Hello everyone!
Below is my translation of Part 2 of Liang Jing’s 3-part op-ed on ‘The China Dream and Ponzi schemes’ (available in parallel format here). To repeat, I know the author too well to ascribe trivial motives of bandwagon-jumping, factional interest, let alone mercenary interest to him. He means every word.
This does not mean I agree with every word. As stated in the intro to Part 1, I don’t agree that Chinese people (or Zhonghua people, in principle including Han and non-Han people living it geographical China) have a notional Olympic medal in self-deception ( or hypocrisy, mendacity, etc., for that matter).
What was meant by my title, ‘Ponzi, Ponzi, who’s got the scheme’? It’s simply spontaneous recall of a game played in my primary school back in the mid-20th century. The kids would call out, ‘Queenie, queenie, who’s got the ball?’ All sorts of tug-of-war, leaping, throwing and catching would follow. ‘Queenie’ was probably connected to the popularity of the late Queen Elizabeth II at that time. As for Charles Ponzi, Wikipedia is a good starting point.
We note that Evergrande CEO Xu Jiayin 许家印, mentioned here, was placed under investigation on 28 September 2023.
Charles Ponzi (1882-1948)
The China Model and Ponzi schemes revisited (Part 2)
Liang Jing, "The China Model and Ponzi schemes revisited (Part 2)”, Ziyou Yazhou diantai, 13 September 2023 [梁京:“再議中國模式與龐氏騙局(中)”,自由亚洲电台,2023年9月 13日 (in Chinese).].
Before international capital availed itself of the huge economic rents created by Chinese migrant workers to promote financial globalisation, there was a process of monetising this rent. The historic juncture was Zhu Rongji’s decision to enact mandatory foreign exchange settlement for all the surge in trade surplus along the coast with ‘big imports, big exports, and both ends outside’. Most of the US dollars earned from the surplus were used to invest in US Treasury bonds. More to the point, all the CN¥ created by the surplus was used as base currency. This historic decision was made in virtue, not of Zhu Rongji’s grasp of economics, but of far-reaching geopolitical considerations. Meanwhile, it was because he greatly underestimated the potential of Chinese migrant workers to create the world’s factory.
How much economic rent is created by migrant workers? The net rental value caused by wage and welfare discrimination against migrant workers in urban and coastal areas is, some estimate, as high as CN¥ 10,000 per person p.a.. This land rent is not only converted into US dollars held by the PRC, and RMB revenue for local finances, but into the base currency of the PBoC as well, directly promoting the PRC’s economic growth miracle. This process not only completely released the huge energy potential of the serious rural job shortage, but relieved all internal or external economic constraints on economic growth: investment, demand and natural resource constraints. The world’s investment, demand for processed products, and supply potential of natural resources were in other words mobilised by the migrant workers, who provide cheap and high-quality goods. This is a ‘resource allocation’ model that had never been and could not be imagined in Western economics textbooks.
How then did this model contribute to the Chinese-style Ponzi scheme? A Ponzi scheme is, we know, a financial game that leverages human greed. Its basic feature is that the wealth gained by first comers playing the game is defrauded from those who come later. When there are no newcomers, the game can no longer be played. It should be said that after the June 4th 1989 Movement, the PRC provided ideal social conditions for generating the game. This can be confirmed by the fact that pyramid schemes have remained rampant and undefeated despite decades of government crackdown. (See the 8/23 People’s Daily report ‘Full-chain crackdown on online pyramid schemes’).1
The pyramid game has become a state-led financial Ponzi scheme, and the medium is the huge financing needs of China’s real estate industry. As stated, land rents were distributed equally among households, and agricultural land rents were converted into cheap migrant workers. The large-scale population flow and migration brought about by the opening of the coastal region began to rapidly release the huge amount of non-agricultural land rents implied by China’s serious lack of urbanisation. Zhu Rongji failed to grasp this. The 1994 tax reform left almost all shadow land rent in cities to local governments, greatly catalysing the real estate-isation of local fiscal revenue. Coupled with the state’s monopoly on finance, this would inevitably lead to financialising real estate revenue: only thus could local governments turn future land rent revenue into revenue for the current government.
Real estate developers certainly grasped this huge demand. Analysing how Evergrande could develop so fast and on such a scale, it’s not difficult to find that it provided local governments with the best conditions to realise future land rents. The secret behind its success was that Xu Jiayin turned pyramid schemes into a globalised financing game, another global Ponzi scheme.
Xu made full use of the arbitrage opportunities—differences between domestic and foreign countries in interest and exchange rates—brought about by financial globalisation. He made full use also of the ‘comparative advantage’ of China’s differential culture to develop a pyramid selling network. Arbitraging interest and exchange rate differences at home and abroad brought real money to firstcomers to the game, while the illusion that housing prices would never fall kept attracting latecomers. None of this would be possible, of course, without the ‘world’s factory’; countless people, both Chinese and foreign, firmly believe the world’s dependence on Chinese factories will continue for many years. For all their intelligence, many of those playing this game think it the most sustainable Ponzi scheme in the world.
Zhang Tianpei, "Full-chain crackdown on online pyramid schemes”, People’s Daily 23 August 2023 [张天培:“全链条打击网络传销”,人民日报,2023年8月 23日 (in Chinese).].