China Research

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

China – “forgotten”events and news outside the big headlines

March 29, 2022

In recent weeks, more or less only two Chinese events were topping the headlines in major Western media. The first one is linked to China’s position vis-à-vis Russia in the Ukrainian war. The other one deals with the increase of corona in some important Chinese (economic) melting pots. Much more, however, should be really worth to know about for improving the understanding of China. Some examples are given below.

Statistics of secondary importance for understanding China

Financial markets focus a lot on incoming statistical numbers from China, usually too much. However, when it comes to China, such a focus may mostly be the wrong approach. Economic statistics that play a role in our part of the world – such as GDP and its components, inflation, unemployment, government debt etc.- are not really applicable to China since it cannot be estimated to what extent single numbers are close to reality or not. Transparency does not belong to China’s strong sides.

Lagging transparency may have two reasons. One is aiming at the official ambition to make things brighter than they really are. The other one can be referred to the enormous size of China and the following logical consequence that there certainly exist difficulties with the finding of representative statistical selection processes, both geographically and for the analyzed topic.

The bad thing is that Western skepticism against Chinese statistics will remain in place for quite some time even if the quality of Chinese statistics may already have improved for a while. It always takes time to establish trust in long-lived institutional shortcomings – also when improvements are there.

Probably, most readers of this article know that China is a problematic country to interpret. For this reason, it makes much more sense for Western analysts to improve the qualitative understanding of China than ambitiously trying to interpret incoming statistical numbers.

News from China that should have caused more attention

Some examples from China are given below that should or could have caused  more attention in our part of the world, particularly the initial ones, taken from the National People’s Congress (NPC) that was held in March 2022.

New Prime Minister this fall – Li Keqiang stepping down
Current Prime Minister – and number two in the Communist Party – Li Keqiang has recently announced that he will step down later this year after ten years of managing the Chinese economy. In my view, Li gave through all these years a feeling of knowledge and understanding the economy (unless political priorities were set in the first place; a Chinese position that has been strengthened further by President Xi Jinping). Speculating on Li’s successor does not make sense right now but I assume that Xi will remain in power after the Party Congress in fall – contrary to the will of former leader Deng Xiaoping who wanted for the future a presidential change after ten years. One may guess that China’s next ministers of finance and foreign affairs will have even closer ties to Xi Jinping than their predecessors – and also the whole Standing Committee where China’s most important leaders make all important decisions. These assumptions if verified matter for global political power.

Quite optimistic target for GDP growth in 2022
Usually, the official objective for China’s GDP growth during a recently started year is announced in the beginning March. This time, the official GDP-growth target is set at “about 5.5%” – more than expected and less than last year for 2021. Looking more precisely at the growth target since 2000, a clear downward trend can be watched in the past two decades. Previous GDP-growth targets: 2000, 2002-2004: around 7%; 2001:7%; 2005-2011: around 8%; 2012: 7.5%; 2013-2014: around 7.5%; 2015: around 7%; 2016: 6.5%-7%; 2017-2018: around 6.5%; 2019: 6%-6.5%; 2020: no target (covid-19); 2021: above 6%. One of the explanations for this descending development is the declining marginal rate of productivity gains. By the way, despite the lagging quality of Chinese GDP statistics, we have to work with the official numbers since no alternative can be found.

The main pillars of China’s economic policy in 2022
In Q4 of 2021, GDP growth achieved only 4%. The number for Q1 will be published on April 18 and probably not look very encouraging when really applying growth conditions in the first three months of 2022. Since the Russian war in the Ukraine will have negative impact on European (global) growth, Chinese exports (GDP) will be most probably be affected negatively. Interpreting official comments at this year’s NPC, China intends obviously to conduct both an expansionary fiscal and an expansionary monetary policy (which obviously also quite a number of Western countries did as well in the past years).

Economic growth at the expense of the environment
Here we come to an issue of global importance. Xi also told local officials at the Party Congress that they should be cautious about reducing emissions. Obviously, economic growth comes before emission at least in 2022. One may wonder what such a change of priority may mean psychologically to global and domestic confidence in China’s fight for a better environment.

What do we really know about covid-19 in China?
We do know that lockdowns have occurred in a number major cities, for example in the important city of Shenzen and currently in two phases in Shanghai, certainly a measure at the expense of GDP growth. China still applies its “zero-covid strategy which explains the radical lockdowns. But what do we really know about covid in China? The answer to this question is a major conundrum – but probably also an important input into forecasts on the Chinese economy in 2022, particularly when it comes to exports, private consumption and – maybe – investments in machinery and equipment. Furthermore, new problems with supply chains and transport problems may arise because of further lockdowns.

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

 

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Worsening outlook for emerging markets – China included

January 26, 2022

It seems obvious that the Fed in 2022 will have a couple of interest rate hikes which have been almost officially announced in recent weeks by Chairman Powell. This probable development may be necessary to be started in the U.S. for the attempt to re-balance the globally economy, both when it comes to the fight against the ongoing high inflation and to the deflation of unpleasant asset price bubbles in quite a number of countries (real estate, bond and stock markets).

However, welcoming higher interest rates in the U.S. – and at a somewhat later stage in Europe and other parts of the world – is really not an easy call, particularly since such a development also will dampen GDP growth somewhat in the global economy. Some kind of getting back to a realistic “new normal” for short-term rates has no alternative. But how can a “new normal” be found and defined? A safe answer cannot be given these days. Different markets (financial and labor markets, technological competition, etc.) will gradually lead us to more insight in this conundrum.

Higher U.S. rates bad news for (many) emerging markets

For emerging markets, tightening monetary policy of the U.S. is bad news in several respects. Matters of concern for emerging and less developed countries are, for example (at least theoretically and according to textbooks):

¤ Lower growth in OECD countries dampens imports from emerging countries
Higher interest rates have a negative impact on investors and consumers in advanced countries – followed by a similar reaction in emerging countries. However, in this case some new hope may arise from declining global bottlenecks on the supply side. Many emerging countries may benefit from weakening commodity prices in the case of slower growth in mainly the U.S.

¤ Many emerging countries are highly indebted in U.S. dollars
Higher short-term rates in the U.S. mean also ceteris paribus higher costs for the borrowing in USD by emerging countries. Reactions on bond markets are not really predictable.

¤ Higher U.S. rates will probably strengthen the dollar
Higher short-term rates in the U.S. make the USD stronger – and for emerging countries the costs for changing into USD more expensive. The open question is for how long time the dollar will surge.

¤ Declining foreign propensity to invest in emerging countries
Here we have really a high risk. We have seen such reactions in the past. Portfolio investors prefer often less risky strategies in (very) uncertain times. They wait for signs of recovery. Greenfield investors also tend to cut or delay their planned projects when uncertainty is increasing.

¤ Economically vulnerable countries are less resilient
Countries with healthy economic conditions and limited foreign debt are certainly more resilient against rising U.S. rates than the weak and vulnerable emerging and developing countries. Analysts should consider this distinction.

¤ How much will China be hit – and how much hits China emerging countries?
This question is not easy to answer. China stands now for 17 percent of the global economy. This is why China cannot isolate itself from developments in the U.S. and the global economy.

But how much will China be hit by the American hikes? Financially certainly to some extent, probably also (temporarily) by weakening exports to mainly the U.S. and other emerging countries. However, most of China’s problems are made at home by the worrisome conditions on the bubbling real estate market, the enormous domestic debt credit bubbles and all the well-known structural growth impediments -> see my previous article in this blog (chinaresearch.se). It is not a secret that China is overly dependent on the real estate market – even more than the U.S.

Altogether, developments in China will be very important to other emerging countries in 2022 and beyond – but not basically due to the interest rate hikes by the Fed. The main Chinese economic problems are purely made at home.

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

 

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China faces slower growth

January 17, 2022

China’s GDP development in the whole of 2021 (+8.1 percent) seems to look fine at the first sight. However, this high number has to be seen in the light of the weak growth of 2020 (recently revised downward to 2.2 percent) and, consequently, the low comparative levels from 2020.  GDP growth in Q4 (4 percent yoy) reflects current reality much better and must be seen as a disappointment and clear slowdown both by global analysts, their colleagues in China, Chinese politicians and also by many domestic and international companies outside China.

The problem of credibility and the way of sending messages

The publication of the Chinese GDP development in Q4 and the whole previous year – again very early in the middle of January – is usually a major statistical event for Chinese and foreign analysts. This can be said despite the fact or concern that major progress in the statistical quality of China’s GDP as a whole and the different components still cannot be singled out. And certainly not either very much as far as the quality of economic growth itself is concerned since it remains impossible to deeply analyze all GDP components.

Many years of not really reliable Chinese GDP numbers unfortunately means that possible limited qualitative improvements initially remain difficult to be found or confirmed by external experts. Here we come to the psychology of sending and receiving messages, a well-known research area from behavioral finance. At the same time, it is known from research that improvements of institutional shortcomings tend to take quite some time to be visible and / or believable, in certain cases even generations.

What do the new growth GDP numbers really mean? 

If we look at previous official forecasts or objectives for 2021, one can compare with Prime Minister Li Keqiang’s forecast of “more than 6 percent”  for GDP growth at the National Party Congress (NPC) in the beginning of March last year. This objective has been clearly met by the published annual average growth number of 8.1 percent – one more time almost exactly in line with expectations.

Considering the outcome of GDP growth in Q4 leads, however, to the conclusion that Chinese growth has been slowing down markedly in the course of 2021(yoy Q1: + 18.3 %, Q2: + 7.9 %, Q3: +4.9, Q4: + 4.0) – due to gradually higher comparative GDP levels in the course of 2020, and in the last year to distortions from the supply side, corona (fears) and other contributions from uncertainty.

 

The outlook for 2022 – substantial problems are still there

In my view, China will be confronted with different kinds of problems also in 2022. It really should be emphasized that interdisciplinary analysis will be particularly important in 2022 and beyond. Examples of different non-economic approaches with possible impact on the economy can be given for the forthcoming quarters – and partly even years – from

¤  politics: relations to the US, the EU, protectionism;

¤  social challenges: handling  the pandemic (omicron included), demography;

¤  institutions: the ability of managing the real estate problems;

¤  health: the fight against covid-19;

¤ psychology: reactions on Chinese politics in China and abroad, confidence from consumers, investors, financial markets, etc.

Possible growth objectives and indications

Important indications come certainly from the most two most important influential members of China’s dominating political institution, the Standing Committee (of the Central Political Bureau of the Communist Party of China) – with President Xi Jinping and Prime Minister Li Keqiang on the top. Probably at the NPC in March at the latest.

Three alternatives for the GDP-growth objective in 2022 are theoretically in the cards according to my view:

a) an optimistic one ->  would be back to (more than) 6 percent like for 2021,

b) a quite cautious one -> would be 5 percent or less,

c) a position somewhere between the optimistic and the cautious one -> would be around 5 percent.

Even if calculations of China’s potential GDP are extremely difficult to prepare because of the insufficient quality of necessary statistics, one can assume that potential GDP growth when applying official statistics currently may be around 5.5 percent or what I above define as “between optimistic and cautious” (reflecting only half of the potential growth rate that was achieved on average from 1980-2010). Could this current potential growth number turn out to be the official GDP objective for 2022?

Whatever the most correct number for potential GDP growth may be, China’s economic growth has been clearly downsizing in the past decade.

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

 

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