“Hidden” leading indicators give reason for Chinese growth concern

August 20th, 2018

No doubt, China has not given encouraging growth signals during our European holiday season. I am here not so much focusing on weaker official statistics (GDP, public investment, real growth in retail sales, etc.) but rather on analytically mostly unwatched or neglected signals.

But also hard statistical data were not really favorable – neither the PMI nor production indicators. The escalation of the trade war with the U.S. dampened business confidence, even if Chinese  trade numbers so far did not give particularly negative results (which according to experience and textbooks indeed could take some more time). But the Chinese currency yuan weakened visibly (not so much hidden this time but not very much related to growth concerns by the analysts); so did the two Chinese stock exchanges.

In this analysis, I do not focus very much on hard Chinese statistics. Major parts of Chinese are not (completely) reliable or have their quality shortcomings for other reasons. However, it is worth-while  paying increasing attention all the same when the Chinese themselves publish (slightly) weakening statistical numbers; such an indication came also in July from rising urban unemployment. In this also officially confirmed negative statistical sense growth could indeed be on its way to move in  a more dampened direction.

On the other hand, two developments outside the statistical sphere – which usually are not really observed by Western analysts in a more specific growth perspective – make me usually particularly curious in an economic growth context. They are

– (unexpected) loosening of monetary policy without interest rate cuts, and more than a very temporary weakening of the yuan.

Loosening of monetary conditions (by  decreasing cash requirements for the banks) has indeed taken place more recently despite the debt problem of local governments, firms and private households. It should be observed whether there is more to come in the nearer future.

The real reasons for the weakening of the currency yuan (also called the renminbi,  RMB) in 2018 may be in reality somewhat more opaque. First, there may be fundamental explanations for the drop of the yuan based on the existing  economic imbalances and also at least some negative impact from the trade war with president Trump, which means induced by market forces. Second, there may also have been Chinese political efforts to drive the currency down. My own guess is that reality may include both components. Perhaps the strong fall of the RMB was somewhat overdone but remarkable all the same.

Anyway, there is good reason to believe that Chinese GDP also officially will continue to slow down in the foreseeable future – but slightly and not very visibly apart from probably or possibly (net) exports. GDP growth around 6.5 percent for 2018 seems still be achievable in official real terms.

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

 

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Turkey’s enormous problems

August 13th, 2018

From my previous professional life as a bank chief economist I remember very well the Turkish banking crisis of 2000/2001, followed by a major economic downturn (GDP 2001: -5.3%). Prior to the banking crisis, macroeconomic imbalances in mainly the budget and the current account had worsened alarmingly and, thus, strongly contributed to fading international confidence in Turkey’s financial – and also political – system. The lira weakened strongly at the time. Foreign investors sold huge amounts of their Turkish T-bills and even stocks. Logically, the currency reserves shrank dramatically. At the end of the day, the IMF provided Turkey with a 10.5 billion financial rescue package. After this, a serious political crisis followed all the same – before an economic recovery could be noted and the weak banking system was reformed into a more stable shape.

Unfortunately, the acute starting position of the current Turkish crisis does not look very different from the one 17 years ago. Major macroeconomic fiscal and trade imbalances exist also today. The Turkish currency has dropped substantially not only in recent days but also by around 35 percent so far in 2018.

Political conditions, however, look partly different this time – with other kinds of political leadership in both Turkey and the U.S., giving the current economic problems in Turkey even stronger political dimensions than in the beginning of this century. But this does not necessarily mean that the current Turkish crisis “automatically” will end in a more benign way, particularly when considering president Trump’s current resistance to potentially needed major international global financial rescue actions.

Worst case scenario

Still, the worst case scenario is only a scenario. But the current situation is critical and can aggravate further. The worst case scenario could include major bank problems in Turkey with contagion to EU banks that have major loan and securities involvement in the Turkish financial system. Such a development could lead to major GDP losses in mainly Turkey but also to a more limited extent in the EU. Read, by the way, more about this relationship in the research of Hyman Minsky!

All this leads to the conclusion that the coming development in Turkey should be given very strong analytical attention. President Trump’s future ideas and action play certainly an important role in this respect. Sometimes, he changes his mind unexpectedly in another direction. But Turkey itself should also under all circumstances work more ambitiously with its ongoing macroeconomic imbalances, particularly since the country is highly indebted abroad – both what concerns private and public debt.

Experience from other countries with similar challenges shows that nervous or speculating financial markets usually are stronger than the defense lines set up by the pressured country with its currency reserves – unless the acute problems are combatted promptly or surprisingly positive news make the whole picture brighter.

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

 

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Semi-knowledge about China is risky

August 7th, 2018

We are living in a rapidly working and changing (economic) world. This development also leads many times to less profound analysis and reading. Conditions have been – and are – changing both on the analytical demand and supply side. More people express their opinions – but decreasingly based on profound skills. And less people want to spend much of their limited time on deep intellectual penetration of different special areas. The demand for good, deep and comprehensive general knowledge seems to be declining.

I do not motivate these brief conclusions by the latest results from economic and social research. Instead, I apply many years of my own experience from industry, financial markets and academia – and also proven and undisputed results from (academic) research.

What really worries me is the obvious fact that so many articles and reports on China obviously are reflecting semi-knowledge. Good understanding of Chinese politics and economic conditions or developments is certainly not an issue one can deal with briefly or occasionally – which unfortunately often seems to be the case. Analysis of China may be knowingly or unconsciously. In my view, the latter alternative is dominating.

Here we come to Nobel Prize winner Robert Shiller. In his book “Irrational Exuberance” (p 142), Shiller discusses a phenomenon called “overconfidence” which he defines by writing “people think they know more than do. They like to express opinions on matters they know little about, and they often act on these opinions …”

In other words: semi-knowledge exists indeed and can become very risky. Ambitious and future-oriented countries should not become dependent on strived special skills in IT and AI – but should also do a lot for improvements of general knowledge. I believe that the Chinese have understood this dualism better than many political and corporate leaders in the West. At least I still cannot find good evidence that necessary educational efforts for improving general knowledge are really taking place on a broad scale in our part of the world. It may be a structural problem in times of speed, electronic games and modified spare time with – probably – less interest in reading. Updated research on this area would be very interesting.

Conclusion:

A good understanding of China assumes deep and regular studies of this – by its enormous size – continental country. Overconfidence is always risky – but particularly when it comes to China.

 

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

 

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