In the recent decade ( 2003-2013) , world has witnessed,China’s tremendous Economic growth powered by its diversified export oriented economy ,with sizeable import of raw materials like Coal,Iron ore,Petroleum products etc. to meet its domestic energy needs.In 2013,china had a total trade surplus of $259.24 billion by exporting goods worth $2.63 trillion & has $3.5 trillion in its Forex reserve. With this amazing monetary figures one may think that China has strong economic credentials & a disciplined financial system & is definitely marching ahead,with its contemporaries especially in the BRICS community still struggling to keep their economic condition afloat,while rest of the global economic powers gradually recovering from 2008 economic shock. More often ,china’s newly earned economic might is compared with US and an intense debate ensues that who owns whose key to economic interdependence & how it affects America’s Asia-Pacific policy & China’s gameplan in South China sea,Indian Ocean Region,Persian gulf, Middle East ,Aghanistan & in African continent.So,this further triggered my curiosity to delve into the chinese economic system,which is one of the important factor contributing to its huge military modernisation programme & her aggressive behaviour in the South China & East China sea ,with its growing clout in African countries.

In free market economies like India,Indonesia,Japan,European Union,US,UK and other western countries their currency value fluctuate depending upon Domestic & International Market conditions,Sovereign Debt ,Trade Imbalance (Import & Export), Monetary Policy ( as decided by their Central Banks like RBI,US Federal bank) , Political Stability etc.,whereas China, fixes the exchange rate of its own currency (YUAN) against  Dollar ($) & other leading currencies every morning before the transactions begin in its stock markets i.e around 0915hrs (UMT+8). So basically it has a very tight economic system with two key players acting as the main controller of its financial structure : The Chinese Government ( ran by Communist party of China) & People’s Bank of China (PBoC)- china’s central bank).

So the moot question is how China despite wavy world economy manipulating its Currency & keeping its value intact ….. ?

Unlike emerging economies (India,Brazil,South Africa etc.) China doesn’t need foreign currencies to finance its trade & investments abroad ,rather she borrows loans to finance her banks and then banks lend each other to keep ailing domestic companies afloat.So you can say that this borrowed money provided china’s financial system with easy liquidity(cash).But the interesting part of this cheap money lies in the way it is raised.Here PBoC (People’s Bank of China) plays a crucial role to push or pull the value of Yuan.So as to secure loan from foreign banks, it issues Letter of Credit (LC- they are meant to assure seller of any product that it will get paid on behalf of the buyer once the product is delivered to the buyer) to real as well as shell companies ( frontline companies created to carry out transactions with no real manufacturing activity) ,when they provide PBoC  with trade order (trade order contains information regarding selling/buying of any products),the bank in turn use the Trade Order as its collateral and get the Loan amount from the foreign bank,then it converts the money received in Dollars into Yuan & provide the amount to the respective Companies ,who then invest the money in its Stock markets ,Housing properties,manufacturing activity etc.The bank in turn pocket the Commission arising out of the difference in the value of currencies dollar & yuan ,when the loan is repaid by the bank at the end of the loan period to the foreign bank. The PBoC prints yuan, hands it to Chinese banks, which print up LCs for Chinese companies (or help facilitate the trade credit directly with a foreign bank). Foreign banks then issue dollar loans with the LC (or an asset) as collateral,and those dollars are swapped for yuan, given back to the Chinese company, which then invests it in China = Instant finance,no hassel.

Chinese government doesn’t track the issue of LCs & Chinese Banking Regulator doesn’t hold LC’s as loan ,else they would have caught this new from of instant money making business of their banks .Currently,Chinese banks have issued outstanding LCs of 3 trillion Yuan ($482 Billion ) which itself has surpassed its total trade growth in 2011 & 2013.So this doesn’t mean the Chinese Goverment is completely oblivious of this business,instead as i said before in this article ,they deliberately stalled the opening of the country’s Capital Account ( the account keeps track of Capital expenditure [in FDI,Shares & Stocks] & Incomes by the way of funds flowing in & out of the Economy) to facilitate such easy money making business of their banks & to fund their defaulting Companies without touching its $ 3.5 trillion foreign reserve.Unlike free market economies China doesn’t have Capital Account to keep track of its investments and Income.Due to this china also encourages its companies to keep stock of dollars with them to bail themselves out of bankruptcy in case of emergency.

Now, you may have the doubt ,why do foreign banks lend money to chinese corporations despite knowing its bad practices ? The answer lies in its huge Foreign Currency Reserve & the confidence on its rising export & credit ratings being accorded by the Rating agencies like Fitch,Moody,Standards & Poors etc.

Another way of raising money in Chinese system is FAKE TRADING or FAKE INVOICING.Chinese companies see this as a suitable media to earn profit & make some easy money. They borrow dollar loans by faking their trade taransactions or by swelling their order books,convert them into yuan and invest them in the real estate properties,wealth management products & risky investment products through Non Banking financial Companies engaged in Banking buisness that give rise to Shadow Banking.As long as the Yuan is strong against Dollar ,they are assured of the profit arising from the difference between the two currencies ,otherwise they become sick companies if yuan becomes weak. So here PBoC comes into picture to regulate Yuan.In 2013 around $500 billion of “hot money,” flowed into China, largely via the fake-trade channels.

So, as to control appreciation of yuan in domestic & international market Chinese government blocks the Speculative trading by its domestic Companies of its currency,else that will affect its export competitiveness.Chinese government subsidizes its exporters with enough finance to purchase dollars & hence they use it for further acquisitions abroad.

Again,China also has a feat of being World’s biggest Natural Resource hungry country owing to its huge manufacturing & export oriented economy.It imports huge amount of Coal,Copper,Iron Ore and many other metals needed by its industries,but what lesser known in the public domain is how it uses them.Since its well known of China’s housing Bubble,Ghost towns ( towns with no inhabitants/Apartments not being purchased by the people & are lying vacant) etc. One should doubt how the companies involved in raising those ghost cities , Ailing Manufacturing units come out of shock without affecting the Country’s financial System.Now the crux lies in the way they pay their collaterals.Chinese metal traders have long imported copper & iron ore as collateral for onshore loans (loans taken from Banks or Financial institutions within the country), profiting both from the Strong Yuan and from high onshore interest rates & sometimes they also profit from using the same pile of metal to borrow multiple loans.Around 60-80% of China’s imported copper is used as collateral for loans & since most of that was bought priced in dollars & will be sold back onto the global market in dollars,the weakening of yuan makes those dodgy traders lose money & in panic they sell back these accumulated metals to cut back their loans & also to bail out their firms..

It seems China follows the teachings of Suntzu in Financial Systems as well to Inflate & deflate its Currency , to Sack or Sail Companies to keep its systems away from breakdown ..So Is China heading for a Financial Breakdown in Days to Come , time will say that …….


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4 thoughts on “Dragon’s Economic Deception : China’s money Game

  1. A good survey. China has built enormous power and influence by its amoral, LONG TERM planning and meticulous execution of plans based on the pursuit of SELF INTEREST as a NATION with considerable navigational flexibility in reaching the target destination. Today Australia and the US are beholden to and dependent on China for trade and investments. The Australo-American prosperity depends on the Chinese piece of their Jig Saw puzzle as does much of Africa and the “Third” World. Russia is dependent on China for international standing, now that Obama’s West have turned the G-20 into a Kindergarten Lunch Break replete with “the silent treatment”, “Two” and “Coventry”. Islam has less hold on China than even Russia which both of them abhor while the West (excluding Australia) is making haste slowly to slip into the maws of Sharia. China even cavorts with Pakistan, the bomb and terror wielding sword arm of Islam, while yet keeping Islam under the lid and at bay. India is the joker in the pack. Too big to be just a Nation and too weak to aspire to the status of a Nation. Rendered so impotent and amorphous by sixty eight years of navel gazing, dividing to rule, and waging war on itself Constitutionally or otherwise. A nation occupied by home grown aliens who rape, plunder, loot, and oppress with the instruments of “reservations” and “corruption” under the yoke of a resultant Politician-Bureaucrat-Police-Judiciary-Crony Kleptocracy that believes the “Nation” is the self serving interests of each member, each member’s family, or, in the broadest terms, each member’s socio-metric community while spouting National and even International ideals to justify the subversion of resources of the State to personal pomp, pelf, pleasure and perpetuation, having dispensed with both “rule of law” and equality under law” under the name of “democracy”! Here is a vignette of memory from my days in Africa: “China was active in Africa since the 1990s. They had an operative there in Nairobi who ran the best Chinese Restaurant in town, spoke English with his family and was point man for Chinese plans in Sub-Saharan Africa. He carried a PRC Passport and was close to the Pakistan High Commissioner. He travelled a lot and was quite open about China’s intentions. The plans were ready and waiting for the money to flow from the Chinese export boom to the US. I knew him well in 1995-1999 and was often invited for his soirees, with free food and drink to discuss matters related to the Internet and Information and Communication Technology. Pakistan is a more nuanced case. Pakistan is the sword arm of Saudi Arabia, the long term ally and funder of US opinion and decision makers. It is Pakistan that brokered the US-China entente cordiale. Nuclear weaponisation came to Pakistan from the US (not China) albeit through various routes, including Europe where Holland was an integral part of the CSIR (South Africa) -Israel Nuclear Weapons program and from where A.Q.Khan procured Pakistan’s centrifuges. The US has always played the “Either you are with us or your are against us” card to differentiate between “Good” (our) terrorists and “Bad” (their) terrorists. (I used to be a frequent visitor to the CSIR facility on Meiring Naude Road, Pretoria during the ’90s and was on a Nile cruise in December (Christmas) 1996 watching Egypt’s best belly dancers with Musharaf, Qaddafi and Mubarak on my way back from an Internet seminar at Oxford. I was, at that time, based in Nairobi working on bringing the Internet to Africa). I had warned the Indian High Commission of an imminent terrorist threat, in writing, after seeing Mujahideen men in Pathan suits with skull caps and beards) receive smuggled parcels from Air Hostesses of Pakistan International Airlines at Jomo Kenyatta Airport while waiting for a flight to Johannesburg. I was surprised when the attacks materialized on the US embassies in Nairobi Kenya and Tanzania as the US and Saudi-Wahabi Islam were allies then as now.”

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