Modi’s victory – India is awarding its PM

March 16th, 2017

India’s Prime Minister Narendra Modi and his governing, hindu-nationalist party BJP (Bharatiya Janata Party, BJP) is currently celebrating happy days after the strong victory in the regional elections in the 220-million people state of Uttar Pradesh. This overwhelming result was not really expected after the chaotic currency reform last fall when the government abruptly invalidated almost 90 percent of the circulating bank notes. This measure was taken in order to make people to deposit money visibly at the bank – and, consequently, to combat corruption and black money.

In other words, Modi benefited even from this monetary/institutional reform, expressed by substantial popularity gains. Hopefully, Modi uses his current strong personal ranking for accelerating economic reforms, particularly since his chances of winning the next general elections in 2019 seem to be increasing. So far, Modi’s (and his coalition partners’) reform record is not really convincing. Much more must be done to improve, for example, (youth) unemployment, education, infrastructure, the environment and productivity. At the same time, it is obvious that many Indians still have high expectations that Modi is the man to move their huge country forward.

For 2017 and 2018, a GDP-growth rate around 7 percent seems to be achievable (if major global distortions can be avoided). One should not forget that India’s international trade exposure should be less sensitive to American and global trade distortions than China’s. Indian GDP-growth seems to develop (somewhat) faster than the Chinese in the next few years. Such a comparison is, however, not quite fair since China started its accelerated modernization and restructuring process much earlier than India did.

But India has now an improving chance to catch up!

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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China – (so far) nothing really new from the National People’s Congress

March 6th, 2017

China holds currently its annual big convention, the National People’s Congress (NPC). The NPC is not a major policy or decision forum but it brings together around 3000 people from all over the country to single out the (economic) state of the country, the outlook for the current year and the strategies behind the plans, particularly the GDP-growth target. Sometimes, also important news may be presented but this mandate is usually more directly in the hands of the most powerful Politburo Standing Committee of the Communist Party. The Prime Minister’s press conference at the end of the NPC week, however, deserves special attention as well. Still, the most interesting event during 2017 will most certainly be the 19th National Congress of the Communist Party of China this coming fall.

On Sunday, March 5, Prime Minister Li Keqiang had his important performance announcing a slight reduction of 2016 year’s GDP-growth target of 6.5-7 % to around 6.5% in 2017 or better if possible (outcome 2016: 6.7%). This is certainly only a minor adjustment and within the limits of accuracy of statistical measurement (which still is not very precise when it comes to Chinese GDP). Anyway, Chinese growth expectations have really come down during the past few years – but China still cares strongly about “employment and the improvement of people’s lives” according to Li Keqiang. This certainly includes the environment. It can be added that Prime Minister Li really did not play down various major risks for the Chinese economy – but positive signals dominated.

There are altogether nine top priorities determining Chinese economic policy during 2017. The details are certainly not new but positively repeating major objectives from the important strategic Third Plenum in 2013. The encouraging conclusion is that reform policy is still on track – and hopefully also after the 19th National Congress of the Communist Party of China (even if certain goal conflicts do not allow for an optimization of all the 60 reform chapters from 2013). Compromises will be needed.

Read more about the top nine priorities of the government for 2017 in an interesting document edited by the State Council (chairman: the Prime Minister) from March 5, 2017:

http://english.gov.cn/premier/news/2017/03/05/content_281475585531944.htm

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Trump and the yuan

February 22nd, 2017

Trump does not like China’s exchange rate policy. Furthermore, he criticizes Germany for using the “grossly undervalued “euro to undermine the export interests of the United States. Trump really thinks that the euro is a kind of implicit German mark. This latter conclusion is wrong, too. Germany alone would certainly prefer higher interest rates these days and, thus, also accept a probably stronger currency within the eurosystem. By the way, the euro was not a German invention but was created after a strong French initiative.

I don’t know what led Trump to the findings mentioned above more than his deeply anchored protectionism. Sure, the Chinese currency has been weakening on trend since early 2014. However, does this really reflect an ongoing severe manipulation of the yuan (also called renminbi , RMB)? China has indeed a managed floating exchange rate system – although I would even say a strongly managed exchange rate system. We also know that Chinese (provincial) leaders are deeply concerned about declining international competitiveness in a number of areas and about insufficient foreign market growth. This makes it logical that the Chinese currently are not working ambitiously for a stronger currency. But is China really dumping its currency? In my view it is rather the case that appreciation expectations of financial markets have gone (somewhat) too far in the past few years.

May be Chinese political leaders like their own current situation and see it also as a kind of fair currency equilibrium for some time in the future. Looking at China’s structural challenges, a steadily ongoing appreciation of the currency would not be quite logical anymore due to all the structural problems. Other countries with floating FX-rate policy are targeting or willingly influencing there exchange rates as well, at least from time to time. Japan may be mentioned in the first place – but Sweden’s central bank is currently also acting in favor of a relatively weak exchange rate.

Furthermore, the Trump administration has still not realized or accepted that China more recently announced that it is concentrating FX policy on a relatively stable RMB vis-à-vis its total currency basket rather than on the U.S.dollar alone. China has more lately been turning away from the buck to some (limited) extent. This is not unfair. China is an independent country that is free in its exchange rate policy as long as it does not violate or jeopardize global stability very visibly – but this is right now obviously not the case.

America is not always first on forex markets though the floating U.S. dollar remains the most important currency on global markets. Trump can only have a major and sustained impact on global FX markets – China included – if markets can relate him to really bad or good policy decisions or announcements. But he cannot just say how Beijing or Frankfurt should behave for improving his “America-First Policy” on global currency markets.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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