Presentation by Hubert Fromlet, Linnaeus University (Linnéuniversitetet), at the Baltic Sea Region/Emerging Markets and China Seminar 2023 in Kalmar
The Chinese economy develops currently very disappointingly. Market expectations from earlier this year were obviously not met – and certainly not positive expectations from earlier years either.
The following question remains interesting: Was the current economic crisis predictable? The answer should be – “yes indeed”.
Too little profound analysis in time
China became the number 1 exporting nation in 2009 and the number 1 total GDP nation in 2016 (in PPP terms). Thus, there were many years to increase knowledge about China. However, foreign (Western) analytical curiosity about the Chinese economic system remained by far too limited ever since the beginning of China’s era as an economic superpower. In many cases, final enlightenment happened as late as in 2022 during the Chinese covid-19 disaster or only this year caused by the serious real estate crisis.
Since the millennium change, I have singled out four kinds of foreign China analysts. They are
¤ specialized researchers at universities and institutes with focus on China,
¤ full-time and part-time China journalists at home or with location in China,
¤ politicians and ambassadors with long-time experience from China,
¤ analysts on global financial markets and forecasters without special analytical skills and focus on China.
Considering these four groups, it seems to be clear that there has been a number of experts indeed well understanding the forthcoming problems in the Chinese economy – but not so many people could be counted. This implies that financial markets – generally expressed – during many years have been standing for the lion share of the foreign interpretation of the Chinese economy; unfortunately, naively based on (wrong) Chinese statistics and the neglect of poor transparency. However, a positive change may be started in the foreseeable future – hopefully giving us conditions for better China analysis also on a global scale.
The visible and neglected warnings signals
One of the main difficulties for economists or other risk managers is the question about the timing of possibly bursting (financial) bubbles or the misery of other serious accidents. This is mostly impossible since aggravating developments usually happen “step by step”. However, “step by step” or gradually should not make managers to forget about a quite early stressed problem or risk. Let’s now turn to some recognizable early warning signals (which may have been given as much as 15-20 years ago):
Warning signals for China’s economy in the past decade
About bad transparency:
Bernanke/Olson, 2016, https://www.brookings.edu/articles/chinas-transparency-challenges/
Comment: Persistent bad transparency impacts negatively on potential growth.
About poor statistical standards
Ravallion/Jalan, 1999, https://www.aeaweb.org/articles?id=10.1257/aer.89.2.301
Fromlet, 2013, see above
Comment: Statistical shortcomings could/can be found when it comes, for example, to GDP, (youth) unemployment, inflation, government debt and particularly local debt, housing market, bad loans of the banks, subsidies, government support of state-owned companies etc. These shortcomings make economic policy too difficult.
About previous and the current real estate crises
Lu Gao (ADB), 2010, https://www.adb.org/sites/default/files/publication/28408/economics-wp198.pdf
Comment: Developments on Chinese housing and commercial real estate markets should permanently be watched very closely since these two sectors mean so much to the whole economy.
About banks and financial markets
Poon/Wu/Ahmad, 2023, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/chinese-banks-enter-2023-in-worse-shape-than-global-peers-more-risks-ahead-73464612#:~:text=Collateral%20risk&text=Credit%20losses%20for%20Chinese%20banks,report%20from%20S%26P%20Global%20Ratings.
Comment: Financial risks will remain a top issue for China analysis in the foreseeable future – also in a psychological respect.
About political developments
McBride/Chatzky, 2019, https://www.cfr.org/backgrounder/made-china-2025-threat-global-trade
Fromlet, 2017 (October 26), https://blogg.lnu.se/china-research/?cat=13398&paged=34
Comment: Politics and the economy belong together, particularly in a country like China.
Affiliate Professor at the School of Business and Economics, Linnaeus University