ANALYSIS: China’s Economy Stuck in Deeper Crisis Due to More State Interventions

RMB weakens; more bad bank loans are passed to Chinese nationals and foreign stockholders

A staff member counts money at a branch of the Bank of China in Lianyungang, Jiangsu Province of China, on Aug. 10, 2011. VCG/VCG via Getty Images

News Analysis

The devaluation of China’s currency, the yuan, has plummeted to its lowest point this year due to failed government interventions amid the economic depression.

More money issued by the Communist Party’s financial institutions will be used as a government hedge against the collapse of the banking and financial system, shifting the country’s debt burden onto Chinese nationals, which will worsen the country’s economy, said financial analyst He Bing.

On July 1, the offshore RMB (CNH) weakened to 7.26 per U.S. dollar, setting a record low for eight months since last November, with a value reduction of nearly 5 percent this year.

According to data from the State Administration of Foreign Exchange, in the past half a month, the mid-point of the RMB exchange rate heavily depreciated by 769 basis points from 714.89 on June 15 to 722.58 on June 30.

The rapidly weakening RMB is partly due to the Chinese central bank’s (Bank of China’s) curbs on interest rates out of concern to stimulate the sluggish economy, He Bing said on Elite Forum, a Chinese-language program of The Epoch Times, on June 24.

A security guard and an electricity board showing foreign currency deposit rates are reflected on a glass wall of a bank in Chengdu of Sichuan Province, China, on July 22, 2005.China Photos/Getty Images

On June 20, the central bank lowered the Loan Prime Rate (LPR) by ten basis points from the previous period for both the 1-year and 5-year periods after reducing the seven-day Reverse Repurchase Rate, the Standing Loan Facility (SLF), and the Medium-Term Loan Facility (MLF) by ten basis points each in the open market on June 13 and 15.

That 10-basis points reduction is not that big a move and much less than the usual 25 basis points of an interest rate cut. But it devalued the RMB significantly, in He Bing’s view, indicating that the Chinese economy is “quite vulnerable.”

In addition, while other countries are fighting inflation and tightening their currencies in the post-COVID period, only China’s central bank has opted to ease money, highlighting that the country’s economy is trapped in a “unique” dilemma, she said, noting that after June 1, the U.S. dollar index fell against major currencies except Chinese yuan.

He Bing believes that another reason for the yuan’s weakness is that interest rates on the U.S. dollar have been rising. In contrast, interest rates on the yuan have changed relatively little, along with the downturn in the Chinese economy and capital outflows from the stock market.

The continued depreciation of the Chinese currency challenged the Bank of China Research Institute’s forecast released on March 1. It said that China’s economy would recover and that the RMB exchange rate would “stabilize while rising” in 2023.

According to economic data for May, released by Shanghai Securities on June 20, China’s macroeconomic data on industrial production, fixed asset investment, and consumption fell short of expectations, with the value added by industries growing by 3.5 percent, down 2.1 percent from 5.6 percent in April; fixed asset investment growing by 4.0 percent year-on-year in May, down 0.7 percent from 4.7 percent in April; and total retail sales of consumer goods rising 12.7 percent year-over-year in May, a 5.7 percent decrease from April’s 18.4 percent.

“[China’s] market entities are not optimistic enough about the prospect of economic recovery, there are not many investment opportunities in the real economy, and the economic vitality is weak. Meanwhile, the real estate market remains in a slump, and residents prefer to deposit rather than to consume,” said Li Gengnan, columnist for the Chinese portal Sina Finance in a June 21 article.

With state intervention, the Chinese economy is currently characterized by ample market liquidity and “easy money,” according to Li. “Easy money” refers to a monetary policy in which banks regulate market liquidity by increasing the supply of funds.

Banking and Financial System

Jing Yuan Finance, an economic commentary video channel with He Bing as the producer, reported on June 22 that the issuing amount of RMB would be probably calculated based on the banks’ bad debts. In other words, the more bad debts the banks have, the more RMB that the CCP government will print out, and the less valuable RMB will be in the hands of the Chinese people.

China has not yet erupted into a large-scale financial crisis so far. However, the Chinese Communist Party’s (CCP) financial system has been on the verge of collapse as per Western economic indicators, “That is because the CCP has passed the crisis on the Chinese people,” and RMB devaluation will add to people’s burden, it said.

Jing Yuan Finance reported that by means of intimidation and coercion, the CCP authorities have cut off depositors from demanding to withdraw their savings from the banks, regardless of people’s desperation about the economic outlook and insecurity about their money.

A woman leaves the Bank of China in London, England, on July 21, 2020. Luke Dray/Getty Images

Moreover, China’s communist authorities commonly strip banks of their bad debts and pushes them onto every Chinese citizen to pay, according to Jing Yuan Finance, citing research data that that it traced back to 1999-2000.

At that time, China’s four major state banks—the Bank of China, the Industrial and Commercial Bank, the Agricultural Bank, and the Construction Bank—accumulated a considerable volume of non-performing loans, bringing them to the blink of bankruptcy. In the face of a crumbling financial kingdom, the CCP’s then-ruling Jiang Zemin government set up four major asset management companies—Huarong Assets, Great Wall Assets, Orient Assets, and Cinda Assets—to address the bad debt crisis.

First, the Ministry of Finance of the CCP allocated 10 billion yuan (about $1.2 billion at the average exchange rate in 1999) to each of the four companies as registered capital. Then, the central bank provided 570 billion yuan (about $68.4 billion) for each in refinancing loans; and third, the four companies issued 820 billion yuan (about $98.4 billion) in bonds to their respective banks. Thus, each company had access to more than 1.4 trillion yuan (about $168 billion) to pay off bad debts.

In a word, asset management companies help banks pass bad loans to the state treasury as “government debts,” thus making all a country’s nationals pay for them.

Yet, the stock of non-performing loans at the four largest state-owned Chinese banks remains high even after stripping away billions in bad loans: at the end of 2002, the non-performing loan ratio reached a staggering 26.12 percent, including 26.01 percent for the Industrial and Commercial Bank, 36.65 percent for the Agricultural Bank, 25.56 percent for the Bank of China, and 15.28 percent for the Construction Bank, according to an article published on Finance 40 Forum on April 6, 2018.

The CCP then came up with its so-called “stock reform,” which facilitated the big Chinese banks going public to raise money, with the Bank of Construction and Bank of China listed on the Hong Kong Stock Exchange in 2005 and 2006, respectively.

From then on, the state banks have also extended risks to stockholders inside and outside of China, Jing Yuan Finance reported.