Chinese bubble and lurking shadow of Tiananmen Square

By Maj Gen Sudhakar Jee

A video showing tanks deployed in the streets of China’s Henan province to protect banks from protesters whose accounts have been frozen has gone viral globally. The world reacted sharply and a general comparison of the incident was with the 1989 incident at Tiananmen Square.

But a fact check found the whole hype and hoopla, false. The video was captured in the eastern province of Shandong, China, more than 400 kilometers away from Henan province. Chinese authorities claim that it shows an annual military exercise unrelated to the bank protests.

Even if the world believes the claims of the Chinese about the video, suspicion always remains over the glossy prosperity of China, the pizza-eating middle class, and the country’s financial capabilities to sustain growth without coercing workers and damaging the environment irreversibly.

The Chinese bank depositors involved in the protests are among thousands of customers who opened accounts at six banks in Henan and the neighboring Anhui province that offered relatively high-interest rates. The customers later found they could not make withdrawals after news reports that the head of the banks’ parent company was wanted for financial crimes. A parent company linked to the banks is under investigation by police. It is hard to believe that in a country where everything is vested in the state, a financial crime of this magnitude could take place without ‘the party’ knowing about it.

Chinese Prosperity: An Enigma or Mirage

China, with current GDP of $19.91trillion, is expected to be the largest economy by 2028, five years earlier than expected.

But under the veneer of economic growth and the glitzy appearance of the Chinese Superpower, there is a financial crisis that is being denied vehemently. It became visible with the Evergrande in 2021. The Chinese property sector crisis was sparked by the financial difficulties of Evergrande Group and other Chinese property developers, in the wake of new Chinese regulations on these companies’ debt limits.

But before this, Chinese authorities cracked down on the Ant group and the legendry ‘mascot’ of Chinese globalization – former Alibaba CEO Jack Ma. Common people in China are now reportedly boycotting the EMI payments to the failed developers and protesting on the streets to withdraw money from their own bank accounts.

The skeleton started to tumble out with the state’s action and the delayed response of the authorities clearly hints at the bigger malice in the economic fundamentals which lies under the grab of opacity and smokescreens of the Chinese state.

Sub Prime Crisis in China?

There are no individual land ownership rights in China but still, the real estate sector has been the favorite investment destination of the upwardly mobile Chinese urban populace along with bank deposits – to keep the money liquid at all times. High-interest rate is always a lure as happened in Henan province.

It is estimated that 70 percent of the Chinese household wealth is invested in real estate which has fueled a housing boom in the last two decades. However, 200 real estate projects and 80 property developers in China are currently facing a “boycott EMI” campaign from the homebuyers as financially strapped developers are not been able to finish the projects.

The real estate crisis has exposed banks to $9.2 trillion of bad debt – 25-30 percent of China’s GDP. China’s top four state banks—the Bank of China, the Agricultural Bank of China, China Construction Bank, and the Industrial and Commercial Bank of China are most exposed to mortgage lending. Economists say local, rural banks may be the most exposed to defaults compared to larger regional or national banks.

Bank withdrawal Protests

Banks too have been caught in this credit squeeze. In April 2022, the four banks in Henan province in China namely the New Oriental Country Bank of Kaifeng, Zhecheng Huanghuai Community Bank, Shanghai Huimin County Bank, and Yuzhou Xin Min Sheng Village Bank were the focus of the protests for having suspended cash withdrawals and frozen a total of $5.8 billion of customer’s deposits.

In response to the growing protests, local authorities in Henan weaponized China’s Covid-19 health code apps. Henan authorities had to relent and announced that starting on July 15, the bank depositors would be able to withdraw up to $7,442 from accounts that have been frozen since April 2022. It is widely believed that the run on banks in Henan may just be the start of a broader banking crisis.

A large-scale demonstration in the communist country is definitely a political embarrassment for President Xi Jinping seeking a third term and promoting his nationalistic vision of leading the country to “great rejuvenation.”

Xi’s Common Prosperity Campaign

Though the number of people living in extreme poverty has dropped dramatically over the past decade, more than 600 million people – about half of China’s population – live on an annual income of $1,858 or less. China has 81 billionaires on Bloomberg’s ranking of the world’s 500 richest people but the gap between haves’ and have-nots’ have also widened steeply.

One reason for the crackdown on Ant Group and its CEO Jack Ma was that they had become a much bigger brand than the Chinese state at the global level. The Regulators in China have also targeted some of the country’s most successful private enterprises and the data-rich tech sector. They are also trying to rein in what the government sees as the excesses of civil society, including rabid celebrity fandom, academic cram schools, and video gaming.

Accordingly, China has announced a sweeping overhaul of the $100 billion for-profit education industry, banning tutoring companies from making a profit and teaching the school syllabus on nights and weekends, among other restrictions.

President Xi’s focus on “common prosperity” is a mix of policy moves, reigning of market forces, and philanthropic exercises of the welfare state aimed at reducing the wide and persistent wealth gap. The common Chinese worker is in the center of all these moves as real estate, bank deposits and education are three sectors where the Chinese bet their money the most.

Moreover, Xi is aiming to touch the “greatness” accorded to Mao in China, and going back to communist brass tacks with the goal of “common prosperity” may still have takers in rural China from where the majority of the working class migrates to the cities.

But reversing the growth engine set in motion by Deng Xiaoping is going to have its own cascading after-effects for Xi’s China.

Is the world worried?

The global economy is highly integrated and China being the “world’s factory,” its economic health is a cause of concern for all. ‘Never put all your eggs in the same basket,’ may be the first cardinal rule of investing but the world blinded by low cost has thrown caution out of the wind.

The Covid-19 pandemic and supply chain disruption due to lockdown in China has jolted the world powers out of slumber and there is no quick fix solution as with its opaque labor and production policies, China would remain hard to beat at least in the manufacturing sector.

An atheist communist country with its iron curtain policies in a largely democratic world is definitely a cause of concern.

(Maj Gen (Rtd.) Sudhakar Jee, VSM is a former colonel of the Mahar Regiment. He has commanded troops in varied terrain, climate, and conflict zones. Currently, he is pursuing a doctoral thesis on the India-China border dispute.)


Disclaimer: The views expressed are not necessarily those of The South Asian Times

Images courtesy of (Image Courtesy: NBC News) and Provided

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