What (most) analysts forget about China

February 5th, 2019

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Kinas ekonomi analyseras (ofta) för ytligt

Svensk sammanfattning

Efter många års studier av kommentarer och rapporter om Kinas ekonomi kommer jag till slutsatsen att flertalet västerländska ekonomiska Kina-analyser ter sig alltför ytliga och föga frågande eller ifrågasättande. Sällan efterlyses av analytikerkåren förklaringar eller förtydliganden. Mestadels kommenteras enbart BNP- och PMI-siffror precis i det skick som dessa presenteras. Det räcker givetvis inte.

Det vore bra om västerländska (finansmarknads-)analytiker kunde fokusera mer på detaljer kring Kinas ekonomiska utveckling och brister i rapporteringen. Hit hör bland annat mer djupgående analyser av BNP-utvecklingen, den ”nödvändiga” 6-procentiga årliga BNP-tillväxten, uppföljningen av den ekonomiska reformverksamheten, den totalt försummade bytesbalansen, Kinas framtid som forskningsnation och psykologin mellan de två statscheferna Donald Trump och Xi Jinping – inte minst vid kommande förhandlingar om förbättrade handelsrelationer mellan USA och Kina.

Även kinesiska beslutsfattare skulle vinna på ett mer detaljerat och bättre analyserbart beslutsunderlag – om möjligt baserat på tillförlitliga ekonomifakta.

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There is much focus on China these days by professional forecasters, major international organizations like the IMF and the OECD included. In most cases, the current concerns are related to the trade war between the U.S. and China and to China’s dampened GDP growth – and, at the end of the day, to future exports from the rest of the world and the own country to China.

Most of these analyzing people know well about the growing political and economic importance of China. However, the background analysis is in most cases still too superficial or too cautious. Below, ten examples are given for this conclusion (and further examples could be quoted).

1. Dampened GDP – what’s behind it? China’s GDP grew in 2018 by 6.4 % – with falling growth rates throughout the year. This development was easily predictable – with an outcome each time only slightly down from the previous quarter (q1: +6.8 %, q2: +6.7 %, q3: + 6.5 % and q4: +6.4 %). This fact should be discussed more deeply.
Matter of discussion no 1: the too“easy” predictability of GDP growth.

2. Still a problem: China’s GDP calculations. Of course, one may wonder why GDP in reality has not fallen more than from 6.8 to 6.4 percent in 2018 when, for example, at the same time the negative impact from U.S. protectionism on Chinese exports, the falling passenger car registrations, and at least some industrial restructuring could be noted (downsizing of coal and steel capacity). It remains a major problem that the changes of the GDP components – according to my knowledge – still are not presented in volume terms. This is not really in line with what should be expected from the largest economy in the world (in PPP terms). External pressure on China to improve the statistical quality seems to be non-existent (whereas sometimes – in other economic areas such as exchange rate policy – too much foreign pressure on China can/could be noted).
Matter of discussion no 2: the issue of better accounting standards for GDP.

3. The “need” to keep up GDP growth at around 6 percent. The Chinese political leadership is obviously under strong growth pressure in the forthcoming years – more than can be found in Western analysis. First, there is next year the evaluation of the results of the structural strategy paper from the Third Plenum. Xi Jinping – CP Chairman and President of the People’s Republic of China – is inevitably committed to give the Chinese people a positive summary of his time as China’s main political leader.

Second, in 2021, China will celebrate the 100th anniversary of the founding of the Communist Party of China. Such an important event simply has to be decorated by positive and undistorted developments. This includes that the political leadership will be able to confirm that the still valid vision of having provided China with the status of “modestly prosperous nation” has come true in 2020. Third, China strives to keep GDP-growth rates close to 6 percent for both optical and psychological reasons – and last but not least for being able to create sufficient new jobs; however, there is no scientific evidence that this latter bottom line really should be set at 6 percent. The quality of growth should receive much more emphasis – but is instead rarely mentioned in Western analysis.

Unfortunately, there is still too little analysis on all these important issues.
Matter of discussion no 3: the “need” of managing GDP growth at 6 percent.

4. 6 % of economic growth today is much more than 6 % ten years ago. Chinese GDP growth has been downsizing in the past few years – a development that is described by China’s political leaders as the way to a “new normal”. The “new normal” means, consequently, a new equilibrium for growth, job creation and inflation and more lately probably also the environment.

However, it should be stressed that a real GDP-growth rate of 6 % today means much more than an additional growth rate by 6 % ten years ago. Then it would have been as much as roughly 15% (when calculating with an average GDP-growth by somewhat more than 8 % during the past decade). Conclusion: If China really could achieve a trustworthy annual growth rate of GDP around 6 % in the forthcoming years, it would be a great performance. 6 % could be so good! It is still difficult to understand that the Chinese do not want or manage to offer statistics that Chinese and foreign analysts really can apply. Analysts pay still too little attention to this topic.
Matter of discussion no 4: the necessity of more applicable GDP data.

5. The conundrum or art of regularly meeting the official growth target. China seems to have a unique capability of regularly meeting the official growth objectives. This was also the case in 2018. The official objective for GDP growth in 2018 was set at “around 6.5 %” – and the official number came in at 6.6 %. This is rather a phenomenon for a planned economy than for a market economy. Looking at 2019, the official objective for GDP growth is “located” at 6-6 ½ percent – and this objective will under all circumstances safely be met (see point 3 in this article).
Matter of discussion no 5: meeting the growth target year after year.

6. The insufficient updating of planned reform activities since 2014. It is indeed striking how little we can read about progress of the structural reform agenda from 2013. However, it would be unfair to summarize that we learn no details from official communication. Some numerical details are spread, for example by the National Bureau of Statistics (NBS) in its comments on the development of GDP in 2018 (from January 21). However, not even these limited details are discussed in our part of the world.
Matter of discussion no 6: the current state of Chinese economic reforms.

7. The total absence of a current-account analysis. The current account balance of China has weakened substantially during the past few years (even if any exact measuring of the net cross-border development of mainly trade, services, transfers, dividends and interest payment proves to be difficult in most countries). In 2007, the surplus was as much as 10% of GDP, indeed a very high ratio, in 2018 probably quite close to zero. These previously high surpluses in the current account contributed simultaneously to the rapid rise of China’s currency reserves, by far the largest in the world. Technically, a current account surplus can be “used” in five ways:

¤ Portfolio investments abroad,
¤ foreign direct investment abroad (FDI),
¤ cross-border lending,
¤ further accumulation of the currency reserve,
¤ interventions on the currency market to strengthen the own currency.

Officially, the Chinese currency reserve has been shrinking by around 1 trillion USD in the past five years, from roughly 4 trillion to now around 3 trillion USD. 3 trillion USD is, of course, still a lot. However, a more or less stagnating development of the current account balance in the future would probably mean less capacity to be financially active in other countries – unless China and foreign lenders should show willingness to accept an increasing Chinese foreign debt or unexpected and steadily high inflows of investment money should occur. Who predicts such sustained trends?

So, what about China’s future capacity for outward investment if the current account continuously will develop without sizeable surpluses? What would happen if China even started to run major deficits in the current account at some point in the future, stimulated by continuously high or even growing imports for managing the transition to a consumption-led growth? Or the other way around in a more positive scenario: What about the chances that China may return to considerable surpluses in the current account balance?

These and a number of other questions related to the current account are not even taken up briefly in Western analysis.
Matter of discussion no 7: the future of China’s current-account balance.

8. Demography and urbanization. There is indeed some ongoing discussion about these two long-term issues – but certainly not enough. What seems to be missing is the link between demographic/urban developments and corporate application. I would like to read much more about these important developments from demography and urbanization which probably will change the structure of the Chinese economy substantially in the next few decades.
Matter of discussion no 8: the impact of demography / urbanization on the economy and the corporate sector.

9. Will Trump and Xi ever get along? It seems to be clear that the President of the United States and the President of China do not like each other. One reason is certainly that Trump accuses China of violating the global rules of fair play in business on a broad scale. The Trump administration has a lot of distrust against Chinese politics which – in my view – cannot be eroded any time soon.

Any optimism in this respect seems to be premature – even if the result of the next meeting with the political leaders of the U.S. and China on the sensitive trade issues initially should receive some encouraging recognition. In this context, I have a feeling that financial analysts do not consider Trump’s psychology sufficiently. Also the mixed or offended feelings of the Chinese may be underestimated.
Matter of discussion no 9: the psychology between Trump and Xi.

10. China’s still neglected long-term objective: champion of science. The Chinese have the rare ability to think, plan and act simultaneously in both short- and long-term perspectives. Despite current short-term attempts to keep the economy performing roughly well, the political leaders are also working hard for quite a number of long-term projects such as the Belt & Road Initiative. Digitalization and Artificial intelligence (AI) have a lot strategic priority already today – but one can assume that this priority will be in place even more visibly in the longer run.

As I have described in a previous blog (April 4, 2018), there are actually three Chinas:

¤ the traditional and conservative China,
¤ the slowly reforming China,
¤ the rapidly changing China.

In the context right here, I am talking about the third classification, the rapidly changing China which is particularly focusing on science and innovation. The Chinese know that scientific progress is necessary to give China a promising and encouraging future in the longer run. They will work hard for this objective, supported by the huge absolute number of scientists. However, today we cannot even know about all areas of possible scientific breakthroughs. China really wants to become a champion of science!
Matter of discussion no 10: the foreign (Western) underestimation of China’s scientific efforts – and how the “rapidly changing China” (see above) may or will be able to develop.

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

 

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China’s GDP growth – no surprise at all

January 21st, 2019

In my latest blog I wrote that “the lowest number that can be expected for Q4 of 2018 should be 6.3 percent (for GDP growth). Any number lower than 6.3 percent, I would interpret as a kind of official confirmation that things are really going in the wrong direction…”. However, this seems to be the case all the same by officially confirming a lower GDP-growth number again (GDP q4: +6.4 percent yoy, q3: 6.5, 2019 compared to 2018: + 6.6, in line with the official 6.5 objective).

Altogether, the latest Chinese GDP development is no surprise. The development continues to calm down. The political leadership is worried (see my latest blog). Further decreases of the banks’ cash requirement and other stimuli will most probably come. The total volume and success of the planned structural reforms become therefore more uncertain.

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

 

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China’s latest PMI worries – but another development gives more concern

January 7th, 2019

Kinas senaste inköpschefsindex återspeglar ingen recession – men ytterligare sänkta kassakrav förstärker oron

Med det nya årets första nummer av denna blogg påbörjas här en liten innovation. Fortfarande skrivs merparten av analyserna mestadels på engelska. För att väcka ytterligare intresse här hemma för Kinas ekonomiska utveckling – vilken blir allt viktigare för den globala ekonomin och Sverige – har vi framöver också en liten sammanfattning på svenska.

Två huvudsakliga slutsatser kan dras av nedanstående analys. För det första betyder siffror som ligger endast snäppet under 50-strecket ingalunda att en recession är nära förestående – utan endast långsammare tillväxt. Recessionsgränsen varierar från land till land och kan ligga i olika länder kanske kring 35 till 45. Närmare information om detta fås dock endast genom mer djupgående, landspecifika undersökningar.

Det betyder också att Kinas senaste PMI-industrisiffror strax under 50 ej får jämställas med en påbörjad recession – utan ”endast” med en inbromsning av tillväxttakten (vilket dock kan vara allvarligt nog eftersom kinesisk statistik ofta inte är riktigt tillförlitlig, speciellt vid en utveckling åt fel håll).

Men det kom en annan negativ konjunktursignal i början av det nya året som framkallar klart större oro hos mig än PMI statistiken, det vill säga aviseringen av en förnyad – ganska omfattande – sänkning av bankernas kassakrav. Denna åtgärd kan ge ett tydligt utökat utrymme till nya krediter och således fungera som konjunkturstimulans. För mig är bankernas kassakrav kanske Kinas viktigaste konjunkturindikator, speciellt vid en (pågående) konjunkturförsvagning.

China’s latest PMI does not indicate a recession – but lower cash requirements for banks increase worries

China has two different PMI producers (see my analysis from September 2018 https://blogg.lnu.se/china-research/blog/china-2/chinas-statistical-conundrums-the-example-of-the-pmis/ – where I also explained some specific characteristics of the PMI). When looking at comments on the official Chinese PMI for December 2018 – the larger one of two Chinese PMIs, produced by the National Bureau of Statistics (NBS) and the logistics and purchasing organization CFLP – I found again some articles interpreting the December number of 49.4 as “below the official borderline for growth”. However, this “growth limit” is not really true – but may indicate that some further weakening of Chinese growth rates could be on its way. (In general terms, ongoing or commencing recessions mostly can be singled out when the PMI index has been falling to a range around 35-45, varying between different countries. For more exact estimates, specific calculations must be made country by country; more precise studies for China’s PMIs remain absent in this specific context).

More weakening ahead – and a slightly lower target for GDP growth

In reality, some more weakening of the Chinese economy may be plausible or even probable. The question, however, is to what extent Chinese statistics transparently will “verify” such a possible and negative economic development any time soon. Chinese authorities prefer instead to show very gradual and small changes between two months or two quarters. This is also why I do not believe in any sizeable GDP change for Q4 in 2018. Q3 gave a Chinese GDP change of 6.5 percent compared to Q3 one year earlier – the lowest growth rate since Q1 ten years ago.

The lowest number that can be expected for Q4 of 2018 should therefore be 6.3 percent. Any number lower than 6.3 percent, I would interpret as a kind of official confirmation that things are really going in the wrong direction. 6.4 to 6.6 percent still looks most probable – perhaps including some window dressing.

I would also guess that new objective for GDP growth in 2019 will be 6 up to 6 ¼ or 6½ percent – but most probably not lower than 6 percent. Things should not develop too badly the year before the official evaluation of achievements since 2014 – at least not according to the official version. And in 2021, time has come for celebrating the 100th anniversary of the founding of the Communist Party. The need of an impressing success story is obvious.

Waiting for January 21

We are waiting impatiently for China’s next GDP statistics which will be published as soon as January 21 for both Q4 and the whole of 2018. However, interpretation of the so-called underlying growth development – i.e. in reality – will remain difficult.

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

 

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