China Research

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

Summer news from China – how strong are SoEs in reality?

August 30, 2017

Back from a long summer vacation, I have indeed a feeling that I missed a lot of interesting news about China. In an attempt to catch up with my information deficit, I found some striking news. Let me mention a few.

1. GDP remains at its ( easily) predictable growth path

GDP growth for the second quarter came in at 6.9 percent (yoy). Some Western analysts claimed that this was higher than expected. However, what are these small deviations from expectations really worth when we simultaneously know that Chinese GDP statistics hardly fluctuate and regularly land in line with forecasts and objectives of the politicians and government authorities?

There is no doubt that the official growth objective for 2017 will be met (“6.5 percent or somewhat more”) – particularly in the light of this fall’s Party Congress. No major (economic) accidents are “allowed” to happen any time soon.

Probably five new members of the the so-called Standing Committee will be appointed during the Party Congress to join the only continuing top leaders of the current Standing Committee, i. e. President Xi Jinping and Prime Minister Li Keqiang. It is important to keep in mind that the Standing Committee clearly must be regarded as the most important decision-making institution in China.

Thus, the importance of this forthcoming event in – presumably – October should not be underestimated. The future of the economic reform process will to a high extent depend on the new names in the Standing Committee and their relations to Xi and Li .

2. Strong rise of profits in state firms

According to the Ministry of Finance China’s state-owned enterprises (SoEs) increased their profits in the first half of 2017 by strong 23 percent due to “structural supply side reforms”. (Supply side policy means in China capacity adaptations – mostly reductions – and improved/new access to goods and services. In our part of the world, however, we see supply policy more aiming at more fundamental, growth-supporting structural conditions for private households, companies and governments).

However, China’s has already decided on an ambitious strategy for SoEs but as late as during the so-called Third Plenum in fall 2013. Thus, the above-mentioned remarkable increase of profits should have come after only 2 1/2-3 years of structural changes – if we trust the calculations. Is there reason to do so? Some doubts are probably motivated – despite the obvious downsizing of particularly not really competitive exporting SoEs.

3. New China-Europe transport links

Really amazing news was the message about the introduction of the freight train service between Zhengzhou (Henan province) and Munich. This can be regarded as another little step toward the verification of the so-called Belt and Road initiative, an extremly ambitious China-led project aiming at the support of transports and economic growth between China and as far as to Western Europe.

While reading the article about this issue, I unfortunately got my doubts again about the quality of economic information.

Nothing very serious – but one has to wonder how the reporting Chinese agency can put together a description like this in the same article: “Munich is renowned for its auto industry and is home to brands such as BMW, Porsche, Mercedes Benz, and Bosch.”

However, all the three latter companies have their main offices in Stuttgart. This is not really a secret.

4. Surprising expansion of Huawei

In the first half of 2017, the major Chinese cell-phone producer Huawei achieved more or less the same market share as the pioneers of Apple. This is a surprising development – at least in my eyes.

We have to learn and to accept that China increasingly will surprise with globally successful companies – even if it still is hard to predict the velocity of such a development. But ears and eyes should be kept open.

 

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

 

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The impact of China’s new economic policy on corporations

August 8, 2017

Here we have a topic I frequently use to discuss with students and companies. Two factors play in this context a decisive role for the corporate sector: the geographical location of the headquarters (home country) and the volume of activities.

If we concentrate the answer on a non-Chinese and probably not very small company, the following areas or departments of the company may feel or will/may be affected by the results of the new economic policy (if business with China is not too limited): strategy, sales (marketing), purchasing, product development, production, finance, human capital formation, investor relations, etc., i.e. major parts of the company in the case of quite extensive business with China. However, smaller foreign companies with more limited commercial relations to China may be affected by China’s economic reform policy as well.

The composition of Chinese imports from the developed world will in the future change a lot compared to the past two or three decades – the demand patterns of the young and urban population included. The application of digitalization will certainly increase rapidly in the – so far – second largest economy in the world. Digitalization will also affect many production processes. China wants to establish itself as a technological and an economic superpower – and means it seriously.

Consequently, many foreign companies will be forced to develop new business models and/or products for China. In certain cases may, for example, even future or potential reforms of the Chinese tax and fee system or educational reforms become parameters of interest for Western corporations.

It should be added that also many Chinese companies will have to change their business models, either to maintain current good positions, to expand in the future or in order to survive. This angle should not be neglected – and it will also affect purchasing managers in OECD countries. Competition within China will increase, too.

More could be mentioned. The objective of this little article is not to give a comprehensive answer to all possible effects of China’s new economic policy on corporate strategies and decisions in the rest of the world – but to indicate that there will be effects.

However, all the different kinds and volumes of these reform effects cannot be singled out today. More hints may come from the – probably – five new members of the Politburo’s Standing Committee. They will be selected at the 19th National Congress of the Communist Party of China this coming fall.

Do not hesitate to continuously watch political developments in China. The link to business with China is obvious and will become increasingly important!

 

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

 

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Summer reflections – new opportunities for the EU, China and Africa

June 28, 2017

Pro-European citizens in the currently 28 EU states certainly dislike the British decision to leave the European Union (EU), probably in 2019. However, the British departure from the EU should now encourage the remaining EU-member countries and Brussels to think more strategically and concretely about the future of the EU. What should be done? What can be done?

First signals in such a positive and more encouraging direction can already be recognized. Important topics and reform areas, however, should be addressed more transparently already in the near future. Many of them are well known, others have been scarcely discussed so far. Much can be done to rejuvenize the image of Europe and the EU itself. In this respect, the British withdrawal from the EU – with all its disadvantages – also offers new opportunities.

Below, three examples are summed up and briefly elaborated on, dealing with digitalization and relations of the EU to China and Africa. All three different cases affect both politics and business, i.e. the EU as an institution and the corporate sector in the member states.

Readers of this article may wonder why an economist wants to deal with such a complicated political issue as the EU exit of the UK. The answer, however, is much easier than one may believe: political and economic developments have been interlinked in the past few decades to an extent that they in many cases cannot be separated from each other anymore. This is certainly true also what concerns the economic future of Europe. However, this obvious reality of internationalization and globalization has not reached out to all producers and users of economic forecasts so far.

A similar kind of lagging interdisciplinary understanding can also be found between the large areas of microeconomics and macroeconomics. Microeconomic improvements – for instance when it comes to education, innovation, entrepreneurship, working conditions for women, foreign direct investments, taxes, etc., can indeed have a positive impact on long-term macroeconomic GDP growth as well – a correlation that is often forgotten or neglected by forecasters, other kind of economists and politicians. The EU and its member countries should work with these microeconomic issues much more intensively and ambitiously than in the past. It could mean a good way into the future.

Let’s now get back to three above-mentioned examples of areas which the EU and its member countries should focus on in the next few years, among many others. These three areas serve only as exemplifications and do not reflect – despite their importance – any given preference of the author.

Digitalization

Digitalization is certainly an area that will gain much more momentum in the foreseeable future – a most probable development that should be taken increasingly seriously by the EU and its member states, employers and unions. Many new, interesting IT-products or products with applied IT-technology will enter domestic and international markets in the forthcoming years. To get there, the EU, its member states and corporations have to raise IT skills on all kind of research, development and application levels, also in order to meet all upcoming future cyber risks in an appropriate way.

All these needs urge for many future cross-border activities within the EU – as indicated also what concerns the important area of cyber security. Promising and in praxi working ways forward have also to be found in order to reduce the IT-outsider and IT-insider problem on the labor markets (applying here the outsider-research results of the great Swedish economist Assar Lindbeck who, by the way, really deserves the Nobel Prize in Economics as soon as possible).

China

EU relations with China should be regarded as another area that could be improved considerably, including bilateral trade and co-operation in research, investment, the environment, energy, urban planning, health care, institutional improvements, IT protection and cyber security, exchange of students, etc. Increasing trust between the EU and China could mean more trade and other commercial business between these two giants and, consequently, contribute to better economic growth on both sides.

Without doubt, the EU has now a fair chance to improve European co-operation with China which certainly would be a win-win situation for the EU and its member countries, China and the rest of the world – particularly if China really is willing to stick ambitiously to the Paris climate agreement. It should not be forgotten that more clarification and progress in EU-/China-relations could support European corporate activities in and with China in times when many companies have to change their business model for China already as a result of China’s ongoing reform policy. In this commercial context, generally improving European relations with China may appear even more relevant. This should be concluded without considering China’s self-proclaimed global role as prominent defender of free trade and the Paris climate agreement.

Africa

The third example for concrete new opportunities for the EU and its member countries deals with Africa. Africa must in most respects be considered as a lagging continent – but with a rapidly increasing population and still hidden good economic potential. Time has come when traditional European aid-oriented development politics for less advanced countries should be replaced by more concrete long-term growth strategies and measures – a necessary policy change that the German Chancellor Angela Merkel repeatedly has pointed at more recently.

Sure, a long-term perspective has to be applied in the hopefully modified EU relations with Africa. However, if taken seriously, it could be worth-while to increase efforts – from the north to the south of Africa but also for the EU itself. New commercial opportunities could show up – and possibly at some point less pressure from (potential) African migrants. It would, of course, be wonderful if more and more African citizens gradually prefer to stay in their home countries for one specific reason – i.e. that the future finally looks better and more promising.

Ways forward for the EU

Altogether, the examples chosen above hopefully give some alternatives how and where the EU could move forward in the forthcoming years. Certain positive changes may be quite costly, others relatively cheap – particularly when it comes to many institutional improvements.

“L’union fait la force”(“unity makes strength”) is an old proverb in a number of countries. These words are still valid – also in the Europe (EU) of today and tomorrow.

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

 

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