Increasing understanding of China needed – as much as possible

10 May, 2022

China has been a conundrum for many years – and it still is. This means that China can be (too) difficult to understand – certainly not always but too frequently. However, three conclusions can be made for trying to understand what is or will be going on in China:

  • China is a giant country that needs a lot of deep and careful observation. Occasional articles and subsequent analytical absence from China is certainly not an appropriate way to become an expert on the largest economy in the world.
  • Understanding the Chinese economy means that good knowledge is needed also about the history, the traditions and the culture of this gigantic country.
  • Furthermore, it should be recognized that China is not a transparent country. Insufficient transparency is an institutional shortcoming which can be frequently found in China. For this reason, (foreign) analysts dealing with China should continuously try to improve their institutional understanding as much as possible.

Winds of change

Certainly, China is in many respects a very conservative country. This can particularly be stated when it comes to the supremacy of the Communist Party though this supremacy has been individualized significantly in recent years by President and CP Chairman Xi Jinping’s dominance.

Thus, since Xi Jinping came into power in 2012, also China as a country has been changing. In 1978/1979, China’s then political leader Deng Xiaoping introduced his visionary “Reform and Opening-up Policy” which was the decisive move to internationalization of the Chinese economy. Opening China was a major step forward.

During many years with visits to China, I really had a feeling that China cared about its international economic relations – though many times purely in order to support Chinese cross-border trade or to attract foreign direct investments to China. But China gave many Western political and commercial leaders (mostly) a feeling of beneficial welcome.

In the past few years, however, considerable winds of change could be noticed which were started by President Trump but ambitiously continued by President Biden and joined by President Xi. Contrary to the opinion of most foreign China analysts, it may not be a safe prediction that China for a long time in the future will give international trade relations more weight than the non-peaceful reunification with Taiwan. Sure, China still does so – but for how long? It may be worth-while to add that President Xi in October 2021 has been stating that reunification “must be fulfilled” – obviously without completely ruling out the future use of violence but preferring a peaceful solution.

Consequently, China’s hardening attitudes vis-à-vis Western countries can clearly be recognized, also when it comes to recent negative Chinese comments on the possible enlargement of NATO with Finland and Sweden joining. China seems in this context applying a position that is more or less completely in line with the Russian one (https://www.manilatimes.net/2022/05/07/news/world/nato-inciting-bloc-strife-chinese-envoy/1842671. Without doubt, China feels nowadays as a strong global political leader – more than a couple of years ago.

Yes, there are winds of change in China…

Universities should broaden knowledge about China

Today, China is already the number one country in many different economic respects and, consequently, becoming an increasingly stronger global political and economic player. Already by now, China is the country with the highest total GDP in the world (in PPP terms, not per capita). Despite China’s declining GDP-growth trend since a decade ago, it can be expected that China will increase its global market shares further. However, temporary growth distortions are unavoidable and will turn up occasionally.

Considering this probable or possible future, it will be increasingly important to improve the understanding of China in both (Swedish) universities, the banks, the press, politics and the general public. Recent developments in Russia were completely underestimated ex ante – certainly also in Sweden in the past 20-25 years. Such an insufficient understanding should not happen in the future analysis of China. It takes time when trying to understand China; this should be better understood in Sweden.

Therefore, when now turning to Sweden, professional China researchers – with their main occupation in academia and other research institutions – should be financially supported by the Swedish government and Swedish foundations. Of course, we have a number of good China researchers and journalists at home in Sweden. But there should be more of them.

Hopefully, Swedish university leaders and lecturers will in turn become more active in providing students with broader knowledge about China – both what regards history, politics, culture, economics and management. All these topics should be preferably offered in the same course!

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

 

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The analysis of emerging countries in the light of the Russian war

7 April, 2022

The analysis of emerging markets is traditionally part of my lectures and generally not changing very much from year to year. However, this year (and beyond?) is different. A kind of limited global downturn was already in the cards last fall for the forthcoming quarters. But the Russian war makes the outlook for the global economy both worse and more uncertain about both depth and length of the downturn. The world is indeed confronted with the abominable black swan.

The spillover to emerging markets

Also emerging markets all over the world are affected badly by the ongoing terrible war development in the heart of Europe. There are clear spillover effects on the less advanced countries as well. Of course, the Ukraine and Russia itself are hit the most. But there are many other countries in the emerging world that are now meeting worsening conditions that are directly or indirectly linked to the Russian war.

When considering the already existing economic troubles before the eruption of the war Russian war, the timing for the commenced war in February could not be less favorable for emerging countries. But emerging countries are not equally hit by all the deteriorating political and economic developments. In very general terms, one may say that less advanced countries far away with, for example, energy and food resources tend to be better off than countries with corresponding shortages. Altogether, more details should be examined.

Reliable calculations are currently not possible     

I feel pretty sure about the conclusion that accurate point forecasts for individual emerging countries and emerging regions currently are not possible – at least not without precise assumptions about uncertain parameters like the supposed depth and length of the war, energy and other commodity prices and – not to forget – transports and delivery times.

However, when a major event like a big war in Europe happens with a military superpower involved, our models do not work anymore because of the lacking historical experience in a comparable war. Using another one or two different assumption baskets about depth and length of the war, a number of different scenarios could be developed. But still, we are not talking about a forecast. Instead, it is about scenarios.

Thus, further studies on war developments with impact on emerging markets would be beneficial. More can be found.

Influence on emerging markets due to the war

Initially, it would be useful to single out a number of different negative global developments that already had shown up globally in 2021. Here we find

  • rising global inflation, interest rate hikes not far away,
  • rapidly rising energy prices,
  • insufficient supply of chips, other IT components, metals plus transport bottlenecks,
  • since last fall worsening GDP forecasts for the beginning of 2022.

What we now can see as a further consequence of the war, are currently worsening trends for several of the negative developments from last year

—>  more inflation (coming from energy, agricultural products, metals, intermediate IT-goods, transport bottlenecks)

—>  further and/or faster global/American interest rate hikes than anticipated some months ago (means higher costs for emerging countries borrowing in foreign / American currency)

—>  higher American interest rates may mean a stronger dollar (which would lead to higher costs for many emerging markets since most foreign credits by emerging countries have been taken up in dollars)

—>  clear weakening GDP growth both in advanced and emerging countries.

—>  slowing FDI from Western companies in emerging countries as a result of increasing general uncertainty and risk aversion.

Conclusion 1: The foreign debt situation will remain an increasingly important indicator for emerging countries (https://databank.worldbank.org/source/quarterly-external-debt-statistics-gdds). Check it out!

Major producers of oil, gas, agricultural products etc., are, of course, better off than less developed countries that need to import a lot of these commodities. Commodity production at home and imports from abroad are other important factors that should be considered when emerging countries are analyzed, particularly now during the Russian war (https://www.worldbank.org/en/research/commodity-markets).

Conclusion 2: Also commodities play an important role for the development of many emerging countries, particularly during the Russian war.

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

 

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China – “forgotten”events and news outside the big headlines

29 March, 2022

In recent weeks, more or less only two Chinese events were topping the headlines in major Western media. The first one is linked to China’s position vis-à-vis Russia in the Ukrainian war. The other one deals with the increase of corona in some important Chinese (economic) melting pots. Much more, however, should be really worth to know about for improving the understanding of China. Some examples are given below.

Statistics of secondary importance for understanding China

Financial markets focus a lot on incoming statistical numbers from China, usually too much. However, when it comes to China, such a focus may mostly be the wrong approach. Economic statistics that play a role in our part of the world – such as GDP and its components, inflation, unemployment, government debt etc.- are not really applicable to China since it cannot be estimated to what extent single numbers are close to reality or not. Transparency does not belong to China’s strong sides.

Lagging transparency may have two reasons. One is aiming at the official ambition to make things brighter than they really are. The other one can be referred to the enormous size of China and the following logical consequence that there certainly exist difficulties with the finding of representative statistical selection processes, both geographically and for the analyzed topic.

The bad thing is that Western skepticism against Chinese statistics will remain in place for quite some time even if the quality of Chinese statistics may already have improved for a while. It always takes time to establish trust in long-lived institutional shortcomings – also when improvements are there.

Probably, most readers of this article know that China is a problematic country to interpret. For this reason, it makes much more sense for Western analysts to improve the qualitative understanding of China than ambitiously trying to interpret incoming statistical numbers.

News from China that should have caused more attention

Some examples from China are given below that should or could have caused  more attention in our part of the world, particularly the initial ones, taken from the National People’s Congress (NPC) that was held in March 2022.

New Prime Minister this fall – Li Keqiang stepping down
Current Prime Minister – and number two in the Communist Party – Li Keqiang has recently announced that he will step down later this year after ten years of managing the Chinese economy. In my view, Li gave through all these years a feeling of knowledge and understanding the economy (unless political priorities were set in the first place; a Chinese position that has been strengthened further by President Xi Jinping). Speculating on Li’s successor does not make sense right now but I assume that Xi will remain in power after the Party Congress in fall – contrary to the will of former leader Deng Xiaoping who wanted for the future a presidential change after ten years. One may guess that China’s next ministers of finance and foreign affairs will have even closer ties to Xi Jinping than their predecessors – and also the whole Standing Committee where China’s most important leaders make all important decisions. These assumptions if verified matter for global political power.

Quite optimistic target for GDP growth in 2022
Usually, the official objective for China’s GDP growth during a recently started year is announced in the beginning March. This time, the official GDP-growth target is set at “about 5.5%” – more than expected and less than last year for 2021. Looking more precisely at the growth target since 2000, a clear downward trend can be watched in the past two decades. Previous GDP-growth targets: 2000, 2002-2004: around 7%; 2001:7%; 2005-2011: around 8%; 2012: 7.5%; 2013-2014: around 7.5%; 2015: around 7%; 2016: 6.5%-7%; 2017-2018: around 6.5%; 2019: 6%-6.5%; 2020: no target (covid-19); 2021: above 6%. One of the explanations for this descending development is the declining marginal rate of productivity gains. By the way, despite the lagging quality of Chinese GDP statistics, we have to work with the official numbers since no alternative can be found.

The main pillars of China’s economic policy in 2022
In Q4 of 2021, GDP growth achieved only 4%. The number for Q1 will be published on April 18 and probably not look very encouraging when really applying growth conditions in the first three months of 2022. Since the Russian war in the Ukraine will have negative impact on European (global) growth, Chinese exports (GDP) will be most probably be affected negatively. Interpreting official comments at this year’s NPC, China intends obviously to conduct both an expansionary fiscal and an expansionary monetary policy (which obviously also quite a number of Western countries did as well in the past years).

Economic growth at the expense of the environment
Here we come to an issue of global importance. Xi also told local officials at the Party Congress that they should be cautious about reducing emissions. Obviously, economic growth comes before emission at least in 2022. One may wonder what such a change of priority may mean psychologically to global and domestic confidence in China’s fight for a better environment.

What do we really know about covid-19 in China?
We do know that lockdowns have occurred in a number major cities, for example in the important city of Shenzen and currently in two phases in Shanghai, certainly a measure at the expense of GDP growth. China still applies its “zero-covid strategy which explains the radical lockdowns. But what do we really know about covid in China? The answer to this question is a major conundrum – but probably also an important input into forecasts on the Chinese economy in 2022, particularly when it comes to exports, private consumption and – maybe – investments in machinery and equipment. Furthermore, new problems with supply chains and transport problems may arise because of further lockdowns.

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

 

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