Why Chinese leaders are not really happy with current GDP growth – 6% is not 6%

28 October, 2019

China’s GDP increased by “only” 6.0 % in q3 (yoy) compared to 6.2 % in q2, the lowest growth rate in nearly three decades. In quite a number of external comments, I could read that China’s political leadership should be contented with the above-mentioned growth rate. However, I can see no reason why.

The point is that 6% in GDP growth today is not always equal with a 6 %- rate at another occasion or somewhere else. Here we come to issue of the quality of economy growth. I would agree with the supposed satisfaction of Chinese leaders if growth had come down in recent quarters as the result of future-oriented reforms of the state-owned enterprises (SoEs) and other kinds of necessary structural downsizing. In this case, we would regard the slower growth as an intended result, some years ago often called “the new normal”.

Weakened GDP growth not due to economic reforms

Instead, China’s latest growth deceleration is caused involuntarily and cannot be seen as the result of structural reforms and confirmation of the planned “new normal”. Instead, the current slowdown seems to be much the result of the trade war with the U.S., the weakening global demand, and the related deterioration of the business sentiment which at some point also started to affect Chinese investments more negatively.

In my view, the dampened growth of Chinese investments should not be related to domestic structural reforms but rather to exogenous factors. This means that the political leaders of China do not like the current rate of GDP growth since it is not the result of their own forward-looking Chinese reform policy. I would not be surprised if the next quarter will show a very limited renewed improvement of the GDP-growth rate, possibly to 6.1 or back to 6.2 %. Such a reversal could be motivated by a number of growth supporting measures regarding taxes, lowered cash requirements for banks in the PBoC and easening conditions for foreign investors on Chinese stock markets.

To summarize: A further weakening of GDP growth below 6 % does not seem to be probable – particularly not for several quarters in a row. Analysts should not forget the importance of nice statistical GDP numbers for the forthcoming evaluation and anniversary events taking place in 2020 and 2021 (see my article in chinaresearch.se from October 16 this year).

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

 

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Laureate Esther Duflo and colleagues – admirable award courage in Stockholm

18 October, 2019

Pristagare Esther Duflo (och kolleger) – hurra för Nobelpriskommittén!

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Summary in English

October 14 in 2019 turned out to be a great day also in my own professional life. I had no particular achievement myself but I could see something come true that I have been pleading for repeatedly for quite some time – the Nobel Prize in economic sciences with development economics as the awarded research area and Esther Duflo as a female winner together with Abhijit Banerjee. Concerning a third person I had in recent years changed my mind a couple of times forward and backward between Partha Dasgupta, William Easterley and Michael Kremer. Kremer made it finally – a good choice as well.

In recent years, I have pointed several times at my view that the evaluation time for the winning research area not in each and every case necessarily has to be 20-30 years – and certainly not when it comes to developing countries (poverty) and the scientific field experiments there.

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Own contributions / bidrag på svenska och engelska

https://lnu.se/en/meet-linnaeus-university/current/news/2019/who-will-be-awarded-the-nobel-prize-in-economics-2018/

https://blogg.lnu.se/fromlet-bbsresearch/files/2019/10/Nobel_Prizw_2019.pdf

https://johanschuck.se/hubert-fromlet-dags-for-en-ny-kvinnlig-ekonomipristagare/

https://lnu.se/mot-linneuniversitetet/aktuellt/nyheter/2019/hubert-fromlet-det-ar-hog-tid-att-hitta-kvinnliga-ekonomipristagare/

https://www.di.se/debatt/debatt-kvinnorna-som-borde-fa-ekonomipriset/

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När jag igår fick höra resultatet från omröstningen till ekonomipriset 2019 blev jag mycket glad. Dels för att forskningsområdet “utvecklingsekonomi” belönades, dels för att Esther Duflo blev en av pristagarna (utan att göra avkall på de två manliga pristagarnas meriter). Det hade dock tagit så mycket som tio år sedan den första kvinnliga pristagaren hade belönats (Elinor Ostrom).

Jag hade också föreslagit i några av ovanstående länkar att – om det ej skulle uppstå kvalitativa risker – att (något) förkorta den traditionella, 20-30 år långa utvärderingsperioden för att kunna utvidga listan på kvinnliga priskandidater.

Så klart att jag kände mig nöjd efter tillkännagivandet. En del traditionellt skolade och sinnade kolleger framförde en hel del tvivel. Några sade också till mig rakt på sak att fältexperiment inte duger för att komma fram till generella eller makroorienterade slutsatser.

Visst, i vissa situationer kan det vara så. Har man dock sysslat lite närmare med fattiga utvecklingsländer brukar man märka rätt snabbt att effektiviteten och resultaten av speciella reformer och satsningar endast kan mätas med hjälp av fältorienterade mikroexperiment, speciellt eftersom makroekonomiskt statistikstöd av olika skäl knappt förekommer. Men neutralt vunna lokala eller regionala undersökningsresultat kan också göra mycket nytta och leda till bredare geografisk tillämpning.

Bra med Banerjees och Duflos forskning är inte minst att de kan åstadkomma praktisk koppling med sina studier och exempelvis även inkludera något så viktigt som psykologiska aktioner och reaktioner. Deras forskning är neutral och kan ej påverkas eller manipuleras av inhemska institutioner. Såväl berörda (fattiga) människor och inhemska institutioner kan dra direkt nytta av MIT-ekonomernas forskning som utländska biståndsgivare och företag. En helt ny forskargeneration kan äntligen mer konkret bidra till en bättre och rättvisare värld.

Min hyllning till Banerjee och Duflo ska dock inte förringa Michael Kremers mycket seriösa vetenskapliga insatser för fattiga länder, speciellt eftersom han sysslar så mycket med hälsoekonomi – ett viktigt forskningsområde med Amy Finkelstein, Jonathan Gruber och Kevin Murphy som potentiella pristagare längre fram. ”Health economics” förtjänar ännu mer uppmärksamhet framöver, både i utvecklade och mindre utvecklade länder.

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

 

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“Pressure on China and India to revive growth”

16 October, 2019

Presentation by Hubert Fromlet, affiliate (affilierad) professor at Linnaeus University (Linnéuniversitet), Sweden, on October 16, 2019, at its annual
“Baltic Sea Region /Emerging Market (China) Day“ in Kalmar/ Sweden ————————————————————————————————–

Brief summary in Swedish

Både Kina och Indien drabbas för närvarande av dämpad BNP-tillväxt. Tillväxtförsvagningen är mestadels hemmagjord. Kina påverkas dock mer än Indien av USA:s protektionism. Såväl Kina som Indien är piskade att undvika en ytterligare tillväxtdämpning eller att snarast möjligt komma på en (något) snabbare eller åtminstone stabilare tillväxtbana igen.

I Kina handlar redan nu all ekonomisk planering bakom kulisserna om att kunna presentera landet i en mycket positiv dager vid Kommunistpartiets 100 års jubileum år 2021 – men också att redan nästa år kunna framkalla positiva rubriker vid utvärderingen av de cirka 50 ekonomiska reformplanerna som lades fram vid Centralkommitténs Tredje Plenum år 2013. Utvecklingen bortom 2021 förblir oklar som resultat av den till jubileumsåret delvis artificiellt framkallade tillväxten.

För regeringen i Indien gäller det inte minst att återvinna konsumenternas förtroende. Nationalräkenskaperna visar att det är framför allt konsumenterna som på sistone blivit mer skeptiska. Indiens ständiga hänvisning till att den egna tillväxten på senare år varit bättre än Kinas håller inte riktigt eftersom Indiens upphämtningsprocess kommit igång tydligt senare än Kinas. Indiens långsamma reformtempo bör höjas i den mån det är möjligt.

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Why GDP growth is so important to China these days …

Despite regularly returning general criticism, the Gross Domestic Product (GDP) is still treated by almost all analysts as the most important and most frequently used macroeconomic indicator of a country. Critics, however, mostly want conditions like the environment, national health, wealth etc. to be included in annual national accounting (GDP) as well. Certain governments work already on widened definitions of economic growth but rather in additional terms than on substitutional conditions. These efforts are – in my view – a good idea but certainly difficult to develop and measure in practice. Attempts should be made all the same – like intended in Sweden (though I have so far not heard anything about the progress in this specific respect).

Good numerical GDP growth means traditionally a lot to China and its political leaders. Progress can be shown to the public in a relatively simple and understandable way. The lagging accuracy of official GDP statistics is not really an issue for discussion in the second largest economy (second in dollar terms – but in so-called PPP terms, total Chinese GDP is already the largest in the world).

Outside China, however, many economists have recognized the qualitative statistical shortcomings and inconsistencies of China’s GDP calculations – however, without having the tools to explain these shortcomings in a more accurate way. However, it is certainly not normal that Chinese GDP-growth rates are more or less even during at least several quarters and very predictable from quarter to quarter and from year to year. This happens to my knowledge nowhere else in the world but in China.

The extremely important anniversary year of 2021

For this reason, I feel very sure that the evaluation and anniversary years of 2020 and 2021 will be presented as (very) positive years for the Chinese economy. 2021 will be a key year for the Communist Party, 100 years after its foundation. It is certainly not desirable for China’s political leadership to announce and/or admit a notable downsizing of GDP growth in 2021. GDP growth will therefore be particularly stimulated by monetary policy, certain (environmental) investments and financial support to state-owned companies – indeed as much as possible. Any GDP growth below 6 percent in 2019, 2020 and 2021 would be a major surprise – and probably mean that the development in reality has been worse than this. And besides, in Chinese mythology six is certainly a more lucky number than five.

It could be added when trying to figure out what is really happening in China’s economy, I prefer using indications or indicators like official statements by President Xi Jinping and Prime Minister Li Keqiang and reading their comments between the lines, particularly when these top leaders themselves are pointing at a problem . I also look carefully at changes of the banks’ cash requirements at the People’s Bank of China and even more when they are loosened. This means normally an official easening of monetary and credit policy, i.e. an attempt to stimulate the economy and growth. Furthermore, the development of the Producer Price Index (PPI) seems to be another good short-term indicator because of its obvious correlation with GDP. Not to forget statistics on transports!

Sure, there are also many long-term challenges for China – such as private and (local) government indebtedness, the avoidance of a late bursting of the real estate bubble, the creation of new competitive industries with advanced technology, sustained social stability, clear improvements of the environment, dealing with demography and the necessary processes of improving institutions, financial markets included. And what about attempts to improve certain international political relations?

Without doubt, we can recognize China as a superpower that has to face many difficult challenges in the forthcoming decade and even beyond. But there is also a China with specified high ambitions and strong strategic objectives, well looking into the future and working actively for good or at least satisfactory GDP growth in the medium and longer run.

The outcome of this balancing act will remain uncertain for quite some time. But we know that the legitimacy of Chinese political leadership continues to be linked to economic progress, i.e. GDP growth.

… and India ?

More recently, GDP growth has been weakening in India as well, first due to decelerating activities in investment and now very obviously by dampened demand from consumers. All this his is certainly not a good message to Prime Minister Narendra Modi and his government. There is pressure on government politicians to work harder for renewed strong economic growth.

Currently, India’s GDP growth is still roughly in line with China’s – but after some time of higher Indian GDP growth than Chinese. 5 percent in y-o-y GDP growth during Q2 in 2019 means the weakest Indian increase since Q1 in 2013. The exact answer to the most probable numerical GDP differential between both countries depends highly on China’s assumed accuracy in national accounting (which we do not know enough about).

Consumers need to become more confident – both in the short and the long run

The currently declining speed of economic growth can be mainly related to skeptical consumers. Consumers’ confidence has been coming down – and, logically, also GDP growth. Future sustainable GDP-trend forecasts at around 8 percent – as often published about two years ago – can certainly not be taken for granted.

Of course, also India has a lot of burdening medium- and long-term challenges. Among them, one can find high governmental fiscal deficits, slowly moving legislation processes, poor infrastructure and environment, lagging human capital formation, political relations to China etc.

However, despite these structural shortcomings: India has two important competitive advantages compared to China – being a democracy and an average population that is ten years younger than China’s; together, China and India count quite equally distributed for more than one third of the global population.

But India can only benefit from this latter advantage if it will be able to give the younger Indians clearly improved conditions for their education. For this conclusion, we have a lot of scientific confirmation.

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

 

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