Concrete policy goal conflicts in China? Explaining the probable growth concerns

April 19th, 2018

China’s policy conflicts have regularly been discussed in this blog during the past few years, most lately in my comments on the political statements from the National Congress in March. These policy conflicts may relate to both short-term and long-term economic policy issues.

Sure, Chinese GDP-growth in the first quarter of this year came officially in at quite strong 6.8 percent. Therefore -together with the existing private and local debt crisis – nobody would normally suggest some easening of monetary policy at this point, as it was the case in the middle of April.

The only two plausible reasons for the monetary softening are – in my view – that growth rates currently overrate reality on the one hand and/or – on the other hand – that growth concerns about increasing protectionism are bigger than officially stated. A third possibility of unexpectedly good structural progress on mainly the supply side – expressed predominantly by a relatively far-reaching consolidation of state-owned companies – can be considered as quite improbable.

In other words: Growth concerns could indeed be the main reason for the PBoC ‘s  easening of monetary policy. However, this should mean that statistical GDP-growth numbers at around 6 1/2 and 6 3/4 percent also in the forthcoming quarters may not quite reflect the probably somewhat harsher economic reality.

I myself use changes of the banks’ cash requirements as one of the better economic indicators. Analysts, however, should always try to find out whether changes of cash requirements mainly seem to be driven by GDP-growth expectations or something else like sharpening or easening debt concerns.

Again: China’s economy is often a conundrum and difficult to analyze – even when exact statistical numbers exist.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
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Are increasing doubts about China motivated?

April 4th, 2018

More recently, political and economic analysis in our part of the world has become more skeptical about China. This is no surprise when considering recent political autocratic changes inside China, heavy political challenges from abroad (Trump), and domestically expressed concern about the burdening indebtedness. Furthermore, foreign analysts are getting more uncertain or even worried about the speed of implementation of all the planned economic reforms. Unfortunately, transparency remains poor also in this respect.

Three Chinas

It is probably wrong to speak unsophisticatedly about “one China”. In my view, there exist three different Chinas – divided as follows:

  1. The “traditional” and conservative China.
    Here we talk about sticking to traditional values about “Chinese socialism” and remaining strong political influence on individuals and major parts of the corporate sector (state-owned enterprises, of course, included), recently again underlined by China’s strong leader Xi Jinping.
  1. The slowly reforming China.
    This part of China is probably quite large even if there is no chance to quantify the share of the slowly reforming China in percentage terms – but it seems to be probable that the size of this second type of China could be essential. More cautious but not really pessimistic foreign China forecasters should be mainly found in this segment – experts who probably also focus on the economic imbalances.
  1. The rapidly changing China.
    Optimists about the economic future of China prefer to give China’s strong technology efforts their main momentum and see it as a driver of future GDP growth. Artificial intelligence (AI) is expected to play a crucial role in this development. Consequently, future progress in this third – the rapidly changing – China is predicted to clearly outperform the two above-mentioned Chinas and less promising definitions of the three Chinas.

In my own view, I also consider the time horizon very carefully. In the forthcoming few years, options 1 and 2 may dominate. In an even longer perspective, option 3 could gain clear momentum. But how much progress can be achieved in the lagging parts of China until this – maybe – new era of production and GDP growth may show up openly and recognizably? This is one of the future key questions, potentially of more importance than future tensions derived from international politics.

More cautious forecasts

Unfortunately, the quite recently finalized 13th National People’s Congress did not really give much detailed information on the current status of all the announced and necessary economic reforms. In other words: Transparency shortcomings are still remarkable.

This is also concluded by the well-known and competent Finnish research institute BOFIT (The Bank of Finland Institute for Economies in Transition) in their recent forecast on the Chinese economy. BOFIT writes in its recent China forecast from March 27 that “major economic reforms have not been carried out as previously expected and some reforms even reversed. Concrete reform execution plans were notably missing from the addresses made at the National Congress … In coming years, dealing with financial risks and China’s massive pollution, problems are inevitable … We expect growth to slow to around 5.5 % in 2019 and to around 5 % in 2020 … (after 6.5% in 2018, own additional remark)”.

BOFIT also singles out that official Chinese (forecast) numbers should be analyzed with “considerable scepticism”. This should be indeed the case. In my view, GDP growth will continue to meet the projections of China’s political leadership because of performance pressure – whatever the real development might have been. Therefore GDP growth will be 6.5 percent in 2018 as China’s political leaders have emphasized during the National People’s Congress – or even 6.6 or 6.7 percent, despite the first preference of reducing the problems of China’s private and local government debt.

The goal conflict between the reduction of financial risks and GDP growth will go on – with financial risk reduction most probably in the first place, at least in practice. Reasonable economic growth and poverty reduction should also have continuous high priority – at the expense of the environment?

Maximizing the reduction of the debt problem, the achievement of future high GDP growth with reduction of poverty and also a clearly better environment seem to be an impossible trinity. Thus, increasing doubts about the Chinese economy are motivated. Hopefully a wrong view at some point in the future …

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
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The economic analysis of China should now be modified

March 22nd, 2018

Not very surprisingly, the very recent 13th National People’s Congress was not dominated by economic issues but by the even further strengthened political power of Xi Jinping, General Secretary of the Communist Party, President of the People’s Republic of China and also Chairman of the Central Military Commission. Xi received now even more personal power by some important constitutional changes than he already had created before, giving him the opportunity to continue his presidency also beyond 2022. Xi’s core status was also underlined by the new guiding ideology in the Constitution, expressed by the now included formulation that “the leadership of the Communist Party is the defining future of socialism with Chinese characteristics” – more exactly the “thoughts” of Xi Jinping.

In my view, “Chinese characteristics” also should be applied when it comes to economic analysis which so far has been made very superficially in our part of the world. Prime Minister Li Keqiang’s latest forecast for 2018 – predicting 6 ½ percent for GDP growth – does not imply any deceleration of economic growth as interpreted in a number of Western newspapers. Furthermore, a little bit higher GDP growth than predicted remains certainly in the cards – particularly for giving Xi recognition for successful economic leadership. However, Li’s comments on major risks seem to be more interesting, i.e. mainly his concerns about financial risks, poverty and the environment which are indeed embedded in a number of major goal conflicts – goal conflicts that I have pointed at frequently in this blog and published papers of mine.

Xi Jinping’s strengthened core leadership urges now for a number of analytical changes and attempts to find answers to difficult questions. Below, there are some examples:

¤  How will Xi handle relations to the U.S. and Trump’s protectionism?

¤  To what extent does Xi want to  stick completely to the reform plans by the Third Plenum from 2013 – and will there be new priorities and solutions to the related conflicts of goals?

¤  Now – with so much power in the hands of one single person but also rising direct personal responsibility – how determined will Xi handle potential failures or setbacks?

¤  How good are the chances of, finally, improving or even maintaining transparency in the potential  case of increasing problems – and what about the necessary qualitative development of statistics?

¤  Where could the domestic warning signals come from if things go in the wrong direction?

These are only a few examples and questions related to Xi’s strong leadership. It should be clear that also economic analysis – especially when applying a longer perspective – much more should be based on politics than in the past. Noting a certain number for GDP growth – even when exceeding (official) expectations – is about to become a (further) weakening guideline for future GDP growth and other macroeconomic forecasts. Careful political and – may be – psychological analysis has to be added to macroeconomic forecasts and conclusions.

Conditions are changing within China – and also China’s international relations. For this reason, economic analysis tools for China should be developed further as pointed at above. Official GDP growth is certainly not enough at all for analyzing trends in the Chinese economy.

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


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