China

Summer reflections – new opportunities for the EU, China and Africa

June 28, 2017, by Hubert Fromlet, Kalmar

Pro-European citizens in the currently 28 EU states certainly dislike the British decision to leave the European Union (EU), probably in 2019. However, the British departure from the EU should now encourage the remaining EU-member countries and Brussels to think more strategically and concretely about the future of the EU. What should be done? What can be done?

First signals in such a positive and more encouraging direction can already be recognized. Important topics and reform areas, however, should be addressed more transparently already in the near future. Many of them are well known, others have been scarcely discussed so far. Much can be done to rejuvenize the image of Europe and the EU itself. In this respect, the British withdrawal from the EU – with all its disadvantages – also offers new opportunities.

Below, three examples are summed up and briefly elaborated on, dealing with digitalization and relations of the EU to China and Africa. All three different cases affect both politics and business, i.e. the EU as an institution and the corporate sector in the member states.

Readers of this article may wonder why an economist wants to deal with such a complicated political issue as the EU exit of the UK. The answer, however, is much easier than one may believe: political and economic developments have been interlinked in the past few decades to an extent that they in many cases cannot be separated from each other anymore. This is certainly true also what concerns the economic future of Europe. However, this obvious reality of internationalization and globalization has not reached out to all producers and users of economic forecasts so far.

A similar kind of lagging interdisciplinary understanding can also be found between the large areas of microeconomics and macroeconomics. Microeconomic improvements – for instance when it comes to education, innovation, entrepreneurship, working conditions for women, foreign direct investments, taxes, etc., can indeed have a positive impact on long-term macroeconomic GDP growth as well – a correlation that is often forgotten or neglected by forecasters, other kind of economists and politicians. The EU and its member countries should work with these microeconomic issues much more intensively and ambitiously than in the past. It could mean a good way into the future.

Let’s now get back to three above-mentioned examples of areas which the EU and its member countries should focus on in the next few years, among many others. These three areas serve only as exemplifications and do not reflect – despite their importance – any given preference of the author.

Digitalization

Digitalization is certainly an area that will gain much more momentum in the foreseeable future – a most probable development that should be taken increasingly seriously by the EU and its member states, employers and unions. Many new, interesting IT-products or products with applied IT-technology will enter domestic and international markets in the forthcoming years. To get there, the EU, its member states and corporations have to raise IT skills on all kind of research, development and application levels, also in order to meet all upcoming future cyber risks in an appropriate way.

All these needs urge for many future cross-border activities within the EU – as indicated also what concerns the important area of cyber security. Promising and in praxi working ways forward have also to be found in order to reduce the IT-outsider and IT-insider problem on the labor markets (applying here the outsider-research results of the great Swedish economist Assar Lindbeck who, by the way, really deserves the Nobel Prize in Economics as soon as possible).

China

EU relations with China should be regarded as another area that could be improved considerably, including bilateral trade and co-operation in research, investment, the environment, energy, urban planning, health care, institutional improvements, IT protection and cyber security, exchange of students, etc. Increasing trust between the EU and China could mean more trade and other commercial business between these two giants and, consequently, contribute to better economic growth on both sides.

Without doubt, the EU has now a fair chance to improve European co-operation with China which certainly would be a win-win situation for the EU and its member countries, China and the rest of the world – particularly if China really is willing to stick ambitiously to the Paris climate agreement. It should not be forgotten that more clarification and progress in EU-/China-relations could support European corporate activities in and with China in times when many companies have to change their business model for China already as a result of China’s ongoing reform policy. In this commercial context, generally improving European relations with China may appear even more relevant. This should be concluded without considering China’s self-proclaimed global role as prominent defender of free trade and the Paris climate agreement.

Africa

The third example for concrete new opportunities for the EU and its member countries deals with Africa. Africa must in most respects be considered as a lagging continent – but with a rapidly increasing population and still hidden good economic potential. Time has come when traditional European aid-oriented development politics for less advanced countries should be replaced by more concrete long-term growth strategies and measures – a necessary policy change that the German Chancellor Angela Merkel repeatedly has pointed at more recently.

Sure, a long-term perspective has to be applied in the hopefully modified EU relations with Africa. However, if taken seriously, it could be worth-while to increase efforts – from the north to the south of Africa but also for the EU itself. New commercial opportunities could show up – and possibly at some point less pressure from (potential) African migrants. It would, of course, be wonderful if more and more African citizens gradually prefer to stay in their home countries for one specific reason – i.e. that the future finally looks better and more promising.

Ways forward for the EU

Altogether, the examples chosen above hopefully give some alternatives how and where the EU could move forward in the forthcoming years. Certain positive changes may be quite costly, others relatively cheap – particularly when it comes to many institutional improvements.

“L’union fait la force”(“unity makes strength”) is an old proverb in a number of countries. These words are still valid – also in the Europe (EU) of today and tomorrow.

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

 

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China’s downgrading – motivated or not?

May 24, 2017, by Hubert Fromlet, Kalmar

Moody’s has finally downgraded its rating for the People’s Republic of China from Aa3 to A1. For certain people this may have been a surprise, for others not. Anyway, the Chinese certainly do not like this step after all their strong efforts to receive international recognition in the past few years in financial areas as well.

Moody’s motivates the downgrading by mainly pointing at China’s increasing debt problem (private and governmental) and the worsening outlook for China’s GDP growth. This may be two justified assumptions but they are not necessarily interlinked. The central and particularly the local government-debt problems are well known. On this page and in many more extended pieces I have been singling out myself the lagging transparency of the Chinese debt structure and volumes. Now China has to pay a relatively high price for these long-lasting shortcomings, leading to (somewhat) higher funding costs and declining credibility on financial markets.

As regards the other motivation of the downgrading, I do not quite share the view of Moody’s that economic reforms really are moving too slowly. This may be the case – but can we be sure? The Chinese reject such an argument. They may be right. But if Moody’s has committed an error, such an incorrect interpretation may also be based on insufficient transparency by the Chinese. Obviously, Moody’s has already concluded that economic reforms are not strong enough – at least so far.

Again: Moody’s may be right – or not. We still do not know. Because one conclusion can be made for sure: China’s growth has indeed to come down if successful economic reforms shall be implemented to a satisfactory extent. Maybe we can learn more about this during the important National Congress of the Communist Party this fall where a number of new, very important leaders of the Standing Committee of the Politburo will be selected (but not the Chairman and the Prime Minister).

Improving transparency and the quality of statistics would be good answers to the shrinking credibility of China on global financial markets – and, of course, even more important – that decisive economic reforms really take place.

Today, it’s hard to say whether Moody’s downgrading was premature or not. However, it may serve as a warning signal for the political leadership in China. An accelerated and more efficient economic reform process is still possible! And if analysts in Western countries really have not underestimated progress in Chinese economic reforms, better transparency for Westerners certainly would be an appropriate answer.

 

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

 

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Growth temperature rises in the Chinese economy to 6.4 in April – up from last December

May 11, 2017, by Hubert Fromlet, Kalmar

Summary

From the end of April until the beginning of May, we prepared our traditional spring survey on the business climate and economic conditions in China. We try to find out more about the Chinese business cycle and some important structural issues.  We received again answers from around 15 independent China experts from Asia, the U.S. and Europe – thanks!

¤   Our so-called Temperature Indicator for the Chinese economy improved to 6.4 in April/May compared to 5.2 in December last year (on a scale 1-10; 10=very hot).

¤   The panel expects GDP growth in 2017 and 2018 to remain quite stable compared to 6.7 in 2016 (2017: 6.5 %, 2017q4: 6.3 %, 2018:6.0 % – based on official statistics).

¤   The panel’s GDP forecast on China for 2017 and 2018 includes the assumption of an ongoing gradual but relatively modest upswing in the OECD area as a whole.

¤   75 % of the panelists have rather a downward bias in their forecasts than vice versa.

¤   There are almost no appreciation expectations anymore for the Chinese currency RMB.

¤   90 % of the panelists still see a bubble on the real estate market.

¤   Ranking of some structural areas in China (scale 1-10, 10 = very good): statistics 3.9, institutions 5.3,  marketization of a) banks 4.1, b) stock markets 4.0, c) bond markets 4.4.

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

 

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