China Research

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

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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China and India in a demographic perspective – a giant future issue

December 16, 2021

In my latest blog – to be found below this article in chinaresearch.se – I summed up a number of mostly economic areas which usually are influenced by demographic developments. There exists indeed a lot of scientific evidence showing many examples of relationships between demographics and, for example, labor markets, education or social welfare.

I certainly will come back to the topic of demography in the future for focusing on different angles. Today, however, I will mainly look at the demographic outlook for China and India. Many pages could be written about this specific issue. But the limited volume for this blog does not allow for extended articles or papers.

Statistics tells a lot – despite shortcomings

We know that there often exist major difficulties for responsible authorities to count more or less exactly the number of their country’s population. Human or administrative resources may be too limited. A substantial part of the population may be migrating farmers accepting time-limited works in cities, often badly paid. Many workers also stay temporarily abroad for making (somewhat) more money – often under quite miserable conditions. We also know very well about the destiny of many refugees having left their home countries.

Consequently, we have to accept the population statistics that is available. There is no choice if demographic trends in emerging or very poor countries shall be analyzed. Foreign companies entering or making business in such a kind of country certainly want to have a population number for the country they are (interested) in. Therefore, I use to follow for my own purposes https://www.worldometers.info/world-population / – but there are many other sources as well and quite easy to find.

Important data for population statistics:

China India
Population (billion, 2020) 1.447 Trend since 2000 1.400 Trend since 2000
-yearly change 0.39 clearly decreasing 0.99 decreasing slowly
Median age 38.4 clearly increasing 28.4 increasing slowly
Life expectancy 77.5 70.4
Fertility rate 1.69 basically unchanged 2.24 decreasing slowly
Urban population (% of total) 60.8 strongly increasing 35.0 increasing slowly
Share of global population (%) 18.47 clearly down 17.7 increasing slowly

Of course, there are many more indicators and specific calculations that confirm additionally that India has more favorable demographic preconditions than China. Furthermore, China will increasingly feel the consequences of its perennial one-child policy which was relaxed only a few years ago after having applied this kind of birth control during 35 years – also having led to an increasingly uneven distribution between men and women – with negative demographic consequences.

Nobel Prize winner Amartya Sen has been talking in such a context about the “missing women” which will be a burden for China many years ahead. The continuous urbanization process will give negative contributions to demography as well since the urban female labor force increasingly seems to change or reduce their family ambitions.

Demography favors India but more (other) progress is needed – China aims increasingly at new sources of economic growth

Altogether, China’s demographic outlook does not look encouraging. But what about India? The briefly summarizing table above seems to prove that India clearly will turn out to be the winner in the future demographic race and, consequently, the country with the better growth perspectives as many analysts predict. Indeed, this outcome could come true.

At the same time, we should recognize that also India will be facing growth obstacles in the forthcoming decades. Examples of these obstacles are, for example, India’s slow political reform procedures, insufficient financial resources, shortcomings in infrastructure and lagging broad education systems, etc. As one of India’s leading economists told me a few years ago, India is primarily enforced to improve and broaden its educational system – also geographically – for visibly benefiting from the demographic advantage.

Since we do not know to what extent India will be able to improve its weaknesses – education included – it remains uncertain whether India with its comparative advantage from demography will surpass China in GDP-growth terms in the very long run. China’s ambitions for the future are clearly based on mainly good infrastructure, broad education, new technology and the obvious upgrading of private consumption to counteract the negative demographic challenges. These efforts should be observed on a regularly basis.

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

 

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