China Research

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

Some Thoughts about Chinese GDP and the Future

January 7, 2015

The quality of Chinese GDP

Soon it’s time again for China to publish its outcome for Chinese GDP growth in 2014 – only a few weeks after the end of the past calendar year. A couple of years ago, this important statistical event happened even before year end. Of course, one may wonder about the speed until publication of this very complex and comprehensive statistical indicator with all its aggregates. In most developed countries we are talking about 6-12 weeks’ delay – and the gigantic country of China does it in (probably) less than four weeks!

This conundrum may have various reasons – or combinations of it:

-Statistical methods for really technically and representatively covering the whole country of China with its entire production/demand are still underdeveloped (which would be logical considering the current – on average – lagging stage of the institutional development in China);

– collecting statistics from all distant parts of the country would be too time-demanding despite all possible efforts; marginal benefits of more detailed data would probably be too low;

– rapid statistical input is needed for preparing the traditional National Congress in the beginning of March;

– there exists some benign or even malign statistical quality neglect/misleading (look, for example, at the usually very small quarterly variations/changes – a quite stable growth pattern that is not common in our part of the world!).

Historical experience or rumours can be added in this context with certain – but academically insufficient – evidence/experience: in times of an overheated Chinese economy GDP growth may be even higher than officially shown; in the opposite case, (foreign) China experts often believe that the officially published, more dampened GDP-growth numbers are still overestimating reality. Is the latter happening these days?

Unsophisticated reactions by financial markets, their analysts and journalists      

Financial analysts are – wrongly – too frequently focusing on very minor changes compared to the previous numbers and/or deviations from expectations. Statistical moves of GDP growth from 7.4 to 7.3 or 7.2 percent may mean nothing – apart from what has been said above(i.e. that the downturn actually may have been larger than national accounts were telling). By the way, a similar conclusion can be drawn when the frequently applied Chinese Purchasing Manager Index (PMI) changes from 50.4 to 50.6 or something like that.

Also many journalists tend to make too rapid conclusions by following (too) rapid interpretations of financial market analysis. Most financial analysts – particularly in our part of the world – are not really familiar with the Chinese conundrum of statistics and the insufficient transparency culture. My feeling is (almost) that the safer analysts feel about many statistical numbers from China, the less they really know about the second largest economy in the world.

Summary:
The probably most relevant conclusions from my reflections above are

– that Chinese GDP numbers should be treated with necessary caution, and

– that quantitative long-term forecasts on China should be treated carefully since they are based on uncertain statistics and methods.

I still have my doubts when foreign economists praise the progress of Chinese economics statistics (even if there may be some slight qualitative improvement going on, as our annual China Survey Panel from April 2014 showed). Statistical progress would be good for China as well.

This article is about the technical part of GDP calculation and its shortcomings. More exciting in the future, however, will be to what extent Chinese decision-makers will be able to improve the qualitative composition of GDP, i.e. to achieve economic growth that favors the Chinese people’s well-being and future. I will come to this important issue pretty soon.

 

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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The “Hype” on Infrastructure Investment in Developing Economies and Emerging Markets: Too Much of a Good Thing?

December 3, 2014

Assumed underinvestment in infrastructure is not only a political issue in developed countries, for instance, in Europe. For quite some time, it has also been identified as a major impediment of growth in developing countries and emerging markets. The World Bank has estimated the need for annual infrastructure expenditure (including maintenance) of about 7% of GDP in these countries. The gap between current funds available from the established development banks and from the budgets of the countries and the amount needed has been estimated at more than 1 trill. US $.

The reasons for the reluctance of the banks to invest more in infrastructure are well-known. There are chicken-and-egg-problems between public and private investment with the risk that the sequence of public investment first and private investment later leaves the countries with highways in no-men’s land without private investors. Furthermore, there are long gestation periods with technical indivisibilities resulting in lump-sum investment and cluster risks, problems of ensuring that the maintenance costs are at least partly financed from the countries’ budgets, maturity mismatches in financing long-term investment with short-term funds with the risk that refinancing leads to an unexpected debt burden, and, finally, there is the fact that infrastructure investment benefits the construction sector which is normally seen as a non-traded service. So, there is little competition and productivity increases if building the infrastructure is either in the hands of the donors (quasi “tied aid”) or of domestic companies trying to defend the domestic market against foreign competitors which would bring also foreign labor into the country.

Now, very recently, there has been a number of initiatives from the emerging markets’ side to close the gap. In July 2014, five leading emerging markets (Brazil, Russia, India, China, and South Africa) established the New Development Bank (“BRICS Bank”) targeted not only as a substitute to the IMF as stand-by agency but also as a bank to finance infrastructure. In October 2014, the Chinese government paved the way to the foundation of the Asian Infrastructure Investment Bank (AIIB) with 21 APEC countries (excluding the US, Australia, South Korea and Indonesia), and in November 2014, the Chinese government offered to pour 40 Bill. US $ into a “New Silk Road Fund” to break connectivity bottlenecks in Asia – including maritime infrastructure.

The common denominator in these initiatives is China, the no. 3 in world exports of construction services, next to the EU and South Korea. Yet, China’s active role has not been without self-serving motives. It has suffered strongly from declines in its construction exports in 2012 and 2013 due to the remnants of the 2008 financial and economic crisis and hopes that the new funds pave the way for a recovery of its construction exports.

Host countries are aware that China finances infrastructure investment in developing countries and emerging markets under income and employment targets on the one hand and under strategic targets of access to resources on the other hand. A third target is omnipresent: becoming independent of transport routes controlled by the developed countries. All these targets must not necessarily match with those of the host countries. Building highways in Brazil, for instance, with thousands of Chinese workers, would certainly meet resistance from local suppliers and the population, and could turn into idle capacities if declining world market prices and technological innovations make the extraction of resources unprofitable. Another caveat is finance. Should loans be given in the Chinese currency RMB while the returns from infrastructure investment are in local currency of the host country, then an appreciation of the RMB against the host country’s currency would create an expensive currency mismatch for the host country.

Finally, apart from China’s role, the key chicken-and-egg problem still is unsolved. How much infrastructure investment is needed to attract private investment and how can a blackmailing dilemma for the public budgets be avoided if the private sector demands a generous endowment with infrastructure as a prerequisite for private investment but for whatever reasons do not deliver once the infrastructure has been built? Linking public and private investment through private-public partnership arrangements could perhaps ease the blackmailing dilemma.

After many years of obvious neglect of infrastructure investment, the pendulum seems to shift in the opposite direction. Now, infrastructure investment is hailed as an important source of economic growth and in times of super-expansionary monetary policies financial resources seem abundant. However, there can be too much of a good thing and good things can turn sour if the monetary and economic environment changes. In particular, host countries should be aware of exuberance, “white elephants”, and self-serving interests of non-traditional donors.

Open resentment about the traditional Western donor agencies should not cloud the sight that also in “South-South” relationship between emerging markets and developing countries, free lunches are very rare.

 

 

 

 

Rolf J. Langhammer
Kiel Institute for the World Economy

 

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Alibaba IPO Underlines Rise of Chinese Private Sector

November 5, 2014

On Friday, September 5, Alibaba Group filed details about its forthcoming Initial Public Offering, suggesting a mid-range valuation of 155 billion US dollars. This would make the Hangzhou-based web retailer the most valuable listed private-sector company headquartered on the Chinese mainland, ahead of its Shenzhen-based online rival Tencent Holdings.

Alibaba’s coming of age underlines a continuous trend of the last half-decade, illuminatingly analysed by the Peterson Institute’s Nick Lardy in his forthcoming book Markets over Mao. For all the fashionable talk of China’s dominant state capitalism and “Guo Jin Min Tui” (“the state advances, the private sector retreats”), the numbers tell a slightly different story, as illustrated by the following chart:

Aggregate Market Value of Large Listed Cinese Companies

 

This chart shows the shares of four categories of companies in the aggregate market value of the largest listed Chinese firms, namely those that feature in the FT Global 500 list of the world’s 500 largest listed companies by market capitalization which is regularly compiled by the Financial Times. Companies are included irrespective of the location of their main stock market listing, whether Hong Kong, Shenzhen, Shanghai or, in Alibaba’s case, New York. The three main groups are state-owned enterprises (SOEs) of the People’s Republic of China (PRC), such as Petrochina, Industrial & Commercial Bank of China, or China Mobile; companies from Hong Kong and Macao (mostly private-sector but also including municipal companies such as MTR, which operates the profitable Hong Kong metro system), such as Hutchison Whampoa, AIA Insurance, or Sands China; and private-sector companies from the mainland, such as Tencent or Ping An. A smaller fourth group includes banks with hybrid ownership of state and private-sector shareholders (with a public-sector majority), such as China Merchants, Industrial Bank, or Shanghai Pudong Development Bank.

The numbers are as of December 31 of each year except in 2014, where the ranking as of June 30 is used. In the right-hand bar, Alibaba is added to the list on June 30 with the notional market value of USD155bn. This inclusion results in a corresponding expansion of the relative share of the mainland private sector. (The other companies’ market values were not adjusted from their June 30 amount, but this would not materially change the overall picture.)

The chart suggests three observations. First, with about two-thirds of the total, the PRC’s government retains a firm control of the “commanding heights” of Chinese business, as has been plain since the massive IPOs of state-owned enterprises in the mid-2000s. Second, however, this measure suggests a continuous erosion of state control for the past half-decade, as new entrants such as Tencent and Alibaba gain ground – and as private firms in Hong Kong and Macao have also comparatively recovered somewhat from their low point of the late 2000s. Third, and for the first time with Alibaba’s addition to the mix, large private-sector companies from the mainland collectively weigh as much as their peers from Hong Kong and Macao when measured by aggregate value.

As always in China, one must keep in mind that the distinction between public and private sector remains somewhat fuzzy. Ultimate ownership of private-sector firms is often unclear, and the Communist Party of China retains ways to influence the strategy and behaviour of many nominally private-sector companies. Nevertheless, the gradual rise of private-sector companies as compared with the state-owned giants is too continuous to be ignored. Alibaba’s IPO is likely to be remembered as the symbolic moment of this momentous transformation of the Chinese corporate landscape.

Nicolas Véron
Senior fellow at Bruegel, Brussels, Visiting fellow at the Peterson Institute for International Economics, Washington DC



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