China

Russia – visible disparities in regional growth

Wednesday, April 3rd, 2019

Many countries in the world are characterized by regional production and growth disparities, both when it comes to advanced and to emerging market countries. Sometimes regional growth statistics may be characterized by good quality, sometimes the quality of officially calculated growth numbers seems to be less illuminating. Regional disparities can also mean different conditions for (foreign) corporate investors what concerns demand and size of the market (for sales), wage levels (for production costs) and educational quality (for access to human resources, better innovation and research and, thus, corporate development).

Regional developments in China and Russia

In China, for example, the addition of all provincial growth results mostly shows higher accumulated economic growth rates than the corresponding weighted numbers for China as a whole. The reason for this discrepancy is frequently explained by better possibilities for the professional promotion of provincial political leaders when good economic results can be shown for the own geographical area of responsibility. Obviously, the central political leadership tries now to change this approach (somewhat), for example by considering environmental improvements as well. However, more exact results in this specific approach still seem to be unknown – at least to me.

Recently, I found very interesting results for the economic performance of Russian regions, published by BOFIT (The Bank of Finland Institute for Countries in Transition) https://www.bofit.fi/en/monitoring/weekly/2019/vw201913_1/ and originated at the Russian Federal State Statistics Service (Rosstat). The graph published in the link above shows clearly the outstanding positive role of Moscow, the Moscow and the Central region, also compared to St. Petersburg and to the North-West region and even more clearly compared to the Volga and Ural regions. Despite visible improvements in manufacturing production and investments, retail sales still remain sluggish almost over the whole country after the sharp drop in 2015 – with the Moscow region giving a brighter picture also here.

One can also single out by these statistics that the above-mentioned regions counted in 2018 for 81 percent of all Russian manufacturing production and for 70 percent of all fixed investments and retail sales – which certainly can give some guidance for (foreign) corporate planning.

It could be added that BOFIT publishes a lot of interesting news and research, particularly on China and Russia. I never omit their BOFIT Weekly and their other publications. https://www.bofit.fi/en/monitoring/weekly/

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

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China improves transparency at the National People’s Congress – talks about problems

Monday, March 18th, 2019

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Kina visar mer transparens vid Nationella Folkkongressen – många problem påtalas

Svensk sammanfattning

Nyligen avslutades Kina sin 13:e Nationella Folkkongress, närmare bestämt sin andra sittning under innevarande mandatperiod. Detta är en betydelsefull sammankomst med närmare 3000 delegater från hela landet. De viktigaste bidragen kom från partichefen och presidenten Xi Jinping och premiärminister Li Keqiang. Deras tal, kommentarer och ordval borde regelbundet granskas av svenska och alla andra utländska Kina-analytiker.

Man kan nog definiera Nationella Folkkongressen som Kinas parlament med en enda årlig sammankomst under den 5-åriga mandatperioden, det vill säga varje vår (i mars) under 10-14 dagar.     

Årets resultat av sammankomsten kan klassificeras på följande vis efter egen sökprocess (hittade exempel och formuleringar är i den engelska versionen):

  1. med relativt konkreta resultat och/eller uttalanden
  2. med något mindre konkreta resultat och/eller uttalanden samt uppmaningar
  3. med uppmuntran eller uppmaning till snar bättring
  4. med mer allmänna slutsatser och/eller uttalanden.

Denna kategorisering visar mer konkret att det faktiskt togs upp en hel del kritiska framtidsfaktorer vid Nationella Folkkongressens senaste möte. Ett nämnvärt antal obesvarade frågor kvarstår emellertid, exempelvis

¤  hur långt man har  kommit med uppfyllelsen av de viktigaste målen från Tredje Plenumet i oktober 2013 (med utvärdering 2020),
¤  hur en hel del målkonflikter kan komma att bemötas och hanteras,
¤  hur sänkningarna av bankernas kassakvoter och därmed eftersträvad större utlåning kan matchas med den enorma privata och offentliga skuldbördan.    

Det lätt reducerade BNP-tillväxtmålet för 2019 (6-6 ½ %) kommer siffermässigt att klaras. Jag tippar på 6 ¼ %. Även under 2020 kommer tillväxten knappast att underskrida 6 %. Men hur kommer den verkliga eller underliggande tillväxten att se ut? Kommunistpartiets 100-åriga jubileum år 2021 tillåter inget annat än goda statistiska resultat även vid slutet av perioden. Vid officiell beräkning av BNP enligt köpkraftsparitet är Kina redan världens största ekonomi – skäl nog att skärpa den svåra Kinaanalysen.

Hubert Fromlet                                                                                                      Affiliate Professor at the School of Business and Economics,
Linnaeus University (Linnéuniversitetet)

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English version

The 13th National People’s Congress (NPC) with its second session – a very important political event in China – has been concluded on March 15. The NPC is a kind of parliament and to some extent a legislative institution. The term of the NPC lasts for five years with one big annual convention every spring (March) in Beijing, gathering around 3000 invited delegates from all over the country.

For China analysts, it becomes increasingly important to analyze the comments and statements by China’s top politicians, particularly those made by the President of China and also General Secretary of the Communist Party of China, Xi Jinping, and by the Prime Minister Li Keqiang. This includes reading their messages also between the lines – which indeed is tricky but can be very fruitful. Li certainly has a great deal of economic competence.    

Main focus on the economic development and outlook

The 13th National People’s Congress and its second session discussed actually a broad range of topics – topics, however, that were clearly dominated by concerns about the economy. Not everything was referred to Trump’s protectionism. Indeed, many bothering economic problems were described as homemade. Other topics that were taken up – with direct or more indirect links to the economy – by important Chinese political leaders were, for example, education, high-quality development in different areas,   environment protection (health), poverty, urbanization, corporate tax reliefs, etc.

In a summarizing comment, Prime Minister Li Keqiang stressed that externally generated risks remain on the rise and that the real economy faces many difficulties. He added that there still exist many hidden dangers in the financial and other sectors. Altogether, these concerns express quite clearly the worries China’s political leadership currently feels about the economy – and it could also reflect a limited move to more transparency. This latter angle should be checked up more frequently in the future.

Classification of applied communication

Below, I make an attempt to collect different comments or statements by prominent Chinese decision-makers during the NPC (mainly by the President of China, Xi Jinping, quoted here as Xi, and by Prime Minister Li Keqiang, quoted here as Li; others are not quoted by name). Translated into the corporate language, Xi can be described as the chairman of the board and Li as the CEO of China. To get some organization in the comments and statements from the NPC, I have divided them in the following four different groups:

Communication with relatively concrete details:

¤  “Main tasks for 2019”: cutting corporate burdens by reducing VAT, reduced corporate social insurance contributions, shortened list of FDI impediments, RMB 2600 billion investments in road, waterway and railway projects, increasing expenditure on education, cheaper rates for mobile internet services… (Li)
¤  “China plans to reduce sulfur dioxide and nitrogen oxide emissions by 3 percent in 2019 …” (Li)
¤  … credits by state-owned banks to SMEs should increase this year by 30 percent … (Li)

Communication with at least partial concretization:

¤  “The standard for poverty reduction is to ensure that poor people have access to food and clothes and by the basic public services of medicine, education and housing …” (Xi)
¤  “… increasing downward pressure (on the economy) …” (Li)
¤  … continued preferential policies for new energy vehicles … (Li)
¤  … foreign firms will be able to transfer profits easily …

Communication stressing encouragement or urgent improvement:

¤  “There should be no retreat until a complete victory (against poverty) is won …” (Xi)
¤  “We must crack down on those who try to contaminate poverty     alleviation …” (Xi)
¤  “… promotion of China – U.S. trade negotiations …” (Li)
¤  SMEs still have too limited access to money and the speed of innovation is still too modest … (Li)
¤  “Get fully prepared for the 2022 Olympic and Paralympic Games …” (Li)                                                                                                     

Communication with general comments and statements:    

¤  “Financial sector will open further …”
¤  “Local governments are not allowed to raise new “hidden” debt” …
¤  “Farewell to GDP as only performance indicator …”
¤ The government should build a fair, transparent and legal  environment and create a good atmosphere for the development of private companies …” (Xi)  .
¤  “China wants to build world-class SOEs …” (Xi)
¤  “Environmental protection and economic development are closely integrated …” (Xi)
¤   “Social sciences workers should do more field research …” (Xi) 
¤  “Companies should have more time for their business instead of dealing a lot with bureaucracy …” (Li)                    

In certain cases, the borderline between the four groups may be nebulous. However, this is not a decisive point in this context. The main objective is to find out to what extent political comments from the NPC may have become more applicable for corporate (financial) decision-makers, analysts and academics with different kinds of interest in China.

Conclusions from the 13th NPC

¤  Altogether: more pragmatism and transparency at this year’s NPC – necessary also in the future.

My own understanding is that the latest NPC obviously turned out to be more open and transparent than all the previous sessions I have watched them since the early 1990s. This time, a number of problems and necessary improvements were taken up more or less distinctly by China’s most influential political leaders. This hopefully starts a new trend which could mean some kind of progress. For this reason, it will be interesting to observe whether this recent impression has to be regarded as a temporary phenomenon or rather as a visible initial step towards more (economic) transparency – indeed a change the world outside China would appreciate.

¤  Make a difference between short-term and long-term developments!     

Certain comments in Sweden and abroad concluded recently – also during the NPC – that current economic worries about China generally have been overdone and also the specific reactions on financial markets. This may have been – and probably is – a correct interpretation for the near future in a sense that no major economic accidents most probably will be reported from China any time soon. It also seems to be the right conclusion that China really tries to work for a solution of the trade war with the United States, as recorded from the NPC. However, it would be wrong to play down all the (other) risks and challenges that China will be facing in a longer perspective. These more distant fears were also expressed at the NPC and should be included in any well-founded analysis of the Chinese economy – the debt problem certainly included.

¤  The Chinese model needs adjustments.

Only one year ago, Chinese political leadership still pronounced the superiority of their economic model with its politically determined term of a “socialist market economy”. However, functioning improvements of marketization also assume more pluralism in different decision processes. Probably, China has to work more strongly in this direction – also in a social context. Legitimacy for the political system in the past two or three decades was very much – and too much – related to achieved and expected high GDP-growth rates.

In the foreseeable future – when GDP growth necessarily is confronted more clearly with the “new normal” of growth. Dampened GDP development and expectations alone cannot satisfy major parts of the Chinese people anymore. Instead, social issues will increasingly gain momentum such as improvements of the environment, better institutions (less corruption and bureaucracy), better social insurance and health care, acceptable pensions, future-oriented education, better food quality, etc. All this factors will become increasingly important. Thus, a positively adjusted Chinese model for the future will have to include sizeable social progress – and still the ability to deliver reasonable GDP growth in order to keep unemployment roughly under control and to finance necessary social reforms.

I would guess that really visible and felt social progress could be a major part of China’s and Xi Jinping’s way to a considerably revised content of the old legitimacy mandate which mainly – or even only – was based on very strong economic growth. It is certainly not by serendipity that Xi Jinping strongly has been singling out – also at the NPC – that poverty has to be combatted as efficiently as possible. It can be added that current official urban unemployment at around 5 percent does not look so favorable. And what about rural unemployment?    

¤  Improvements for the corporate sector – but more is needed.
It can be noted that China’s political leadership at this year’s NPC has been increasingly focusing on conditions for the Chinese corporate sector, including lower taxes and social contributions but also better conditions for FDI. State-owned banks have been encouraged to lend more money to SMEs which so far have been depending too much on fresh money from the so-called shadow banks. Local governments are now expected to give better financial support to startups. These plans are certainly positive. However, considerably more has to be accomplished, particularly when it comes to private companies – and preferably more efforts and money should regularly flow to improved corporate conditions.

¤  Financial reforms may be delayed further.                                                       China’s financial markets have been reformed in recent years – but not very quickly. Focus should remain on further improvements of the domestic financial markets which – according to my own reading – has not been clearly emphasized during the NPC. Current problems in the Chinese economy should also mean that the complete opening-up of cross-border financial flows should – and most probably will – take time. This conclusion should be particularly applied to cross-border trading of treasury bills, bonds and stocks. Full convertibility of the RMB (yuan) is still not recognizable.  

¤  Trade deal with the U.S. remains difficult to achieve
Sure, China wants a trade deal with the U.S. since China’s exports really show a negative trend – but not at any price as explained repeatedly at the NPC. Financial markets should become more cautious with their spontaneous comments on American-China trade news. We may be more far away from a sustainable trade agreement between the two largest economies in the world than many (financial) analysts pretend these days. Who knows?

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

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India – challenges after the general elections

Tuesday, February 26th, 2019

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Indien – utmaningar efter det stundande valet 

Sammanfattning på svenska

I april/maj går närmare 900 miljoner röstberättigade indier till val. Det förefaller tveksamt om den nuvarande konservativa (religiösa) och nationalistiska regeringskoalitionen National Democratic Alliance (NDA) med Bharatiya Janata Party (BJP) och premiärminister Narendra Modi i spetsen åter kan klara egen majorität. Opinionsmätningarna pekar snarare på behovet av en bredare NDA-koalition. Oppositionens United Progressive Alliance (UPA) med Kongresspartiet i täten befinner sig opinionsmässigt alltjämt i ett tydligt underläge. Likväl råder i Indien – världens största demokrati – för närvarande påtaglig politisk osäkerhet.

Makroekonomiskt ligger Indien ganska hyggligt till med en – visserligen lätt avtagande – BNP-tillväxt kring 7 %, väl underbyggd av den expansiva servicesektorn. Inflationen kring 2 ½  % är acceptabel för en emerging market (om än något låg) liksom bytesbalansunderskottet nära 3 % av BNP. Oroväckande är emellertid fortfarande centralstatens och delstaternas samlade budgetunderskott kring 9 %. Samma siffra fanns redan för 20 år sedan, när jag började resa till Indien. Det offentliga skuldläget innebär fortfarande begränsningar för framtida, mycket kostsamma struktursatsningar.

Det är samtidigt viktigt att inte stirra sig blind på BNP-tillväxten. Stora utmaningar väntar den nya regeringen. Områden som bör förbättras är bl a hälso- och sjukvårdssystemet, arbetsmarknaden, infrastrukturen, miljön, bankväsendet och många institutioner (korruptionsproblemet). De politiska spänningarna mellan Indien och Pakistan utgör tyvärr en permanent riskfaktor.

Under det kommande åren torde Indiens BNP kunna stiga med 6-7 % per år, troligen bäst bland stora emerging markets. Åtminstone potentialen borde ligga på dessa höjder. De globala handelskonflikterna berör Indien mindre än Kina. Som positiv framtidsfaktor ter sig – i motsats till Kina – speciellt demografin. Icke att förglömma: Indiens enorma storlek som land med åtföljande enormt stora absoluta tal vad gäller möjligheten inom forskning och utveckling, speciellt avseende IT, AI och många service- respektive verkstadsprodukter. Och last but not least: Jämfört med Kina har Indien fler ”sympathy points” i väst.

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English version

In April and May this year, India – often called the largest democracy in the world – will hold Congress elections. There are almost 900 million potential voters to find their favorite representatives for their central parliament in Delhi named Lok Sabha.

Currently, India is ruled with absolute majority by a conservative and religious/nationalist coalition called National Democratic Alliance (NDA) under the leadership of the Bharatiya Janata Party (BJP) and its Prime Minister Narendra Modi. The opposition is represented by United Progressive Alliance (UPA), led by the previously long-time ruling Congress Party (the political domicile of the Gandhi family).

Right now, speculations and forecasts show up frequently, trying to single out whether the NDA will continue to govern India after the forthcoming general elections or not. The so-called “Modi wave” has been cooling down. Doubts have increased after a couple of losses in state elections last year – at least as regards the continuation of the current composition of the government. Most observers, however, believe that the current coalition can continue to rule – but has most probably to be widened for the survival of the NDA. There is a general belief that such an enlarged coalition will focus more on social improvements.

Good growth is not all  –  budget deficits remain worrisome

GDP in India is currently growing by around 7 % – which is good compared to other major emerging countries but reflecting some downsizing from previous growth rates (“Modi average” 2014-2018: 7.3 %). Inflation has been brought down to slightly above 2 % which may be even too low for an emerging market. Positive conclusions can be drawn about the balance on current account with deficits still around 3 % of GDP – but the slightly weakening development should be observed further.

Most reason for concern still comes from the permanent political tensions with Pakistan and the public budget deficit. The latter topic is not so much taken up by the Indians themselves. In many publications, numbers like 3.5 or 4 % of GDP are mentioned which, however, only summarizes the debt of the central government and does not include the even higher indebtedness of the federal states (5-6% of GDP). Altogether, the total Indian government debt at around 9-10 % remains very negative and sets certainly limits to many future-oriented public investments. Goal conflicts will be inevitable. By the way, debt ratios of this size existed already more than 20 years ago when I started to visit and analyze India (meeting there – mostly – very skilled economists). This is another example of the fact that India in most cases does not move very quickly in the right direction. 

Reforms – results and future needs  

Economic policy of the Modi government is mostly described as relatively liberal and open for globalization. To what extent this really is the case in a Western sense could be a matter of discussion. However, a number of policy moves in the right direction could be noted in the past years of the Modi administration. Some progress has been achieved – e.g. in macroeconomic stabilization and improvements of conditions for foreign direct investments (FDI). However, much more has to be done by the next government coalition which according to many Indian experts will go more strongly for social improvements – both in the case of an enlarged NDA or an UPA government. So far, Modi has been working for downsizing of social costs.

So, what should be done by the next government? Many areas of improvements and reforms can be recognized, such as

  • the labor market,  
  • SME problems from demonetization (cash circulation sharply reduced),
  • the banking system,
  • the high public indebtedness,
  • health care,
  • the environment,
  • infrastructure,
  • institutions (corruption).

Conclusion

India is much more difficult to analyze than the currently good GDP growth may reflect. Quite a number of – so far neglected – reform areas should be tackled by the next government. Check out regularly what really happens! Remember that India still has more “sympathy points” in the West than China –regardless your own opinion in this respect.

Hubert Fromlet

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

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