These Guys “Made” 2% of Their Country’s GDP Last Year

Over the last 30+ years, the Chinese government has maintained control of the economy by gradually implementing reforms that permit greater economic freedom to its citizens.

The citizens in turn have gone along with this scheme because they believed that the system would permit them a greater quality of life and the potential of getting rich before they got old.

In broad brushstrokes, the data supported this view: starting with the re-opening of formal trade arrangements in 1971, China has undergone a near unprecedented level of economic transformations. The country’s per-capita income doubled from 1978 to 1987 and again from 1987 to 1996.

In those 20 years, official statistics indicate more than 300 million Chinese ascended out of poverty with accompanying dramatic changes in lifestyle, professions, and diet: between 1985 and 2008, average Chinese meat consumption more than doubled from 44 pounds to 110 per year.

Moreover, the China consumer (which most analysts believe has been suppressed) saw a tremendous change in habits, with consumer spending rising an average of 9% a year for 30 years. Even high-end luxury goods manufacturers such as Burberry and Tiffany’s opened stores there during the boom.

However, this all came to a screeching halt in 2008. As the global economy collapsed, China found its export driven manufacturing economic model was terribly flawed. The Government, in a panic, unleashed a stimulus program equal to nearly 18% of China GDP.

This plan worked until two items developed:

1)   The Global Central banks let the inflation genie out of the bottle.

2)   The Chinese population began to notice that while it was suffering, many ruling party officials were living high on the hog.

Regarding #1, with nearly a third of its population living off less than $2 per day, any bump in food prices hits China much harder than the US and other developed nations. With food prices hitting record highs in 2008 and then again in 2011, China began to face massive civil unrest.

Regarding #2, China’s government has a history of rampant corruption. Between 1991-2011, it’s estimated that between 16,000-18,000 Chinese officials fled China taking 800 BILLION RMB (roughly $125 BILLION) with them. Bear in mind China’s entire GDP was just 2.1 trillion RMB in 1991. By way of perspective, imagine if members of US Congress fled the US taking $2 trillion+ with them (US GDP was roughly $7 trillion in 1991).

This corruption continues today. If anything it’s gotten worse:

The CDIC report, which was obtained by the Economic Observer newspaper, suggested that nearly 10,000 luxury homes had been sold by government officials in Guangzhou and Shanghai alone last year.

It also claimed that an astonishing $1 trillion (£630 billion), equivalent to 40 per cent of Britain’s annual GDP, had been smuggled out of China illegally in 2012.

Economists and experts cast doubt on the figure, but said the flow of money from China was dramatic. Li Chengyan, a professor at Peking University, suggested that a total of roughly 10,000 officials had absconded from China with as much as £100 billion.

Let’s provide a little perspective on the more conservative number in the above article. £100 billion translates to roughly $157 billion. China’s entire GDP is $7.3 trillion… so Chinese officials stole an amount equal to roughly 2% of China GDP in 2012 ALONE.

An equivalent case for the US would be if it were discovered that members of Congress fled the US taking $300 BILLION with them last year. Bear in mind, if you added up the total net worth of every politician in Washington you wouldn’t come even close to $300 billion.

And Chinese officials stole the equivalent of this in ONE YEAR. Not over the course of a decade but in a single year.

In a country where the average college grad makes $2,500 per year, this kind of corruption is a MASSIVE problem for the Chinese government. Which is why those betting on China continuing to grow at a breathtaking pace are overlooking some of the larger cultural problems the People’s Republic is facing today. With inflation on the rise and corruption becoming more and more apparent, China has MAJOR problems on its hands. And massive stimulus will only exacerbate them.

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Posted by Phoenix Capital Research