What We Learnt From The Tianjin Tragedy

WASHINGTON – More bad economic news from China. Notwithstanding highly publicized official support for the stock market, after a few days of relative calm, the Shanghai Stock Exchange took another serious hit.

Shanghai Index takes another hit 

On August 18, the Shanghai Index lost more than 6%. this would be the equivalent of the US Down Jones index losing about 1000 points in just one day. (Analysts call losses of 200 points or more pretty bad. Losses above 300 really scary. Imagine 1,000). In early trading the following day the market extended its losses by another 3%.

Government actions ineffective 

This -6% (possibly -9%) hit is especially bad because the government is now officially committed to supporting share prices through a variety of interventions. Indeed, because of these well advertised actions, one would think that the smart investors should stay put, or may be buy some more stocks. “After all, these shares are guaranteed by the government. They must be a safe investment”.

Well, it seems that heavy government interventions are not enough. And this is bad. Apparently, average Chinese investors do not believe that the all-powerful government can deliver. Just think about for a moment of the possible political ramifications of this new belief, should it become entrenched. “The Chinese government cannot deliver on its promises”.  

The Tianjin tragedy

On a separate but related note, we have seen the catastrophic chemical explosion in the city of Tianjin. Hundreds of people dead. Many more wounded. Extensive damage to properties. Thousands of imported vehicles ready for final delivery destroyed. And now the danger of additional contamination brought about by the chemical reactions of the released compounds with rain.

Let’s be clear. The issue in Tianjin is not the accident itself. Sadly, there are plenty of major industrial accidents all over the world, including in the United States.

But here is the difference. Usually accidents are caused by human error, or negligence. In some cases they are caused by someone deliberately cutting corners in one particular instance.

Broken laws

Tianjin’s case is different. In Tianjin there are permanent warehouses containing extremely large quantities of hazardous, potentially flammable or explosive material located within populated areas. Both the location of the warehouses and the amount of hazardous material stored in them are in open contravention of existing Chinese laws that prescribe that such facilities must be at a safe distance from homes, businesses, or high traffic areas. The laws also prescribe how much material can be safely stored. Well, the laws are there, but they have been ignored, most likely because some public officials have been paid to ignore them.

So, here we are not talking about someone making a fatal error in a particular instance. This is about a practice of routinely  breaking or circumventing laws and regulations, thereby creating a systemic risk. Therefore this horrible accident is not about what someone did one day. This is about what many people conspired to do over many years, with full knowledge of the hazard they created. 

Not just in Tianjin

Where am I going with this? Very simple. It would be naive to believe that this deliberate circumvention of established safety procedures somehow is confined to some unscrupulous public officials and influential business people in the city of Tianjin. Bribing officials is common practice in China. Everybody who can will do it, if they think this is necessary in order to safeguard their economic interests.

And this means that warehouses that contain hazardous material are in the wrong places. Materials that do not meet safety specifications are used in buildings. Dangerous additives are illegally used in processed food. Toxic waste is dumped everywhere. Information about pollution levels in soil, water or air is unavailable or unreliable.

False data 

And, yes, talking about shady practices, economic data is routinely manipulated to make it look better. But, somehow, it is not polite to point out this practice of deception. When really bad economic news from China comes out, some Western analysts (at best) cautiously say that “May be the underlying situation is worse than what the more optimistic official data would indicate”. Well, let’s be real. What they really mean to say is that we have been fed false data. And now the facts prove it.

In the case of the illegal warehouses in Tianjin it took a massive tragedy to expose the ugly truth of routine violations of elementary safety rules.

What will it take to expose the deception of official economic statistics containing manipulated data?