Wall Street runs its financial operations using time-honored processes based on data and statistics. Such data is needed to ensure investor interests are not jeopardized. The standards are rigid and necessary in a dog-eat-dog world where people take advantage of others.
Generally, there are no exceptions to such procedures. The government and Wall Street insist upon transparency and honesty. Operating without data is like driving blind. It must never happen with other people’s investment funds.
There is one huge exception to this rule: China. Wall Street has poured trillions of dollars into China. However, China is neither accountable nor transparent. Western capital enters China without the tools to evaluate the risks caused by the massive systemic problems inherent to the communist system. Everything is based on deception. Yet, the Western business world accepts liability wholeheartedly.
Chinese Statistics Notoriously Awful
Chinese government statistics are notoriously awful. Local government officials must constantly produce ever-brighter figures that the central government wants to hear, not those that exist. The Communist Party leadership, on its part, also fudges the number to project the best possible picture to Western capitalists and incite more investment.
The resulting scramble to doctor statistics leads to a world of economic irreality. Officials use the phony data to spend and borrow. The system then blows up. Using cash gained from Western investment dollars, the central government usually ends up bailing out offenders until the process starts all over again.
If You Can’t Doctor a Statistic, Suppress It
However, Communist Party leaders sometimes find that the most efficient way to deal with bad statistics is to suppress them altogether. By hiding a crisis, they hope it will go away, and pestering Westerners will stop asking embarrassing questions. Two recent examples show how this suppression system works.
In June, economic observers noted official figures that set the youth unemployment rate at a record 21.3 percent. The rate indicated a lagging economic recovery and a potential crisis. The government’s response was to stop publishing the statistics.
“They rig the numbers, and, when their numbers get embarrassing, they stop producing them,” remarked Derek Scissors, a Chinese studies scholar at the American Enterprise Institute to The Wall Street Journal. “They will get away with it. After a while, you’ll have nothing to discuss.”
Working in the Dark
In the case of the youth, Western analysts largely revert to anecdotal evidence and private data to gauge reality. However, such information is sketchy and incomplete.
The actual situation of youth in China is unknown. It is yet another crisis waiting to explode. Chinese social media reveals the existence of what is called the “lying flat” movement. These youths do the minimum at work and opt out of a career. However, there is no way to qualify it.
The suppression tactic is largely working since discussion of youth unemployment in China has largely disappeared from Western media.
Meanwhile, scholars studying these problems note that the Chinese government is quietly suppressing other sources of economic data. China National Knowledge Infrastructure, a massive government database of reports, has restricted its use outside China. Wind Information, a Shanghai-based data provider, has stopped foreign research firms and think tanks from renewing their subscriptions. The Chinese Ministry of Human Resources and Social Security quietly stopped publishing its quarterly job reports.
Western companies must fly blind as they try to weather the sagging economic conditions of China caused by its COVID lockdown and draconian ideological crackdowns.
A Hidden Debt Time Bomb
A second economic crisis of monumental proportions looms on the horizon. It could have a massive impact on Western companies operating there. It involves practices that Wall Street would soundly condemn outside China.
However, once again, no one knows the full extent of this hidden crisis. Not even the government has a handle on it.
The crisis involves cities and provinces accumulating vast amounts of off-balance-sheet government debt. The International Monetary Fund and Western banks estimate the hidden debt to be between seven and eleven trillion dollars.
Local government officials eager to impress central bureaucrats (and enrich themselves) amassed this debt by issuing bonds and other financing vehicles to pay for roads, airports, bridges, and other infrastructure projects. Sometimes, the projects are “Potemkin villages” meant to impress outsiders or unneeded “bridges to nowhere.”
Swapping Old Debt for New
While no one can quantify the exact amount, Chinese officials do know that the debt is threatening financial stability and must somehow be addressed. The country is starting to feel the financial strain of these heavy liabilities. However, the solution is not a reform of the communist system but to swap hidden debt for new public debt instruments.
This time, there are no vast state funds to bail out offenders and fellow communist comrades who enriched themselves from infrastructure deals. Analysts fear that a wave of defaults could snowball nationwide and freeze up credit markets, endangering investment.
Handwriting Not Written on the Wall
Moody’s Investor Service has read the handwriting not written on the wall and lowered China’s credit rating from stable to negative. Other Wall Street firms are taking the hint.
After operating in a business climate that contradicts all Western business norms, Wall Street is getting out of China. For the first time since the nineties, more investment dollar assets flowed out than in during this year’s third quarter. Private equity funds that once averaged $100 billion annually in investment register a mere $4.5 billion this year.
For years, offshoring companies have learned the risks of doing business in China. Many followed the mantra over the past decades that mandated setting up operations in China. However, it proved not to be the source of the enormous profits that were promised.
Throughout the investment period, Wall Street firms were the ones that made huge profits by handling the massive amounts of money involved in the boom. They invested in startups, managed money for Chinese firms and institutions and facilitated transactions. When scrutinized by U.S. government officials, they could always be counted upon to lobby for China.
The End of the Boom
That boom has ended due to unorthodox financial practices and the ever-present communist ideology behind everything. Wall Street is finding hostility from government officials trying to stem the flow of capital out of China. The rise of Xi Jinping has brought back hard-handed communist norms and increased surveillance.
Congressional leaders are also pressuring Wall Street to leave, pointing to complicity with China’s human rights abuses, religious persecution, and use of Western technology for weapon systems. Rep. Mike Gallagher (R-WI) of the House Select Committee on the Chinese Communist Party has blamed businesses for enabling China’s superpower ambitions that could be used against America.
The West is finding out the hard way that easy money does not pay off. A regime built upon lies will never yield a long-term return on investment. Western capital has built up a superpower that openly threatens the world order. As the situation deteriorates in China, Wall Street can expect the worst. It only has itself to blame.