Alarming signal from China

10 September, 2019



Larmtecken från Kina

Sammanfattning / Summary

Kina har gjort det igen – sänkt kassakraven för bankerna i centralbanken People’s Bank of China. Det är den sjunde gången på knappt två år och redan den tredje gången under innevarande år. Det bör tas som ett larmtecken trots förekommande tillförsikt av en del analytiker och kapitalförvaltare. För mig är bankernas kassakrav en vida viktigare konjunkturindikator än, till exempel, Kinas två inköpschefsindex. Reducerade kassakrav ökar också risken för försummat och eftersläpande strukturarbete.

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It happened again: Chinese decision-makers lowered the banks’ cash requirements in the People’s Bank of China (PBoC) by another 0.5 percentage points for larger banks (and even more for smaller banks), already for the third time this year. This step means a relief by 900 billion yuan (or equivalent to 126 billion USD on September 6) that can be used for new credits.

In my own interpretation, this latest reduction is another clear signal by Chinese political decision-makers – obviously mainly promoted by Prime Minister Li Keqiang – that the economy keeps on giving strong reasons for concern. Furthermore, the latest reduction is already the seventh since the beginning of last year – i.e. the beginning of the trade war with the U.S. (or the other way around if you want). This is quite a trend. It also could be added that I did not find any remark about this important policy measure on the website of the PBoC (hopefully I missed it myself).

It should not be overlooked that the further loosened credit conditions also increase the risk of undermined structural changes and improvements – as already in detail decided six years ago at the Third Plenum of the Communist Party. Evaluation will take place next year!

Also in this blog, I have often expressed that reductions of cash requirements in the PBoC are a good indicator for growth problems in the Chinese economy. In such a situation, GDP numbers use to become less reliable. Thus, I give more analytical attention to this ongoing real monetary policy than to the forthcoming statistical GDP numbers for q3 and q4, close to (most probably) 6 %.

Anyway, a clear result of the American-Chinese trade war can be seen also in the American trade numbers. In the first half of 2019, American imports from China declined by 19 percent – and American exports by remarkable 12 percent as well (with Chinese export values four times higher than the American). This loss of American exports to China indicates clearly that trade wars are not “easy to win”, contrary to what President Trump commented some time ago. Even global losses are obvious these days!

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

 

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The art of understanding China

29 August, 2019

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Konsten att förstå Kina

Sammanfattning / Brief summary in Swedish

Ekonomiska bedömningar avseende Kina kräver god förståelse för kinesernas psykologi och politiska värderingar. Det stora problemet med Kina-analyser och kommentarer som görs i vår del av världen är att det mestadels sker utifrån en västerländsk synvinkel och värderingsansats. Detta fenomen leder ofta till felaktiga slutsatser.

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It can be observed that more and more analysts comment these days on China. Of course, a lot is written and said about developments in China. Thus, some new knowledge about China can be acquired quite easily. One special problem, however, is not recognized sufficiently in many cases: the frequently existing inadequacy of applying Western logic when attempts are made to explain the Chinese and their (future) actions and reactions.

For this reason, the headline of this blog is set as “the art of understanding China”. Interpreting many Chinese conundrums is indeed an art. However, a substantial number of conundrums are not regarded as such phenomena by most Westerners.

President Trump frequently accuses the Chinese of unfair behavior in international business. This criticism is not unmotivated and has in recent years also been taken up frequently and concretely by the European Union Chamber of Commerce in China. It is therefore urgent that the EU in the foreseeable future can achieve a workable common China strategy – however, in a more gentle way than the U.S. has been and still is applying.

What the Chinese dislike

Achieving an acceptable EU strategy also for the Chinese assumes, however, that the EU looks at China in a kind of diplomatic way and not from a “Europe first position”. President Trump’s “America first position” vis-à-vis China certainly was received by the Chinese as extremely unfriendly. It should not be neglected that the Chinese still are very proud of their long-term history and also the (economic) achievements in the past four decades.

In general terms, attitudes that point at humiliation and arrogance by foreigners are always strongly disliked by the Chinese. History also tells us that the Chinese used to become very upset when American officials regularly argued for a stronger currency (RMB, yuan). An important conclusion: It is not so much what you say it but the way you say it (even if there are issues you never should mention for the Chinese).

Below, I link to a summary of Chinese and Western values and logics. There may be certain moves going on into a new direction, for example in China from repetition to innovation or from unity to individualism. But the link still provides China analysts with nicely applicable guidelines for understanding Chinese logics and behavior. Without doubt, the search for such insight promises to be beneficial                          https://www.chinahighlights.com/travelguide/article-chinese-and-western-thought.htm .

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

 

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Argentina in deep crisis again

23 August, 2019

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Argentina åter i djup kris

Sammanfattning / Brief summary in Swedish

Resultatet av Argentinas primärval helt nyligen försatte landets finansmarknader i rent kaos. Utmanaren, peronisten Fernandez, vann tydligt över regerande presidenten Macris gruppering. Kort beskrivet står Fernandez politik för stark statlig styrning, medan Macri företräder tydliga marknadsliberala värderingar.

Orsaken till Macris valförlust är att hans saneringsförsök uppfattades som alldeles för hårt av väljarna. Följaktligen tyder en hel del på en Fernandez-seger vid presidentvalet den 27 oktober. Peronistisk ekonomisk politik har ständigt misslyckats under de senaste årtiondena. Men inte heller Macris insatser kan framstå som speciellt framgångsrika. Tyvärr finns det nu ytterligare en akut kris i vår redan tillräckligt krisdrabbade värld – förmodligen utan att sätta djupare globala spår. Men Argentina är Sydamerikas näst största ekonomi.

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Though it not a new phenomenon, the world feels again sorry and worried about a new economic crisis in Argentina. Ruling president Mauricio Macri was recently defeated strongly in Argentina’s primary elections by the Peronist Alberto Fernandez, leftist candidate for the presidential election in October 27 this year.

Most observers think now that Fernandez will be the new president of Argentina. This is why financial markets reacted so chaotically on his recent landslide victory. Sure, Macri’s liberal economic policy has been very tough – obviously too tough – for the Argentine people. On the other hand, financial markets know that Peronist economic policy always failed in the past.

Thus, fears of renewed strong state interventionism was enough to provoke financial panic on August 12, the day after the primary elections. Enormous falls were noted for both the peso and the stock and bond markets – without contagion to other emerging markets. But Argentina is the second largest economy in South America.

Recession

The turmoil happened when the economy already for some time had been affected by an ongoing economic crisis. GDP fell by 5.8 percent in Q1 this year (Q4 2018: 6.1 percent). Inflation belongs to the highest in the world, in July over 50 percent https://www.indec.gob.ar/uploads/informesdeprensa/ipc_08_193C0A98AEA4.pdf

Very recently, Macri promised the voters to provide economic policy with a more social profile. Good news? Probably not good enough to prevent Fernandez from winning the forthcoming presidential election.

Unfortunately, there is still reason to cry for Argentina. I really wish to be wrong.

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

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

 

Back to Start Page