China Research

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

China vs India – who wins in the long run?

October 23, 2024

Presentation by professor Hubert Fromlet at LNUs Baltic Sea Region/Emerging Market/China Day, October 23, 2024, in Kalmar

In recent years, China and India have been frequently quoted as the main future challengers for Western economies. This may still be the case but things are changing. Both countries have their future opportunities. But they also have their future risks and challenges – risks and challenges that are, however, increasingly drifting apart from each other in these two giant countries.

Conclusion 1: The mentioned diverging trend of risks and challenges between China and India should be watched closely by business economists in the forthcoming years. However, China and India cannot be measured and analyzed with the same yardstick.

The conumdrum of the latest growth-supporting stimuli – however, long-term trends are more important

The official Chinese GDP-growth objective for 2024 has been set at “around 5 percent” in the beginning of this year. After +4.6 percent in Q3, the numerical goal of 5 percent may not be quite achievable for the whole year. However, Chinese leaders probably still want to meet their growth target.

During many years, Chinese GDP-growth numbers were extremely predictable due to ex ante politically set numbers which were, consequently, (mostly) not correct.

However, having then met the official growth target numerically did not mean that such a result was in line with reality. At least not according to historical experience. One may wonder whether these statistical question marks are still in place.

In the past few years, I sometimes heard that the quality of Chinese statistics finally has been improving. May be – may be not. We simply don’t know. 

These doubts are the price for many years of poor statistical standards. Institutional shortcomings like this are always difficult to repair and need therefore quite some time for gaining new or renewed trust. 

Considering China’s still uncertain statistical quality and all the current existing transparency problems, it seems to be doubtful to expect much progress of the latest Chinese liquidity and fiscal injections for supporting sluggish growth. First, the volumes of these measures are not known. Second, the size of the problems to be addressed such as the bubble in the real estate sector is also terra incognita.

Conclusion 2: It is impossible to predict the effects of the latest stimulation measures. All this is in uncharted waters – despite certain encouraging comments from financial markets. Instead, my own feeling is more skeptical or even pessimistic about the short-term outlook. However, the long-term issues should be more interesting all the same.

China’s long-term future looks may be even gloomy…

Also China’s published GDP- growth numbers have been clearly dampened in the past years, i.e. more than halved. Such a slowdown was certainly not expected by most forecasters – but it was not either unforeseeable when having looked at the already then obvious imbalances.

Many of these “old” imbalances still exist today such as local debt, bad loans, struggling state-owned enterprises and the problems on the real estate market. Today, I would like to focus on three specific issues that really motivate to have a gloomy view on China’s long-term perspectives. They are

¤  the negative impact on markets and growth derived from autocracy  

¤  the ongoing growth-impeding effects of the real-estate bubble

¤  the more or less unmanageable demographic implosion.

China’s nowadays applies a more and more autocratic system which certainly impacts negatively on the market economy, (private) initiatives, entrepreneurship, innovation, risk capital, financial markets, competition, etc. – and, consequently, on economic growth. A change of this political system does not seem to be on the cards – neither in the foreseeable nor in the unforeseeable future.

Despite all lagging transparency, we know that the enormous Chinese real-estate bubble already has been bursting. Almost 100 million apartments seem currently to be empty – in a situation where the real estate sector stands for a quarter of Chinese GDP. The extremely poor development of the real estate sector also had – and will have for the time being – very negative effects on consumer confidence and private consumption. Improvements of this critical issue are not on the cards – most probably not even in a longer perspective. 

When looking at structural impediments to future Chinese long-term growth, the demographic challenges clearly look most worrisome from a long-term investors’ point of view. Today, China has a population of 1400 million people. If we believe in (uncertain) estimates by the United Nations, this number will have shrunk to 640 million by the year 2100. Even if this decrease may turn out to become less dramatic, one can easily single out that China’s demographic outlook will have enormously negative consequences on GDP and the market potential for most (foreign) companies there.

Conslusion 3: Companies with business in China should watch demographic trends carefully because of changing demand patterns

and volumes.

… which makes India to “win” probably in the long run

About twenty years ago, I published an article with the same headline as set as the title of this presentation. At the time, China still was a strongly booming country with high, double digit growth rates. Economic problems were visible – but not really taken seriously by most Western economists and corporations. 

Then, I published an article with the title “The run to China – another example of herd behavior” (Economic & financial review : a journal of the European Economics and Financial Centre. – London, ISSN 1351-3621, ZDB-ID 12001399. – Vol. 12.2005, 3, p. 111-143). By writing this piece, I wanted to point at my view that Western decision-makers then had explored China’s political and economic trends insufficiently, or as one of my friends – then working for a major global company – put it by saying: “We invest a lot in China because all our major competitors are there”. In other words: Decisions were not really based on deeper analysis. Herd behavior dominated.

Areas where China already then was superior to India were in the early years of this century (and still are), for example, GDP per capita, infrastructure, education and health on broad levels, and probably also productivity growth. China started two decades ago becoming a global powerhouse whereas India at the same time still seemed to be quite isolated from the global scene.

On the other hand, India had already in the beginning of the 2000s a number of competitive advantages compared to China, for example: democracy, better – though not good – institutional conditions (transparency), a more developed financial system, more fundamental market economy and what may be called “more Western sympathy points”. Particularly this latter observation has become much more visible in the past few years, partly as a reaction on China’s increasing political autocracy and state interventionist economic policy against market principles.

If we go back 40 years, India’s and China’s nominal GDP were almost about the same. Now China’s GDP is almost five times larger than India’s. These figures demonstrate clearly that China in recent decades has been more successful in GDP terms than India. Also the GDP per capita development points at a much more favorable trend for China. Today, China is the largest economy in the world when measuring in purchasing power (PPP) and India number three (and number two and five when calculated in USD). 

Anyway, three main factors seem to make India to a long-term winner when comparing with China. Advantages for India are mainly

¤  the more favorable population outlook though India may face (slightly) shrinking numbers as well by the end of this century,

¤  at least according to the knowledge of today: a better political rule,

¤  higher potential GDP growth,

¤  more optimism for the future (but for how long?).

Conclusion 4: For the first time, I see now India as the future winner in the overall competition with China.

However, India’s major challenges should not be neglected either. Infrastructure is still poor. Education needs to be improved sharply in order to bring literacy to Chinese levels and for managing global competition. The environment and sanitation must be improved substantially, the access to water included. Economic inequality and the agricultural distress should be tackled much better.

All this means that also India must work hard to meet all the positive expectations inside and outside India.

In this context, it may be guiding to quote Nobel Laureate Paul Samuelson who described globalization to me around 25 years ago as a development that means that “there is no longer room for comfortable ineffectiveness”.

This conclusion is also relevant for India which has in the meanwhile become increasingly globalized – and will so even more in the future.

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

Can China’s monetary easing do the job?

September 25, 2024

Without doubt, the People’s Bank of China (PBoC) has been very active with its fresh attempt to stimulate the sluggish economy. However, monetary policy should not be regarded as the main tool to revive growth – not fiscal policy either. Instead, far-reaching structural reforms are badly needed in China to restore confidence of consumers and investors. Monetary policy alone is not strong enough to sizeably create new consumer confidence.

Largest stimulus package since the bad days of covid-19

The latest monetary stimulus package by the PBoCindicates clearly that China’s political leadership has become increasingly concerned about the (gloomy) outlook for the economy which is partly linked to the highly burdened real estate sector as well. Different measures to reduce borrowing costswere introduced. For example, the People’s Bank of China cut interest rates on existing mortgages and created new lending capacity by reducing cash requirements for banks. The PBoC also announced that the necessary deposit for buying a second home will be lowered from 25% to 15%, and that restrictions on borrowing for investments in stockswill be easened.

Usually, I consider increasing Chinese worries about the economic development already after reliefs of cash requirements only. This time, instead, a whole package of monetary easening was introduced. This should probably be interpreted as further growing political leadership worries aboutthe chances of meeting the 5% GDP-growth target for 2024. 

Sure, one may wonder about the real size of these political leadership worries when reading on the same day of the announcement of the stimulus package that “in general, the national economy maintained stability while making steady progress in August. Production and demand sustained a recovery, and employment and prices remained stable” (see here about the economic data in August https://www.chinadaily.com.cn/a/202409/24/WS66f1ee40a3103711928a9532.html). Real official belief in the above-mentioned economic analysis for August would not have made the recent central bank measures necessary…

Will the stimulus package help?

The answer to the question above seems to be obvious – no or not enough. Some possible – but certainly limited – relief on the real estate market cannot function as a real growth stimulator when relating to all the structural imbalances in the Chinese economy. There are bad bank loans, largely indebted municipalities and provinces, high implicit state-government debt, unprofitable state-owned companies, subsidized pricing in many areas, insufficient competition, tensions with important trading partner countries, all the institutional shortcomings, the influence of the almighty CP on the whole Chinese economy, etc.

Conclusion: The absence of urging structural reforms in many imbalanced areas of the Chinese economy and society hardly can enable uncertain consumers to raise their mood visibly with following GDP-improving effects. Central bank measures cannot do the job alone – not either this time. At least not when it comes to GDP in reality.

Hubert Fromlet

China: What does the Third Plenum tell us this time – or not?

September 3, 2024

The Third Plenum of the Chinese Communist Party’s Central Committee uses to be an important event. In the past, Third Plenums have taken place in fall following a Party Congress – with focus on the political leadership’s future economic and reform agenda.

The first – in my view – really memorable Third Plenum goes back to its number 11 in 1978 when China’s groundbreaking visionary leader Deng Xiaoping started up China’s famous process of economic reforms and opening-up, and, consequently, its modernization – with agriculture, industry, defense, science and technology as the main areas for the future.

This time, the Third Plenum happened in July, sending again quite a number of messages to the Chinese people and the rest of the world. But what do the messages tell us this time – or not?

Disappointments after the 18th Third Plenum

The credibility and outcome of this year’s Third Plenum still has characteristics of a conundrum. However, I do remember very well the plans and visions of the Third Plenum from 2013. Initially, I then had a feeling that China really might be on the way to a promising economic policy. Quite a number of modern guidelines and objectives could even having been picked from famous Western economic research and textbooks.

One could read in the plenum documents almost eleven years ago that the market economy should play a “decisive” role in the Chinese society – at the time frequently quoted around the globe, particularly since it was the first Third Plenum of China’s then new political leader Xi Jinping (and the 18th in its history). Good intentions could be found in November 2013 as the following summary showed us  (https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2013/12/the-cpc-third-plenum-announces-a-new-roadmap-for-reform-in-china-an-overview.pdf).

However, when checking all the details from the Third Plenum in 2013, one can now recognize that many envisaged or promised objectives from this policy convention have not been met and partly rather developed into the negative opposite during the following years. A deepening look into the quoted summary above – by the way prepared by the law firm Clifford Chance – should indicate or confirm that many officially strived policy improvements did not come true or did so only partly. In my eyes, the failure of giving the market economy a “decisive” role looks particularly disappointing. Rather the opposite could be noted during the past decade.

The question marks after the 20th Third Plenum  

The 20th Third Plenum was concluded this summer on July 18. The official communique confirms also this time the long-term visions and supremacy of the Communist Party (http://en.cppcc.gov.cn/2024-07/19/c_1006186.htm).

When reading this communist party document, “everything“ seems to have developed well in the past years and been put on the right track for the foreseeable future.

Thus, the poor or at least insufficient current economic development is not discussed in the communique. Self-criticism seems to be more or less absent apart from a few general statements like “complex developments at home and abroad”; instead, formulations such as “we have achieved economic recovery and growth and have made firm strides in building a modern socialist country in all respects” look more representative for the pitch of the communique from this year’s Third Plenum.    

Nonetheless, it should be worthwhile to quote the following conclusion from the communique, i.e. that
“ the Central Committee made systematic plans for further deepening reform comprehensively with the emphasis on building a high-standard socialist market economy, promoting high-quality economic , supporting all-around innovation, improving macroeconomic governance, promoting integrated urban-rural development, pursuing high-standard opening up, advancing whole-process people’s democracy, promoting socialist rule of law with Chinese characteristics, deepening reform in the cultural sector, ensuring and improving the people’s wellbeing, deepening reform in ecological conservation, modernizing China’s national security system and capacity, deepening national defense and military reform, and improving the Party’s leadership in further deepening reform comprehensively to advance Chinese modernization…”                                       

—> whatever all this could mean for the future.

 Altogether, we can be quite safe about drawing the following six conclusions from this year’s Third Plenum:

  1. China will keep its political top-down governance of the economy;  
  2. science and advanced technology play a growing role in the future;
  3. there is no recognizable strategy for the different future challenges;
  4. macroeconomic analysis and future policy approaches are still absent;
  5. the environment continues to play an important role;
  6. there is no clarifying strategy for China’s complicated overcapacity issue, the demographic challenge and the fight against (youth) unemployment.

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