|Mao is crying.|
More than $1 trillion in secret cash sneaked out of China in the last 10 years (link) - China’s capital account might be closed—but it’s not that closed. Between 2003 and 2012, $1.3 trillion slipped out of mainland China—more than any other developing country—says a report (link) by Global Financial Integrity (GFI), a financial transparency group. The trends illuminate China’s tricky balancing act of controlling the economy and keeping it liquid.
GFI says the most common way money leaks out in the developing world is through fake trade invoices. The other big culprit is “hot money,” likely due to corruption—which GFI gleans from inconsistencies in balance of payments data.
In China, both activities have picked up since 2009. In fact, $725 billion—more than half of the outflows from the last decade—has left since 2009, just after the Chinese government launched its 4 trillion yuan ($586 billion) stimulus package.
Even after that wound down, the government encouraged investment to boost the economy, prodding its state-run banks to lend. Since loan officers dish out credit to the safest companies—those with political backing—this overwhelmingly benefited government officials and their cronies.
That’s left small private companies so starved for capital that they’ll pay exorbitant rates for shadow-market loans, which a lot of China’s sketchy trade invoicing outflows likely sneaked back in to speculate on shadow finance and profit from the appreciating yuan. Corrupt officials, meanwhile, shifted their ill-gotten gains into overseas real estate and garages full of Bentleys.
Those re-inflows inflate risky debt and had driven up the yuan’s value, threatening export competitiveness. China’s leaders were not exactly happy about this, and in March its central bank drove down the value of the currency in order to discourage hot money speculation on the yuan’s appreciation.
China’s policies leave it with few other options. To avoid the economic nosedive that likely would follow if the bad debt got written down, China’s leaders have the banks extending and re-extending loans, hoping to deleverage gradually.
That requires an ever-ballooning supply of money, though. The slowing of China’s trade surplus and foreign direct investment inflows leaves the financial system dependent on new sources of money—like speculative inflows from fake trade invoicing.
The danger of this is apparent already. For example, the government’s June 2013 crackdown on fake trade invoicing caused a seize-up in liquidity, pushing banks close to a meltdown.
This precarious relationship with liquidity might partially explain “Operation Fox Hunt,” the crackdown on Chinese government officials who have fled China or transferred assets to family members abroad. Already, 329 “foxes” have been snagged, and the government just demoted around 1,000 officials (paywall) whose relatives abroad refuse to return to China.
Xi’s so-called anti-corruption crusade has boosted his populist bona fides with the people. But there’s likely more behind it than just public relations. With China’s real estate market in the doldrums, its economy slowing, and its leader cracking down, the “foxes” have more reason than ever to sneak their spoils overseas. Making sure they don’t isn’t just a matter of legality, but of protecting China’s financial system from freezing up once again.
Anti-Corruption Show Trials In China Take A Salacious Turn
(Mod: According to the following report in yesterday's Los Angeles Times, these "foxes" and their "flies" are apparently some quite frisky and frolicsome Communists. What would Mao think?)
At Chinese brothel, a room for Communist Party cadre fantasies (link): From offering Japanese schoolgirl uniforms to creating rooms tricked out with traditional Chinese wedding decor, China’s underground sex industry is always trying to keep up to date with its clients’ fantasies.
So perhaps it’s no surprise that one brothel decided to create rooms outfitted with all the trappings of a Communist Party official’s office.
Recent anti-graft crackdowns have seen tens of thousands of cadres busted for corruption, and along with fiscal crimes many have been accused by party disciplinarians of moral failings, including an offense that translates as “having multiple sex partners.”
When police recently raided a brothel in Yibin, in southwestern China’s Sichuan province, they found rooms that looked exactly like government officials' offices, with role-play services available, the Shanghai-based Paper reported Thursday. The brothel providing such rooms was shut down by the police, and 40 people were arrested.
Photographs of the brothel’s “office” room showed a red wood desk and a big leather chair. With both a Communist Party and a Chinese national flag standing on the desk, the chambers bore an uncomfortable resemblance to President Xi Jinping’s office. The public got its first look at Xi’s office when he delivered a New Year’s speech on state-run China Central Television at the beginning of 2014.
The Chinese phrase tongjian, which means having an extramarital sexual relationship, has appeared in the Chinese press quite frequently of late. Although there’s no law in China against having an affair while married, internal Communist Party regulations prohibit officials from having such relationships.
Top-level “tigers,” like former national security czar Zhou Yongkang and rising political star Bo Xilai, have been accused of tongjian, as have countless “flies” -- grass-roots-level officials in small cities and counties. Women aren’t exempt, either: Two female officials were sacked in Shanxi province in late November, and extramarital relationships were among the misconduct charges leveled against them.
Prostitution is illegal in China, and those who operate underground brothels typically pay bribes to local officials or police to keep their businesses running. So perhaps “the office” was simply an attempt to better serve local cadres who may have hesitated to pursue tongjian in their real offices.
Some of those who read about the Chinese brothel online praised the operator’s creativity.
“The product manager has succeeded!” wrote one Weibo user from Shanghai. Said another from Zhejiang province: “Most of their clients are officials, right? This setting can definitely help those customers feel right at home.
(Mod: So if "tongjian" means "having an extramarital sexual relationship," and Arcadia is "The Mistress City of California," does that make our neighbor down the hill Tongjian Town? The shocking answer to that one could very well be "Yes!")