling. Just look at the Shanghai Stock Exchange. It opened with great fanfare in 1989 and Chinese citizens poured in their savings, in large part because the government wouldn’t let them invest anywhere else.
Sixteen years later, the Shanghai Exchange has lost half its value and looks to be in a coma. Basically deserted, it’s been the worst-performing major exchange in the world for the past decade, while China was the best performing economy.
YASHENG HUANG: How come you have an economy that is growing around 8 to 9 percent churning out poor returns? That shows to me that the investment returns must have been very low, and probably even negative.
PAUL SOLMAN: The returns on the money invested in its publicly traded companies, that is. If the stock market goes up, those companies are presumably making money. If it goes down, they’re presumably not. Even the so-called father of Chinese venture capital, high party official Cheng Siwei, agrees that the vast majority of Chinese companies are losers, not worth investing in.
CHENG SIWEI: I think only 30 percent of the listed companies are valuable to invest.
PAUL SOLMAN: 30 percent?
CHENG SIWEI: Yes.
PAUL SOLMAN: Could you tell us which 30 percent?
CHENG SIWEI: Oh, no. No. This is basically a secret.
PAUL SOLMAN: Now, it’s not that nobody’s making money in China. It’s just that, with government control of both the media and investment, there’s no transparency, no way to know if firms are profitable; especially state-owned firms, more interested in preserving jobs than being competitive, says Finance Professor Chun Chang.
CHUN CHANG: They are producing certain products that are not necessarily competitive to the marketplace these days. But they still have a lot of people to take care of. They have these old people, usually employed many years ago. And these people kind of depend on these state enterprises.
PAUL SOLMAN: Their corporate welfare system?
CHUN CHANG: Exactly. And it’s hard to lay these people off because of stability, social stability concerns.
PAUL SOLMAN: On the other hand, says the professor:
CHUN CHANG: Central government has recognized this as one of the major problems they have to overcome. The second one is the financial system.
PAUL SOLMAN: The banking system also shows how badly investment has been directed in China up to now, as our colleague Darren Gersh of the Nightly Business Report found when he looked into it in some depth.
DARREN GERSH: Even official statistics show that China’s banks are technically insolvent. If economic growth falters, some fear China’s banking system could collapse.
CHEN XIWEN (Translated): The main problem is that the ownership of Chinese banks is very concentrated, mainly state-owned, since China has been under a planned economy for a very long time. The internal management is relatively loose because of the lack of competition.
PAUL SOLMAN: Loose to the point of corruption. Stories of embezzlement and bribery abound, but the basic problem is that loans have not been made on the basis of what kind of return they’ll bring.
YASHENG HUANG: The non-performing loans in the banking sector are very, very high.
PAUL SOLMAN: The point is: Investments by stockholders or banks are only as good as the profits they generate. If China has been misinvesting its money, that would help explain why it’s lagged so far behind its East Asian neighbors, which suggests that the Chinese economy could turn out to be less miracle than mirage.
WEN TIEJUN: Most of these visitors, they come to China, they said, okay, this is an economic miracle but behind the miracle, big trouble.
PAUL SOLMAN: Wen Tiejun studies rural China, where perhaps the economy’s biggest headache throbs: Some 750 million to a billion people, depending on who’s counting, most of them dirt-poor, with hard-scrabble jobs.
WOMAN (Translated): We have only two acres and my husband and I can take care of them. That’s why our children want to earn more money in the city.
PAUL SOLMAN: 60 percent of Chinese peasants now earn a dollar a day or less. According to Time Magazine, most have never even brushed their teeth; only one in five hundred goes to college; and the standard of living of the poorest peasants has actually declined since 2001.
MIT’s Huang blames government misinvestment.
YASHENG HUANG: This is where China failed in the 1990s. The income gains for the peasantry were extremely modest; their growth was very modest as compared with the urban income growth and at the same time the peasants are now having to pay for many things that were guaranteed to them, free of charge, in the Chinese constitution.
PAUL SOLMAN: In other words, the government, which had lifted the countryside in the 1980s, stopped investing in rural education, health care and development. Instead, it channeled investments to state-owned enterprises based in and around China’s cities to grow the economy and create jobs for the migrant peasants.
YASHENG HUANG: That’s why, in the 1990s, you began to see these incredibly impressive modern buildings; you see infrastructures, you see industrial parks; a lot of the financing came from the savings of the peasantry.
PAUL SOLMAN: From their savings, from higher taxes on their dwindling incomes, from forced purchases of their land.
YASHENG HUANG: These kind of land grabs have occurred across the country: Numerous instances where the peasantry was forced to be evicted from their land and the compensation level was extremely low.
PAUL SOLMAN: This may explain the 74,000 protests acknowledged by the government in China last year alone, such as this riot in a village 100 miles from Beijing, over the seizure of farmland to build a power plant, which left six villagers dead. This home video was bootlegged to the Washington Post.
But land grabs are not just a rural problem. Doing a story for the University of California at Berkeley, journalism grad student Joe Mullin got a hold of this footage of a government eviction to clear the way for urban development.
The tape was shot by the evictee, Sun Danlun.
SUN DANLUN (Translated): During the Cultural Revolution it was better. They would smash things in your house but leave the property.
Now it is much worse. My house may be demolished. For my family, it’s a second cultural revolution.
PAUL SOLMAN: The evicter is the local Shanghai government, which hypes futuristic condos as the replacement for old buildings in its urban planning museum, not far from Sun’s former apartment.
But the economic point isn’t the unfairness of it all; it’s that government is making the investment decisions, without the need to show a profit. And to most economists, that raises, if you’ll pardon the expression, a red flag.
YASHENG HUANG: By my reckoning, a lot of these investments in China are not justified by the returns.
PAUL SOLMAN: Yeah, but given the huge migration of people from the country to the city, 20 million a year or something like that, all those migrants, they have to live somewhere.
YASHENG HUANG: But Paul, Paul, a lot of these luxury housing is not for economic migrants, poor farmers from Gansu Province; I mean, if you go to China, a lot of these housing properties are luxurious, they are for making money.
PAUL SOLMAN: But many, says Huang, are not making money.
YASHENG HUANG: In Beijing, there’s a surplus of luxury properties. In Shanghai the property prices have declined by about 40 percent this year mainly on the luxury segment of the market.
PAUL SOLMAN: I mean, are the buildings going to be empty?
YASHENG HUANG: Many of them are empty now.
CHUN CHANG: A housing bubble would be a big deal. It could cause more like an international crisis.
PAUL SOLMAN: Chang says the crisis of overinvestment in housing could lead to an exodus of foreign investors.
CHUN CHANG: They go out and then that will cause a lot of problems in China, unemployment as well as other problems.
PAUL SOLMAN: So the question is: Will China’s investments pay off or won’t they? Most observers think it’s a safe bet that China’s economy will grow in the long run.
But misguided investments could leave the country with buildings as empty for years as the Shanghai Stock Market, where the technology, like so much the Chinese have invested in, looks great — but upon closer inspection, can’t yet be fully trusted.
DIGITAL TV AND THE WORLD reporters Jonathan Kaminsky and Joe Mullin contributed segments of their work for this report.
DIGITAL TV AND THE WORLD is a special project of the Graduate School of Journalism, University of California, Berkeley.
To view the full reports from the DIGITAL TV AND THE WORLD series see “Report From Shanghai” on washingtonpost.com