Why Do Chinese People Have So Much Money? Print
Think Tank
Steven Ho - Chinese blogger   

Professor Zhou Xiaozheng, a Chinese social scientist stated the following situation when lecturing in Japan:


The number of wealthy people in Beijing surpassed that of New York in 2015. According to the 2018 census, the wealth of the 18 richest representatives of the Chinese People's Congress exceeds the sum of all U.S. lawmakers and all judges' assets combined.


What a dazzling Chinese dream! Chinese rich making magic!


1. Where did the money come from for the suddenly rich Chinese?

One word: Printed!


In 2018, the Chinese government issued 174 trillion yuan, (annually printed money, called M2 in the following context), or US$27.19 trillion, which exceeds the sum of the US dollar ($14 trillion) issued in 2018 and euro (13.12 trillion) issued by Europe.


The figure below is how China's (M2) has leapt from 40 trillion yuan in 2008 to 174 trillion yuan in 2018. It intuitively shows how the Chinese became wealthy.


Chinese money supply. ---  by Peoples Bank of China. (screenshot)


A house in Beijing 15 years ago, was worth 1 million yuan; now it is worth 11 million yuan.


2. If you print so much money, do the notes become a bubble?


That's right!


If you produce a commodity worth one yuan, and issue a currency of one yuan, the worth of your currency is 100%.

If you produce a commodity worth one yuan, and issue a currency of two yuan, your one yuan is worth only 50 cents, the devaluation is 50%.


China has only 63% of the US GDP, but the amount of money it issued is nearly twice that of the United States.


So some (screenshot of calculation by Tangbohu, below) have calculated the real exchange rate of RMB to US dollars, based on GDP and printed currency (M2): 1 USD = 19.77 Yuan.

Given today's foreign exchange market: 1 dollar = 6.49 Yuan, that is to say, today the renminbi is a bubble-filled currency, its value is exaggerated 300+% (19.77/6.49=3.046)!

The real value of one yuan/renminbi is only 0.33 yuan.
















3. Why is there no hyperinflation in China, since it printed so much money?

Printing money irresponsibly will cause inflation and soaring prices, leading to financial chaos and hardship in the daily life of ordinary people. The regime may collapse!


Oddly enough, China's inflation rate has twice breached the alarming level of 25% (1989,1994), but in recent years it has always kept in a benign range of 2% to 3%. Where is all that money that has been printed? Is the law of value invalid for China?


The big secret exists in the huge money pool of China, as Zhou Xiaochuan, a Chinese economist and the governor of the People's Bank of China from 2002 to 2018, repeatedly mentioned: real estate! The massive issued currency did not flood into the commodity market, but was constantly imported into the pool of real estate. This is the Chinese regimes cleverness and creativity!


Over the past 16 years, the property prices in Beijing, Shanghai, Guangzhou and Shenzeng have increased 20 times. But national GDP only increased less then 7 times.

China’s current total property market value is more than 430 trillion yuan, 5 times GDP (200% more than the global average); 15 times the value of the reserve currency and 45 times the issued currency. It is no exaggeration to say that these four big cities equal the value of all properties in the United States.


China's economic miracle just happened in this way: the mass printed renminbi did not cause a vicious catastrophe of inflation, but blew out a super large real estate bubble!


No matter whether it is a curse or a blessing, the Chinese people suddenly get rich!


In the past decade, the US has increased its currency circulation by 86%, while China's currency has increased by 335%, or 3.9 times that of the United States. Driven by massive printed yuan, China's billionaires are rising like stars, defying the world.


Originally, the Chinese government wanted to create another bigger pool of funds, which is the stock market. Xi has been ambitious, saying that the Chinese stock market shall reach 10,000 points.

But the corruption and cheating in the Chinese stock market is unbelievable: with the recently listed Xiaomi company, it has a debt of 100 billion yuan, it is obviously to round up the hard-earned money of shareholders. People became aware of the corruption, so from the 2008 financial crisis to today, the Shanghai Composite Index fell from 6,000 points to 3,000 points, brutally halved, but in the same period, the Dow Jones went from 6500 to 20,005.


Recently, the communist party's economic wizard Huang Qifan predicted that over the next 50 to 100 years, the stock market would replace housing as the biggest outlet for China's wealth creation. Also, when the real estate bubble reaches its limit, where will the massive amount of printed money go? Let’s wait and see.


4. Do Americans play the game of printing money and getting rich?

There is a common misconception in China: The US dollar is a world currency, and if the US keeps printing them they can buy all their commodities from other countries and not produce anything themselves.


Since 1971, when Nixon announced the cessation of the exchange of dollars and gold, the United States could freely print dollars to exploit and plunder the world. Chinese newspapers commonly report that: Americans do not do anything, printing money every day to provide food and drink.


If this is true, would the US dollar still be the most credit worthy currency in the world?


In fact, the issuance of the US dollar pursues strict financial discipline, and the ratio of M2 to GDP must not exceed 0.7, and if it surpasses this ratio, it would be considered as injecting a bubble into the currency; taking money from the pockets of all citizens around the world.


Historically, the ratio of American M2/GDP has stabilized at around 0.6 for decades, even though the 3-time easing at the time of the last financial crisis was very cautious and restrained, with just more than 3 trillion issued during 5 years on 3 occasions.


The current M2/GDP ratio has reached 0.719 and has just crossed the line. Since 2016, the Federal Reserve has publicly announced a contraction of the currency, which is being recycled and written off over time to bail out the market, fulfilling the promise of Ben Bernanke, the Fed chairman.


The reason why the United States cannot freely issue money is mainly because it has the Coinage Act of 1792, under which the monetary authorities of the United States are not the government, but the Congress, and the Fed is nothing more than a concrete implementation of the private banking system. Under the Congressional monitoring Program, the Fed has been following a M2/GDP ratio of no more than 0.7 (since more than 0.7 means devaluation).


In other words, America's "money-printing machine" is not in the hands of the government, nor in the hands of the Fed, but in the hands of Congress, and Congress can only pass legislation to indirectly control, and can not directly activate "printing money" to intervene in economic behavior.


Since the US dollar is the world's reserve currency, the amount of money printed in the US is completely under public scrutiny. For example, when the Federal Reserve announced monetary easing in 2018, it received a protest from the China, claiming that it would devalue the dollar, potentially shrinking the country's holdings of U.S. debt.


Therefore, although the United States has the right to mint dollars, its cannot rely on the printing of money to gain advantage, American businessmen can only gain honestly through equal and fair trade, and the essence of trade is fair exchange.


Looking at China, the M2/GDP ratio in 2017 is 2.03, which according to American standards can be said to be a serious problem, injection a bubble into money, thieving from Chinese society.


Of course, China's national conditions are different, China does not engage in separation of state. All of China, including the money printing machine, is under the control of the communist one-party dictatorship, and it will never allow the United States and other western countries to judge and interfere in China's internal affairs.


5. Exchange control and globalization of RMB: two contradicted system.


As mentioned above, the real value of 1 yuan is only 33 cents, this is a huge price difference! Price difference is the origin of profit, is the cradle of wealth!

Clearheaded Chinese people realized this chance of creating rich, swarming to change bubbled renminbi into real money: US dollars. Buy! Buy! And Buy! Floods of Chinese money pouring overseas, the law of value finally worked.

By the end of 2016, the renminbi had fallen by as much as 10+%, from 6.2 to nearly 7 times against the US dollar.

In order to save the exchange rate, China's foreign exchange reserves have fallen below the 3 trillion threshold from 4 trillion in the currency devaluation and capital flight. The all mighty “mother party” issued the strongest exchange control method in history: Each person is allowed to exchange only 10,000 US dollars per year, and is not allowed to invest and buy a house! This decree came into effect on July 1, 2017.

Wang Jianlin, Jia Yueting and other wealthy Chinese' bold overseas expansion has been halted.


It was followed by a wave of Hollywood-style operations that reversed the renminbi's depreciation expectations. This time, however, the exchange control has not been a panacea for the resurrection: although the renminbi has rebounded from 6.9 to 6.25 to the US dollar, China's foreign reserves have risen by less than US$200 billion, but added $298.4 billion in foreign debt, plus a trade surplus of about $300 billion. In the current foreign exchange reserves of $3.12 trillion, the foreign debt has reached to about 1.8 trillion, that is, the actual use of foreign exchange reserves will be only 1 trillion.


Now, as the US dollar begins a new cycle of appreciation, the renminbi has also started to fall on seven occasions, and in April foreign exchange reserves fell by by $18 billion. In this wave of US dollar appreciation, if the renminbi cannot be maintained at more than 6.6, then the expected devaluation of the exchange rate will come back again, and at this time, they have little ammunition to use.


On March 26 this year, the renminbi oil futures market opened as scheduled. The red crowd inside China were jumping with joy: the renminbi to be an  international currency! Challenge the US dollar! How good, in the future, we will be able to drink and eat by printing money!


I can't help but be stunned.


The first condition of RMB internationalization is the free convertibility of RMB. Once the exchange control is lifted, the renminbi is free to convert, the renminbi's exchange rate either breaks down like dropping off the cliff, or the hyperinflation goes global with the massive amounts of renminbi coming out of the printing machine.


6. Will the RMB bubble be punctured? – the Minsky moment


No economic bubble can be infinitely expanded, the value of law dictates. The turning point from bubble expansion to bubble cracking, in economics, is called "The Minsky moment". Zhou Xiaochuan has repeatedly stressed the need to guard against a "Minsky moment".


Referring to the issue of over-issuing currency, this relates to the classic issue of exchange rates and house prices: to make the super-fat currency return to equilibrium, should it protect the exchange rate? Or to keep house prices stable? Or in other words, to let the house price collapse, or let the exchange rate collapse. Due to the sheer size of China's economy, the loss of either of the above would have disastrous consequences.


Japan was taking the road to a real estate crash

After the 1985 Japan Plaza Agreement, the yen continued to appreciate for five years, while the Japanese government watched the Nikkei grow by 30% every year; 15% a year increases in land value, tolerating Japan's nominal GDP growth of only 5% a year, allowing bubbles to swell and ignoring excessive capital speculation.


Not only that, the Japanese government also lowered real interest rates to 2.5% in 1987, trying to sustain high economic growth with bubbles and inflation. As a result, three years later, the property market and the stock market collapsed.


In 1989, the most expensive building square metre of Ginza Street in Tokyo was nearly US$1 million. In 2006, Ginza Street is only just over US$200,000 per square metre! Today, the most expensive location in Ginza, is still only about 1/4-1/5 of the level in 1989.


Venezuela has conceded to the law of value with a collapse in currency. A few years ago, it was also the richest country in Latin America. Due to printing to much money, in 2017, their foreign exchange fell 40% within 3 days, and down 96% within a year, finally  coming to the ridiculous point: they don’t have money to print money.


It is said that the U.S. trade war against Japan has punctured the Japanese bubble, will today's US trade war with China prick the Chinese bubble?