The Economic Cost of the Beijing Olympics from SHAGYA BLOG
July 5th, 2008
The following item was originally printed on the China Election and Governance Website. They describe themselves as a "resource center for governance and election affairs and gives scholars worldwide the opportunity to study Chinese politics and offer reform measures". This is interesting since the source of this site claims to be resident within China and yet appears to be critical of state policy over there. Perhaps this is an example of intelligent ruling sources that has been mentioned on this blog before. China's economy is moving toward a serious crisis. Although its causes have been built up in the past, the most direct reason is that Premier Wen Jiabao adopted a completely wrong approach to imported inflation. His approach was a policy of comprehensive control of prices and monetary tightening to suppress rising domestic prices; a result, China became the trough of the world's lowest prices. Were China still a closed economy like 30 years ago, Wen Jiabao's policy would not have amounted to such a big problem; however, China has become a large country highly dependent on external trade; if it becomes the trough of the world's low prices, it means that its economy is bleeding.
This in fact is the case. International oil prices have soared to more than USD 110 a barrel, while Chinese oil companies' prices are controlled at a little over USD 80. The result is that all international airlines now refuel in China. The outlook for China's grain supply and demand is most frightening. Wen Jiabao doesn't dare raise China's grain prices closer to international market levels, but fertilizer prices must increase in line with them. The result is that given the grain purchase price fixed by the government, many peasants can no longer afford to buy fertilizer. According to state television reports, fertilizer sales have sharply declined this year and a large number of farmers have switched to farmyard manure. Grain output is likely to be seriously affected as a result. On the other hand, given that grain prices are far below international market levels, a great amount of China's valuable grain stocks are in one way or another being exported overseas. To take rice as an example, China's government-set price is currently USD 300 a ton, while the international market price has risen to around USD 1,000. Attracted by such huge profits, there are of course many business people who are willing to risk the dangers of illegal smuggling, which is greatly facilitated by China's long borders. Recently, when Wen Jiabao was in Haikou he tried to guarantee the supply of cheap Chinese rice to Hong Kong. When 10,000 tons of rice was shipped there, it was sold on to other countries without even going on the market. Wen Jiabao was said to be completely at sea about this, and not long after there was panic buying of rice in Hong Kong.
Wen Jiabao's comprehensive price controls and tightening of the money supply have brought about great difficulties for the domestic economy. Some of the domestic mainstream media have broken through the controls on news and reported the rapidly deteriorating economic situation, placing Wen under pressure. On 25 April, the Economic Observer published a report entitled "Private Enterprise Tormented," which dealt with the difficulties faced by private enterprises under Wen Jiabao's strict credit and price controls [1]. Of the 5.5 million private enterprises, less than 20 per cent can get bank loans; most have to get illegal financing from loan sharks. Price controls are even more frightening: in the face of sharply rising costs, private enterprises are not allowed to raise selling prices; if they do, they are "illegal." A front-page story in the Economic Observer on 5 May reported on the difficulties faced by central state-owned enterprises [2]. Entitled "Central Enterprises Get Set for Winter," it said that due to price controls despite rising costs, 150 state-owned enterprises directly under the Central Committee were, like private enterprises, having unprecedented difficulties, and were expecting to undergo a two-year "winter." Some large SOEs are threatened with breaks in their funding chains. The report also disclosed a Citigroup report estimating that from 2002 to 2006, Chinese enterprises' costs due to price distortions had been underestimated by as much as 3.83 trillion yuan, of which labor costs had been underestimated by 200 billion, commodity prices by 1.6 trillion, and capital costs by 330 billion. And global inflation in combination with China's price controls is going to make China's economic bleeding worse.
Wen Jiabao's attempt to go against the tide of global inflation has led the Chinese economy to an utterly absurd income distribution pattern: producers subsidising consumers, the poor subsidising the rich, backward areas subsidising developed areas and Chinese subsidising foreigners. This is an unsustainable situation. There have been reports that, due to the inversion of electricity prices, electricity supplies to some power plants have virtually stopped, cutting off power in some small cities—how can the economy not be affected?
Why did Wen Jiabao adopt such a foolish policy? Why act so arbitrarily? Why could no one stop him? The Beijing Olympics are, in my view, a great mental burden for China's mediocre and incompetent leaders. Wen clearly does not want peoples' resentment at soaring prices in China to boil over during the Games. And none of the other top leaders dare correct his mistakes—they are afraid of the political responsibility for an unsuccessful Beijing Olympics landing on their heads.
The Beijing Olympics have delivered the Chinese Communists an international public relations disaster; and it seems now that they are likely to bring about an economic disaster as well. If so, a political disaster will inevitably fall on the heads of those in power in the CPC.




