China

“Pressure on China and India to revive growth”

Wednesday, October 16th, 2019

Presentation by Hubert Fromlet, affiliate (affilierad) professor at Linnaeus University (Linnéuniversitet), Sweden, on October 16, 2019, at its annual
“Baltic Sea Region /Emerging Market (China) Day“ in Kalmar/ Sweden ————————————————————————————————–

Brief summary in Swedish

Både Kina och Indien drabbas för närvarande av dämpad BNP-tillväxt. Tillväxtförsvagningen är mestadels hemmagjord. Kina påverkas dock mer än Indien av USA:s protektionism. Såväl Kina som Indien är piskade att undvika en ytterligare tillväxtdämpning eller att snarast möjligt komma på en (något) snabbare eller åtminstone stabilare tillväxtbana igen.

I Kina handlar redan nu all ekonomisk planering bakom kulisserna om att kunna presentera landet i en mycket positiv dager vid Kommunistpartiets 100 års jubileum år 2021 – men också att redan nästa år kunna framkalla positiva rubriker vid utvärderingen av de cirka 50 ekonomiska reformplanerna som lades fram vid Centralkommitténs Tredje Plenum år 2013. Utvecklingen bortom 2021 förblir oklar som resultat av den till jubileumsåret delvis artificiellt framkallade tillväxten.

För regeringen i Indien gäller det inte minst att återvinna konsumenternas förtroende. Nationalräkenskaperna visar att det är framför allt konsumenterna som på sistone blivit mer skeptiska. Indiens ständiga hänvisning till att den egna tillväxten på senare år varit bättre än Kinas håller inte riktigt eftersom Indiens upphämtningsprocess kommit igång tydligt senare än Kinas. Indiens långsamma reformtempo bör höjas i den mån det är möjligt.

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Why GDP growth is so important to China these days …

Despite regularly returning general criticism, the Gross Domestic Product (GDP) is still treated by almost all analysts as the most important and most frequently used macroeconomic indicator of a country. Critics, however, mostly want conditions like the environment, national health, wealth etc. to be included in annual national accounting (GDP) as well. Certain governments work already on widened definitions of economic growth but rather in additional terms than on substitutional conditions. These efforts are – in my view – a good idea but certainly difficult to develop and measure in practice. Attempts should be made all the same – like intended in Sweden (though I have so far not heard anything about the progress in this specific respect).

Good numerical GDP growth means traditionally a lot to China and its political leaders. Progress can be shown to the public in a relatively simple and understandable way. The lagging accuracy of official GDP statistics is not really an issue for discussion in the second largest economy (second in dollar terms – but in so-called PPP terms, total Chinese GDP is already the largest in the world).

Outside China, however, many economists have recognized the qualitative statistical shortcomings and inconsistencies of China’s GDP calculations – however, without having the tools to explain these shortcomings in a more accurate way. However, it is certainly not normal that Chinese GDP-growth rates are more or less even during at least several quarters and very predictable from quarter to quarter and from year to year. This happens to my knowledge nowhere else in the world but in China.

The extremely important anniversary year of 2021

For this reason, I feel very sure that the evaluation and anniversary years of 2020 and 2021 will be presented as (very) positive years for the Chinese economy. 2021 will be a key year for the Communist Party, 100 years after its foundation. It is certainly not desirable for China’s political leadership to announce and/or admit a notable downsizing of GDP growth in 2021. GDP growth will therefore be particularly stimulated by monetary policy, certain (environmental) investments and financial support to state-owned companies – indeed as much as possible. Any GDP growth below 6 percent in 2019, 2020 and 2021 would be a major surprise – and probably mean that the development in reality has been worse than this. And besides, in Chinese mythology six is certainly a more lucky number than five.

It could be added when trying to figure out what is really happening in China’s economy, I prefer using indications or indicators like official statements by President Xi Jinping and Prime Minister Li Keqiang and reading their comments between the lines, particularly when these top leaders themselves are pointing at a problem . I also look carefully at changes of the banks’ cash requirements at the People’s Bank of China and even more when they are loosened. This means normally an official easening of monetary and credit policy, i.e. an attempt to stimulate the economy and growth. Furthermore, the development of the Producer Price Index (PPI) seems to be another good short-term indicator because of its obvious correlation with GDP. Not to forget statistics on transports!

Sure, there are also many long-term challenges for China – such as private and (local) government indebtedness, the avoidance of a late bursting of the real estate bubble, the creation of new competitive industries with advanced technology, sustained social stability, clear improvements of the environment, dealing with demography and the necessary processes of improving institutions, financial markets included. And what about attempts to improve certain international political relations?

Without doubt, we can recognize China as a superpower that has to face many difficult challenges in the forthcoming decade and even beyond. But there is also a China with specified high ambitions and strong strategic objectives, well looking into the future and working actively for good or at least satisfactory GDP growth in the medium and longer run.

The outcome of this balancing act will remain uncertain for quite some time. But we know that the legitimacy of Chinese political leadership continues to be linked to economic progress, i.e. GDP growth.

… and India ?

More recently, GDP growth has been weakening in India as well, first due to decelerating activities in investment and now very obviously by dampened demand from consumers. All this his is certainly not a good message to Prime Minister Narendra Modi and his government. There is pressure on government politicians to work harder for renewed strong economic growth.

Currently, India’s GDP growth is still roughly in line with China’s – but after some time of higher Indian GDP growth than Chinese. 5 percent in y-o-y GDP growth during Q2 in 2019 means the weakest Indian increase since Q1 in 2013. The exact answer to the most probable numerical GDP differential between both countries depends highly on China’s assumed accuracy in national accounting (which we do not know enough about).

Consumers need to become more confident – both in the short and the long run

The currently declining speed of economic growth can be mainly related to skeptical consumers. Consumers’ confidence has been coming down – and, logically, also GDP growth. Future sustainable GDP-trend forecasts at around 8 percent – as often published about two years ago – can certainly not be taken for granted.

Of course, also India has a lot of burdening medium- and long-term challenges. Among them, one can find high governmental fiscal deficits, slowly moving legislation processes, poor infrastructure and environment, lagging human capital formation, political relations to China etc.

However, despite these structural shortcomings: India has two important competitive advantages compared to China – being a democracy and an average population that is ten years younger than China’s; together, China and India count quite equally distributed for more than one third of the global population.

But India can only benefit from this latter advantage if it will be able to give the younger Indians clearly improved conditions for their education. For this conclusion, we have a lot of scientific confirmation.

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

 

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Frequent questions about China

Monday, September 23rd, 2019

China has been topping the headlines quite a bit in recent weeks and months. Referring to myself, I try to summarize in this blog my answers to some of the most frequent questions from different groups in the society – questions that reached me more recently after the Swedish holiday season.

  1. What do we really know about the state of the Chinese economy?
    Not enough. Transparency is still poor. In this respect, the U.S. government has a point. China is an important global player. Markets and we all should indeed know more about the second largest economy in the world. Quarterly GDP numbers develop too predictably and give therefore very limited guidance.
  2. How serious is China’s economic slowdown – is it temporary or structural?
    There are three elements in this slowdown. One element is related to the business cycle, another one can be seen as a negative reaction on the trade war, and the third element can be explained by insufficient structural progress. The continued support of non-profitable state-owned enterprises, for example, does not give enough space for more growth- and profit-oriented companies.
  1. What are the real reasons for the trade war between the US and China?
    There are different reasons, both with short-term and more long-term angles. Certain observers believe that president Trump and his supporters want to avoid that China will become the world champion in new technology. This aspect plays certainly a role, anchored by the official objective of “Made in China 2025” and its intended technological quantum leap. Here we have the medium- and long-term view. But there is also a short-term view. Probably, president Trump and his government are also highly irritated about China’s current interpretation of fair trade and fair rules for foreign companies in China. These already existing impediments for foreign companies in China have also been, for example, criticized by the European Chamber of Commerce in China for quite some time https://www.europeanchamber.com.cn/en/publications-position-paper (download manually). However, the Chamber also stresses that (higher) tariffs should not be used as an appropriate tool for reducing current shortcomings for foreign companies in their commercial and technological relations with China. This is the right conclusion.
  1. Is it possible that pressure from the U.S. can get China on a more reforming and opening track?
    Certain Western observers have this position. However, it does not make sense because the ongoing trade war has too many losers. There is hardly any research area in economics where scientists have such a unified view on as the advantages of free trade between countries.
  1. Can China be regarded as an exchange rate manipulator?
    China has been frequently accused of currency manipulation for a long time. There should be made three comments on this issue. First, before summer 2005 – when the yuan was allowed to strengthen after around a dozen years of almost fixed rates vis-à -vis the U.S.dollar – China was indeed manipulating its currency. Then the yuan started to appreciate but not enough in the eyes of many American politicians and economists. Continuous pressure from Washington gave no major strategy changes in the past 15 years.
    Second, it has to be said that exchange rate policy in principle is a national issue. This is exactly as the U.S. regards the topic these days itself since president Trump himself is working for a weaker dollar. Third, the recent weakening of the yuan could have been even stronger – if market forces really had been applied – because of China’s weakening fundamentals. According to the rules set by the U.S. itself, China is not on the official list of currency manipulators – despite the harsh comment by secretary Steven Mnuchin in the beginning of August. In my view, China’s non-interventional currency decision and, thus, accepting a weakening yuan some weeks ago was not “unfair” and clearly within the limits of an acceptable managed floating policy.
  1. Which are the main tools for economic policy and short-term economic growth in the current situation of dampened GDP growth?
    Probably, the Chinese are already applying the short-term tools they mainly have: (temporary?) delay of the more painful structural reforms (state-owned enterprises, SoEs) and monetary policy. Easening monetary policy will not mean frequent cuts of interest rates but rather lowering the banks’ cash requirements in the People’s Bank of China to enable more new credits (also to unprofitable SoEs). Despite seven cuts of cash requirements since the beginning of last year, they are still on a relatively high level http://chinaresearch.se/. However, there are two disadvantages of such an expansionary monetary policy: the loss of momentum in the necessary restructuring of industry and the further injection of fresh money in China’s already very high debt levels.
  1. How are China’s relations to Russia and the EU developing?
    Relations to Russia are obviously improving. There is even a plan to double trade between the two countries in the forthcoming five years. Beijing is certainly aware of the recently more unified position of the EU vis-à-vis China. China is clearly hoping for good and improving relations with the incoming new EU commission – also when it comes to the fight against protectionism.
  1. Is Hong Kong still as interesting to political leaders in Beijing as it has been in the past?
    The importance of this link is partly questioned these days. An important argument for such a position is the forecast that Shenzhen will replace Hong Kong more and more – also as a financial center. This latter development may be partly in the cards. However, for political leaders in Beijing the increasingly expansionary role of Shenzhen does not allow for paying less attention to Hong Kong.
  1. How much do we know about the progress of all the structural reforms (own addendum: which were initiated in 2012/2013 by China’s new political leaders)?
    By far too little. There is an evaluation of the structural economic progress planned already for 2020 http://www.china.org.cn/china/third_plenary_session/2014-01/15/content_31203056.htm.
    Verbally, positive results will certainly be presented next year in the evaluation paper or statement. But what will really be behind these probably encouraging statements? One has to raise the following question: Why is the general public in China and abroad so insufficiently informed when structural progress really has been taking place in the past years and when structural improvements are expected to remain on a promising track? The trade war and the general slowdown of the economy mean most probably a substantial delay of necessary structural reforms.
  2. What do we really know about “Made in China 2025”?
    We do know about “Made in China 2025” that this strategy means a state-led industrial policy to make China globally dominant in high-tech manufacturing. We know which the preferred ten industrial high-tech sectors really are. But we do not know very much to what extent these plans can be met or not. https://www.merics.org/en/papers-on-china/evolving-made-in-china-2025. Maybe this is not possible yet. However, there is not much official noise about “Made in China 2025” anymore. This is not easy to interpret. The main objectives of this strategy and plan, however, still seem to be alive.

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

 

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Alarming signal from China

Tuesday, September 10th, 2019



Larmtecken från Kina

Sammanfattning / Summary

Kina har gjort det igen – sänkt kassakraven för bankerna i centralbanken People’s Bank of China. Det är den sjunde gången på knappt två år och redan den tredje gången under innevarande år. Det bör tas som ett larmtecken trots förekommande tillförsikt av en del analytiker och kapitalförvaltare. För mig är bankernas kassakrav en vida viktigare konjunkturindikator än, till exempel, Kinas två inköpschefsindex. Reducerade kassakrav ökar också risken för försummat och eftersläpande strukturarbete.

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It happened again: Chinese decision-makers lowered the banks’ cash requirements in the People’s Bank of China (PBoC) by another 0.5 percentage points for larger banks (and even more for smaller banks), already for the third time this year. This step means a relief by 900 billion yuan (or equivalent to 126 billion USD on September 6) that can be used for new credits.

In my own interpretation, this latest reduction is another clear signal by Chinese political decision-makers – obviously mainly promoted by Prime Minister Li Keqiang – that the economy keeps on giving strong reasons for concern. Furthermore, the latest reduction is already the seventh since the beginning of last year – i.e. the beginning of the trade war with the U.S. (or the other way around if you want). This is quite a trend. It also could be added that I did not find any remark about this important policy measure on the website of the PBoC (hopefully I missed it myself).

It should not be overlooked that the further loosened credit conditions also increase the risk of undermined structural changes and improvements – as already in detail decided six years ago at the Third Plenum of the Communist Party. Evaluation will take place next year!

Also in this blog, I have often expressed that reductions of cash requirements in the PBoC are a good indicator for growth problems in the Chinese economy. In such a situation, GDP numbers use to become less reliable. Thus, I give more analytical attention to this ongoing real monetary policy than to the forthcoming statistical GDP numbers for q3 and q4, close to (most probably) 6 %.

Anyway, a clear result of the American-Chinese trade war can be seen also in the American trade numbers. In the first half of 2019, American imports from China declined by 19 percent – and American exports by remarkable 12 percent as well (with Chinese export values four times higher than the American). This loss of American exports to China indicates clearly that trade wars are not “easy to win”, contrary to what President Trump commented some time ago. Even global losses are obvious these days!

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

 

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