China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

China’s short- and long-term strategies – increasing challenges for the West

February 17, 2023

In some of my recent blogs, I paid attention to China’s changing style in international relations. Or should I say President Xi Jinping’s style? It becomes more and more obvious that China has strong political and economic ambitions, also globally. This may mean that even more focus will be put on Taiwan which is increasingly developing as an important U.S. issue – both politically and economically. It is therefore necessary that also the EU – and when possible and necessary Sweden itself – accelerate the formulation of a concrete China strategy. The U.S. has already come considerably longer in this respect – with no major difference between Trump and Biden.

The new – or changing – China

Readers of this blog may have observed that I in recent articles several times have described Chinese attitude and strategy changes that started a couple of years ago, from internationally having been a relatively humble and business-minded country to nowadays presenting itself as self-confident, tougher and less compromising.

Today, China wants to export its “superiority regime model” as much as possible to the rest of the world, particularly to Africa, South America and some countries in South East Europa. China has already gained quite some influence in these continents and regions, also by granting – often expensive – new loans for infrastructure etc.

Altogether, China has become much more ideological, authoritarian and nationalist.

This change can be directly explained by the modified leadership of President Xi Jinping who in the past ten years replaced some kind of the previously collective leadership within the Standing Committee by giving substantially more power to himself. In 2013, the first year of Xi in office, the objectives by the Third Plenum with many plans – also for Westerners – toward more market economy looked quite promising. This allowed then for some cautious optimism about future economic progress – cautious optimism that, however, in the meanwhile to a high extent has been shattered.

Thus, economic policy has been landing on the wrong gangway after 2013 – not easy or even impossible to reverse in the forthcoming years or even decades. “Decades” could be the right term when including the Taiwan issue. In my view, Taiwan has to be regarded as the most complicated political and economic issue of the future for both China and the U.S. – with a lot of potential for escalating conflicts between both countries.

Taiwan – a complicated issue for the whole world

Taiwan is very special for both Mainland China and the U.S. Both countries may at some point find a reason to start a war. The official China wants Taiwan back and has not ruled out the use of force to achieve reunification -but without mentioning a certain year. Some analysts see 2049 – the 100th anniversary of the founding of the People’s Republic of China – as a possible year of confrontation, others predict 2035 when China is expecting to achieve “the status of a moderately prosperous country”. Certain China experts are even of the opinion that the price for an invasion including far-reaching Western sanctions would be too large for China – both what concerns Chinese exports and imports.

On the other hand, the belief that the U.S. most probably would not accept a Chinese invasion of Taiwan seems to be widely spread among Western analysts. One can hardly imagine what such a development would mean to the global economy.

Taiwan receives American support not only for democracy reasons but also for its close link to high-tech software. 65 percent of all semiconductors and 90 percent of all advanced chips in the world are produced in Taiwan which currently does not leave much space to Mainland China, the EU and the U.S. Having pointed at this fact, nobody should be surprised that China, the EU and the U.S. now eagerly aim at visibly enlarge their own production of intermediate IT-products at home. Infineon’s planned chip investment in Dresden is such an example.

Political priorities

Before Xi’s entry into the highest political positions, strategic foreign policy was not really an important issue for China’s political leaders. Most issues dealt with trade policy and international business relations. Now, foreign policy is judged as very important since President Xi wants to see China as the most influential country in the world.

The revival of active foreign policy means all the same that China also applies strategic policy objectives at home with new policy tools that have been explained above. New domestic policy tools and objectives are indeed badly needed for Chinese leaders in order to divert the people from the disappointing economic performance – divert by using an ideological, authoritarian and nationalist stance in communication with the Chinese people.

Conclusion:
The analysis of China is about to become increasingly difficult – particularly when including the Taiwan issue. It is quite new in a way that China and President Xi want to become more powerful in a global perspective, not only at home by the authoritarian and nationalist leadership style. Western companies should observe these ongoing changes of Chinese political leadership.

 

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

April 7, 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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International Women’s Day 2022 – female upgrading good for the economy

March 7, 2022

Even if the position of women in the society and particularly on labor markets has improved during the past decades in quite a number of countries, no one really can be happy about noted developments. So much more can be done – even in Sweden which actually in 2021 was in the lead among EU countries according to the so-called equality index (https://eige.europa.eu/gender-equality-index/2021) – and particularly in emerging markets and other less advanced countries.

Focus on the relationship between equality and economic growth

There are many good arguments in favor of genuine equality between women and men. These arguments may have a social, political, democratic, human or psychological angle. On the occasion of this year’s International Women’s Day, it may be appropriate to focus this time on the mechanisms that lead from female upgrading – particularly on the labor market – to better economic (GDP) growth in the longer run. It is a reaction chain from microeconomics to macroeconomics. What is often neglected: Also men would benefit from such a development.

However, such a win-win situation should be explained more deeply. There are still more than enough skeptics who do not really understand the positive relationship between (more) female equality and GDP growth. Visibly and sustained improving equality for women has to be considered as an economic win-win-position. Another fact that should not be forgotten: The more women are added to the labor force, the more wages are – ceteris paribus – earned in a country.

Unfortunately, this win-win-situation usually is not very well explained by experts and politicians. More should be done – and can be done quite easily. At least if transparency is considered to be important.

In my view, it makes sense to apply a life cycle perspective for achieving positive and visible improvements of female equality. The life cycle goes from birth to retirement in a number of different stages – for example from school, professional education, entry into the labor market to equality at work and job promotions.

However, a visible positive correlation of improved female equality and higher GDP growth in the medium or longer run assumes that such improvement measures are both extensive and sustained. Given this order, there is a stronger scientific relationship than the other way around, i.e. when correlations between good economic growth and improved female equality are measured.

Going more into details, the chain of this microeconomic input to macroeconomic reactions and better GDP growth may practically be implemented as follows:

¤ application of a national strategy to improve female equality – partly simultaneously – on all levels by both law and collective bargaining partners;  if possible provided with numerical objectives and incentives,

¤ annual evaluations, including amendments if necessary,

¤ a first scientific report on achievements and the possible impact on purchasing power, private consumption and GDP after five years,

¤ thereafter further reports on these issues every third year on some more occasions, following up what else has been achieved in this new period for female equality and possible new positive contributions to economic growth.

Theoretically (scientifically), the reaction functions could be described the following way after sustained and sizeable injections of improved equality:

  • improved disposable income for women by fairer wages and better / increasing entry into the labor market,
  • additional financial contributions to private consumption,
  • additional stimuli from private consumption to GDP (favoring also men),  
  • (possibly) new additional jobs.

 

Of course, all these assumptions and developments need quite some years and a lot of determination to be come true. However, this is exactly the reason why there is no time to lose to fight for more female equality.

All the conclusions mentioned above can also be applied to emerging market countries and other less advanced countries. Therefore female empowerment should be much more launched in a global perspective.

 

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

 

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