China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

Emerging markets and a strong dollar

May 27, 2024

Emerging markets are usually more sensitive to weak current account balances than advanced countries. A deficit in the balance on current account urges for a currency inflow since it implies a debt for imports vis-a-vis other countries that has to be paid. This inflow can be done in the three following ways:

¤ by receiving currency reserves via foreign direct investment (which often does not work as an available or sufficient financial source),

¤ by borrowing money in foreign currency (mostly in U.S. dollar, USD), or

¤ by selling stocks, bonds, etc to foreign investors (if such financial products exist in the emerging country and foreign demand for these papers is there).

Statistics show that emerging markets borrow the lion share of their foreign credits in USD which may be challenging in times when the American dollar is strong on global currency markets. This is actually the case. Serving existing debt in USD uses to be even much more challenging.

By the way: During a meeting the other day with American financial analysts, I heard the view that the USD historically tended to be strong when investments in research and development (R&D) in the U.S. were high. This is explained by an increasing demand for American technology stocks and also foreign action for FDI in the U.S., thus leading to a high demand for the dollar and therefore to the strengthening of the American currency. I am not quite sure about the general validity of this suggested correlation. But it can be observed that such conditions can be found these days.

Back to emerging markets. What we can see today is an increasing willingness of certain emerging markets to avoid or decrease new borrowing in USD. However, this is not easy to achieve since USD markets function by far as the biggest global supplier of new loans, also to emerging markets. 

The ongoing situation with the strong dollar is, of course, particularly difficult for emerging countries with high indebtedness in USD. Such countries may be found in all continents – countries that are or have been reporting growing pressure on their currencies in 2024 such as the Nigerian Naira, the Egyptian Pound, the Turkish Lira, the Indonesian rupee, the Argentine peso or the Brazilian real (watch for this the following IMF table: Of course, some of these and other weak currencies of emerging markets have also been impacted by other negative factors than the strong dollar, for example domestic political ones.

At the same time, there are also countries trying to reduce their exposure to the dollar (which also can be seen in the IMF table quoted above). Indonesia is such an example. However, such a trend will not be easy to achieve – but Thailand actually managed it in the past few decades. Perhaps another option may gain momentum as it is currently the case in South East Asia, i.e. trying to expand borrowing within the region at the expense of the USD.  

Conclusion: Analysts of emerging markets should watch the further development of the USD and its impact on indepted emerging markets.

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

Demography – China’s biggest problem?

April 10, 2024

China had until recently a couple of decades with impressing GDP-growth numbers. However, this development was not possible without pain and flipsides such as poor environment, credit bubbles, real estate crises, massive local indebtedness, enormous subsidies to state-owned enterprises, etc. 

These burdens are still there – certainly dampening ongoing and future economic growth. Despite lacking transparency – also when it comes to real GDP growth – the world outside China is now much more aware of China’s structural growth problems than before the eruption of covid-19. 

However, one major Chinese structural challenge is still widely neglected or forgotten in Western countries, particularly in commercial circles – the rapidly deteriorating demographic conditions.

300 million Chinese pensioners

China’s population amounted in 2023 officially to 1.41 billion – only slightly behind India after having been the number-one country by population during many years (India in 2023: 1.43 billion).1.41 billion meant a population decline for the second year in a row. In 2022, Chinese authorities noted also the first population drop since 1961.

India’s move to the top of global population or – in our context – China’s fall from the very top to the second position can be explained in three interconnected ways:

¤ First, by India’s clearly younger population.

This fact also means that India’s demographic perspectives point at a much more favorable population outlook than in the case of China; probably also as regards long-term GDP growth (if the younger Indian people will be provided with necessary education).

¤ Second, by China’s perennial one-child policy.

After 35 years of one-child policy, Chinese political leaders finally allowed couples in 2015 to have two children, since 2021 even three. In my view, 2015 was at least ten years too late for tackling the forthcoming demographic challenges. It should have happened strategically in the early days of optimism and rapidly increasing economic growth.

¤ Third, slowing GDP growth tends to counteract increasing birth rates. 

This experience from our part of the world can also be applied to today’s China. Couples think in worsening economic times more frequently that they cannot afford (further) children. More concretely, the fertility rate fell in 2023 to just one child, mainly due to worsening conditions on the labor market – e.g. for young academics! – and increasing financial uncertainty of private households. Before covid-19 the corresponding ratio was still at 1,50. Urbanization should have contributed to the declining fertility as well.

Altogether, the demographic trends in China seem to be extremely challenging, particularly since the population above 60 years already includes as much as almost 300 million people and is calculated to go on growing quickly in the future. Furthermore, longevity should be rising further.

Thus, one can easily recognize that a lot of different tensions and imbalances are hidden behind the Chinese age pyramid. In 2002, there were still ten working people on one pensioner. For 2030, the corresponding numerical relation will be four working people by one pensioner, even lower ratios are mentioned by researchers.

We can foresee that China really is facing dramatic demographic changes that are predicted to continue into the wrong direction for some decades beyond 2030. China’s total population is estimated to shrink below 4 billion already ten years from now. Researchers at the Australian Victoria University forecast as well that the number of Chinese working people will be equal to all retirees around 50 years from now – indeed a scaring scenario (

50 years is, of course, a very long time horizon for a forecast. In the meanwhile, developments may turn to the worse or to the better. Considering all imbalances in the Chinese economy, however, it looks hard to recognize a less gloomy demographic outlook already in the forthcoming 10-20 years, since demographic trends for such a limited demography period tend to be fairly predictable – at least what concerns the direction.

What could be done?

Here we certainly have a question that many – or even most – Chinese focus on these days. But reality of the demography mystique and its cure is extremely tough as the theoretical examples of possible action manifest below.

¤  Raising the age for retirement.

This could be an alternative forward, particularly since Chinese men usually retire from their jobs already at 60 years of age and working women at 50 (factory workers) or at 55 (white collar). However, many observers consider such a step psychologically and socially as risky and economically as insufficient to solve the whole demographic problem though intentions in such a direction already have been addressed. Certain experts claim even that Chinese decision-makers have no choice anymore and simply have to raise the age for retirement – whatever it takes. But it should be added that enterprise employees already work as much as 49 hours a week.

¤  Improving the conditions for the three existing insufficient pension pillars.

Improvements of the governmental, the voluntary corporate and the voluntary private pension pillars have been discussed in different Chinese fora – but do definitely not look promising because of huge capital shortage in all three pension regimes. For fiscal reasons, China should indeed refrain from rapidly rising public debt.

¤  Generally: economic policy aiming at (considerably) higher GDP growth.

It remains a conundrum how such an objective could be met when the labor force as a main growth factor will be shrinking faster. Sure, the political leaders want to see more high tech and value-added in production. But I cannot imagine how this could take place in a satisfactory way with the scarce future labor market resources. Considerably more automation in production seems to be only a partial approach. Heavy application of AI remains a potential joker – but also an unpredictable one.

¤  Specifically: economic reforms as intended by the Third Plenum in 2013.

Sticking more ambitiously again to these growth-stimulating plans with more market economy and better institutional conditions would certainly be a good GDP-growth idea – but most probably not sufficient to provoke a desirable GDP boom (but better than the current course of economic policy).

¤  Labor force immigration

This is not a realistic option for China – neither theoretically nor practically (where should all the needed people come from?).

Conclusion: Having checked out different Chinese alternatives for tackling the demographic challenges in the forthcoming two or three decades to start with, I could not find any promising and simultaneously realistic way to manage the forthcoming demographic crisis successfully – particularly not under current policy conditions.

In my opinion, not even a combination of higher retirement age and better structural conditions for GDP growth would completely solve the demographic crisis – in the most favorable scenario most probably only dampen the negative consequences after quite some years.

Hopefully, I am too limited in my optional thinking. Of course, the world would benefit from a better outcome from China’s demographic dilemma than it is singled out in this article (see also

Companies should deepen their analysis

Indications are strong that Western corporations already in the forthcoming decade – and also beyond – will be confronted with declining potential growth in China. The demographic burden looks much heavier than most corporate managers seem to anticipate these days.

China’s current political strategy to boost private consumption could fail drastically when/if pensioners will have growing financial problems, and the working people increase their savings ratio because of concerns about their financial future. Psychology will play a major role in this context. It cannot be ruled out that China’s demographic challenges may mean a bigger threat to Western companies in the longer run than China’s wildly expected progress in AI and modern technology.

Summary – more focus should be put on demographics

¤  It seems to be a good advice to Western commercial strategists to follow demographic developments in China in the forthcoming decade(s) very carefully in order to find an appropriate China analysis and strategy.

¤  Western companies need a real long-term strategy for China – not only for the next few years – with the demographic challenge as a major parameter.

¤  However, everything written in this article deals by definition with an uncertain future. I therefore wish all readers to apply all above mentioned forecasts and scenarios on China’s demographic challenge with necessary circumspection and humility – though the enormous challenges are obvious.

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

India – Modi wants to win the election and act as the voice of the South

March 26, 2024

One month from now – on April 19 – general elections will start in India and include altogether seven stages until June 1. Almost one billion people are invited to vote – 150 million people more than last time.

Opinion polls point at a new victory for current Prime Minister Narendra Mori and his Hindi right wing Bharatiya Janata Party (BJP) together with BJPs coalition partners (see my article from February 22 this year with the title “India isn’t easy to analyze and to deal with”, including comments on the economic development and challenges, Most observers expect the oppositional alliance called INDIA to weaken the position of the BJP – but not strongly enough to win.

Strengthening India’s voice of the South

There is no doubt that Modi during his assumed third mandate period aims at further strengthening India’s role as voice of the South, certainly in competition with China. Both countries appear to be quite different in their political approach vis-à-vis the southern world.

India seems to see the South in a collective view with visions of necessary common achievements in important areas such as less poverty, better health and environment but also non-violence in Gandhi’s historical spirit.

More exactly, the Indian government made the following comment in this context: ”India hosted a special virtual Summit, called the Voice of Global South Summit under the theme – ‘Unity of voice, Unity of purpose’ from January 12-13, 2023. It was a new and unique initiative that envisaged bringing together countries of the Global South and share their perspectives and priorities on a common platform across a whole range of issues…”.

India obviously strives to integrate the global South more visibly with the Western hemisphere – in line with its philosophy to see the whole world as one family (Vasudhaiva Kutumbakam).

China’s strategies on the other hand tend to base quite openly on commercial objectives, for example by producing and financing new infrastructure projects and by receiving in return access to important commodities or Taiwan issues. However, China also uses, for example, BRICS and the trade agreement RCEP as platforms for meeting the South multilaterally.

It may be interesting to see how India and China will compete in the South in the longer run. It seems to be on the cards that this competition will become fiercer.

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