China’s economy is at the forefront of global discussion, especially after a meeting last week during which Premier Li Keqiang announced that the government expects the economy to grow between 6.5% and 7% in the coming year.

This was the first time in over two decades that the nation has set a growth rate below 7%.

However, this number should come as no surprise to anyone who’s been paying attention.

For years, the country has silently struggled with overcapacity and overproduction. Workers haven’t been paid in months, despite the fact that they continue to churn out products at unnecessary rates.

…just another facet of the country’s “growth at any cost” mentality.

Over the past few months, China has been digging deep into its foreign exchange reserves in order to balance downward pressure on the Yuan and an increasingly negative market sentiment.

Although the most recent reports show that depletion of the ‘rainy day’ fund has slowed in China in recent months, we cannot ignore the fact that hundreds of billions of dollars poured out of the country last year alone.

At one point, concerns about capital flight were so severe that Beijing actually limited the amount of money citizens could withdraw from ATMs.

“Though its service sector is growing, China is grappling with heavy debt and a glut of factories and homes, a legacy of years when the government pumped money into the economy to keep it humming. Global weakness has reduced demand for China’s exports, while money is increasingly leaving the country.” –New York Times

Inflated growth targets are cause for even more concern, as officials believe that unrealistic targets and pressure to reach them are cause for Chinese officials to hide or falsify data. 

Obsessions with meeting those hard annual growth targets often lead to policies that contradict sound economics and lead to even more harmful consequences. 

Chinese National Cult

Before we delve into the intricacies and failures of Chinese economic policy, I think it’s important to mention the Chinese cultural tradition of “Face.”

“Of all the idiosyncrasies of Chinese culture, the concept of ‘Face’ is perhaps the most difficult for Westerners to fully grasp. Because ‘Face’ is such a strong motivating force in China, it’s also one of the most important concepts in understanding the Chinese Mind.”

-The Cult of “Face”

This is a difficult concept to explain, especially as an American, but I’ll try anyway.

One well-known Chinese author is famous for saying that “‘face’ cannot be translated or defined.” He also characterized it as, “Abstract and intangible… yet the most delicate standard by which Chinese social intercourse is regulated.”

For the sake of argument, I’m going to simplify the “cult of face” down to a concept of pride, honor, and social prestige. In the U.S., the closest comparison is the idea of “saving face.”

“Saving face” is so important that most Chinese competitions don’t have winners or losers. Typically, all participants share the winnings. Maybe this is to prevent feelings getting hurt, but I would lean more towards a delusional perception of reality — everyone, even the losers, deserves to save face.

It should be noted however, that the idea of “face” in China runs much deeper than this. It is incredibly important to everyday business and operations in China, and “losing face” or “having no face” is considered one of the most severe misfortunes or insults that a person, family, or business can experience.

“…it’s less about your own personal pride or ego, and more about how one is viewed by others. Unlike Western face, Chinese face can also be given or earned. It can also taken away or lost.”

-The Cult of “Face”

Chinese “Face” extends into ideas about truth, which are also vastly different from American values. Whereas Americans tend to see truth as a black and white, clear cut issue, the Chinese idea of truth is more about what the situation calls for.

The Chinese will go to great lengths to save face. Even a blatant lie is considered completely acceptable if it saves face.

I’m going to go ahead and call this what it is: Bullsh*tting.

But here’s the bigger problem:

“Face” is an abstract concept that is having a very tangible (and very negative) impact on China’s economy.

In fact, I’m tempted to go as far as to completely blame “face” for China’s economic struggles.

There have been multiple instances where China’s economic decision-making leads me to believe that they are either completely inept, or completely deceiving the public.

“I don’t trust anything about China.” –Jim Cramer

2+2 = Face

Just last week, an announcement was made that between 5 and 6 million Chinese state workers would be laid off, as President Xi Jinping attempts to curb industrial overproduction and eliminate “zombie firms.”

The central government has also reportedly set aside $15.4 billion to assist the families and individuals who will directly feel the impact of these massive layoffs… and that’s just in the coal and steel sectors.

A week later, the head of China’s Commission on Development and Reform stated, “ On the whole, I’m optimistic about China’s job market.”

…excuse me?

As if that already doesn’t add up, it gets worse:

Every three months, China releases information about its Gross Domestic Product.

And every three months, economists draw parallels between China’s GDP and the GDP of the previous year.

…and every three months, economists have significant doubts about the legitimacy of those reports. There are concerns that the numbers are inflated and cannot be trusted.

“We all know the growth data is overstated, particularly at the moment,” says Hong Kong-based investment analyst Peter Churchouse. “It’s a political gesture: they have to keep the domestic markets believing that growth is roughly close to 7%.”

Why does this matter to you?

In our globalized world, China’s economy is crucial to other national economies. Often, you’ll hear China being called “the engine of the global economy.”

One BBC reporter put it this way:

If you’re working for a European or Japanese car company and China is an important market, it matters how much spending power the Chinese middle class has. If you live in Nigeria and China is planning a massive infrastructure project, it matters how much money Chinese companies have to spend on that investment. If you’re down in a mine in Australia or Indonesia and the iron ore or coal you’re extracting is sold to China, it matters whether demand is increasing or slowing. And if you’re working in a steel plant in Wales, it matters whether China is flooding global markets with steel too cheap for you to compete with.

No matter where you live or what you do for a living, I’m willing to bet that China’s economic conditions will impact you.