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China Corruption Crackdown
Topic Started: Jul 23 2013, 06:31 PM (686 Views)
Pasta
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It is late and I am watching Iron Chef America - Tournament of Champions (my favorite show) so am going to restrict my comments for now.

I do note that China has banned development/construction of all new public buildings, as well as refurbishment of existing public buildings for a period of 5 years.

The reason is that this has been identified as an area that is a significant vehicle for corruption. Also real estate tends to be noticed by every day taxpayers.

Again more analysis to follow as corruption is such a huge issue globally. But for the moment only the link and the article from the BBC:

http://www.bbc.co.uk/news/world-asia-23422985

Quote:
 
China has banned the construction of government buildings for five years, according to state media.

The move comes as part of a campaign by President Xi Jinping to show that the ruling Communist Party (CPC) is cracking down on corruption and waste.

Glitzy new government buildings, sometimes in impoverished areas, have been a source of public outrage.

The directive forbids luxury makeovers and expansions done under the guise of repair work, Xinhua newspaper said.

This updated photo shows the luxury golden interior decoration of an office building belonging to the state-owned Harbin Pharmaceutical Group Sixth factory in Harbin, in northeast China's Heilongjiang province. It may not look like a royal palace but this was apparently a state-owned drugs factory A view of the government office building in the city of Fuyang in Anhui Province, eastern China. Officials at the Fuyang government building in Anhui province have been hit by corruption scandals Government offices rise behind a large square in the city centre of Ordos, Inner Mongolia, China.  Government buildings in Ordos were built to serve 1.5 million people but the city is largely empty Continue reading the main story
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Chandeliers

The notice says some departments and local authorities have built huge government office compounds against regulations, tainting the image of the CPC.

Among the buildings that have attracted widespread disapproval in recent years is the western-style government office building in the city of Fuyang in Anhui province, in eastern China.

It reportedly cost 30 million yuan ($4.89m, £3.19m) to build and is referred to as the 'White House' by residents.

A state-owned drug company also caused outrage after photographs emerged apparently showing a building decorated to mimic France's Versailles palace, complete with gold-tinted walls and chandeliers.

Some government agencies have reportedly built luxury offices in seaside resorts where officials can stay for free or at deeply discounted prices.

The ban - described as an "across-the-board halt" - includes training centres, hotels or government motels, Xinhua said.

It also says government organisations should not receive sponsorship or donations towards construction projects, or collaborate with private companies.

"Banning the building of new government buildings is important for building a clean government and also a requirement for boosting CPC-people ties and maintaining the image of the CPC and the government," Xinhua quoted the directive as saying.

Tackling corruption has been President Xi Jinping's most high-profile policy since he became China's leader earlier this year.

He has warned that "corruption and bribe-taking by some party members and cadres" pose "severe challenges" to the Communist Party's rule.
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Pasta
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Lovely article as a follow up that starts to tie things together.

I did promise an analysis of this, which is due shortly.

Cheers

From the BBC: http://www.bbc.co.uk/news/business-23486466

The article:

Quote:
 
China has ordered a nationwide audit of all government debt, underlining fears that the recent slowdown in its economy may impact the financial sector.

Local governments in China borrowed heavily after the global financial crisis to try to sustain growth rates.

The last audit, published in 2011, showed they had debt of 10.7tn yuan ($1.7tn; £1.1tn) by the end of 2010.

Debt may threaten China's growth, and there are growing fears that local governments may not be able repay.

"In line with a request of the State Council, the National Audit Office (NAO) will organize auditing agencies across the country to carry out an audit of government debt," the national auditor said in a statement on its website.

The NAO said that it had halted all other projects to conduct the audit, but did not give any other details or a timeline for the audit.

Pressure on finances

A large part of the local government borrowings were taken up after the global financial crisis as Chinese authorities released a 4tn yuan fiscal stimulus.

According to the China Banking Regulatory Commission, local governments took up 80% of total bank lending in China at the end of 2010.

Some of the borrowings were spent on infrastructure projects, such as road and rail - seen as vital to sustain orderly economic development - but some of it also went into property construction.

There have long been fears that the projects may not be financially viable in the long run.

"A lot of the projects that were invested in will not have the kind of returns that they had initially estimated," said Dariusz Kowalczyk, senior economist with Credit Agricole-CIB in Hong Kong.

"That coupled with slowing growth means that the finances of the local governments may not look too good."

'Large and unknown'

At the same time, there have been concerns about the size of total government debt in China, with some arguing that the figures for local government debt have been underestimated.

According to the NAO's last audit, local government debt was around 25% of the China's total gross domestic product (GDP).

But many have said that the levels may be much higher than that.

Mr Kowalczyk said that the concerns about the bad loans in China were serious because "the size of the debt is large and unknown".

However, he added that the audit was a step in the right direction and would be good for the country in the long run as it should help bring out the details on the the size of the problem.

There are also concerns over the way the local government debt has been managed.

Last year, the audit office said that it had uncovered 531bn yuan of irregularities in local government debts.

It said that breaches included "irregular credit guarantees", "irregular collateral" and "fraudulent and underpayment of registered capital".

The Chinese central government has repeatedly stressed the urgent need to guard against financial risks, including the local government debt problem.

In June, Liu Jiayi, auditor general with the NAO, warned at a session of China's top legislature that local governments must improve their debt management in order to handle escalating growth in local debt.
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Pasta
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The 2008 financial crisis was a major event that affected the global economy and threatened recession.

In the past (starting with the great depression) to date, the world relied heavily on the US and government programs to buy the world out of the economic malaises.

US consumerism has always led the way for the last 40 some odd years.

This 2008 crisis was a bit different from before in that the focus was on US and European financial institutions. They were in big trouble as were sovereigns. What a helluva one two.

The US and European efforts were to save major financial and industrial institutions. It was not necessarily an effort to boost or support consumerism to bolster economies.

In fact bolstering consumerism would not have done too much to support the US and European economies as that would have been short term, given that consumers would have been buying things that would not contribute to local jobs. Most of manufactured consumer goods now come from China.

NOW - China knew that massively declining external consumerism was going to affect her economy and it surely did.

So what was China to do?

For the first time in modern history China had to push internal spending to maintain jobs and the economy and growth without being able to rely on US consumerism.

So China created jobs via government infrastructure spending. Reasonable on the surface as this would enhance domestic infrastructure. Improve shipping and other logistic efficiencies.

As with all government directed/sponsored trickle down initiatives, it cost too much. What China did was open internal credit and directed infrastructure works.

What happened, however, was that the various and massively numerous local governments used this new free credit to finance local projects as a means for the local officials to rape, pillage, steal. And Chinese are pretty good at that sort of thing.

We now have a really incomprehensively large number of white elephant real estate projects that will never be economically viable. And there are people who, together with their friends and relatives, have stolen lots of money.

What I do appreciate about China - if the central government is run by a few good men - is that the central government can make dramatic decisions quickly.

The five year ban on any government building is wonderful - anyone breaching will be imprisoned.

Secondly the country wide audit of banks and their loan portfolios will determine more or less how much of the lending done will be written off. Wonderful transparency.

Can't fix the problem if you can't quantify the problem.

Make no mistake - the central government is going to incarcerate any regional official (bank employees, government employees, contractors, etc.) that they can find. And so they should.

I like this new Chinese government from this perspective.

What is going to be really interesting (and I have no idea of the outcome) is whether or not China is really capable of dragging herself out of potential recession relying more completely on domestic consumption.

First time.
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