China Research

Aiyar et al (2013) define the “middle income trap” as “a phenomenon with hitherto rapidly growing economies stagnating at middle-income levels and failing to graduate into the ranks of high-income countries”. Eichengreen et al (2013) use in a relatively recent analysis the critical “modes” for possibly commencing middle-income trap problems at the GDP per capita range of USD 10 000-12 000 and at the USD 15 000-16 000 level .

Thus, Eichengreen and al rather regard the middle-income trap as a process which can contain several steps. Following Eichengreen et al, China could currently indeed be relatively close to the lower mode – but this still uncertain. Interestingly, Eichengreen et al also conclude that the verification of a middle-income trap situation has shown a sustained reduction in the GDP-growth rate for as much as seven years; so far China has – the strong stimulus year of 2010 subtracted  – noted  five out of these seven years with the declining growth phenomenon (if we define two years with equal official growth rates as shrinking on trend; the average Chinese GDP growth declined during 2009-2013 to roughly 9 percent compared to 11 ½ percent during 2004-2008, with no major changes in average credit growth during these two periods ).

But Eichengreen et al have also found that some other characteristics which until now fit quite well to China and the description of a potential trapped middle-income country. They mention mainly quite high GDP-growth rates before the visible weakening of growth rates, a worsening demographic outlook, very high investment ratios and an undervalued currency. These criteria are very much in line with China’s development in recent years – but still too short-lived for making sufficiently sure about China’s real position in a “middle-income trap” application.

Since we do not know enough about the answer to the question whether China is about to enter the stage of a “middle income trap” or not, it would be very prudent if China could adapt the reasonable economic strategy plans of CPC’s  Third Forum congregation in November 2013 as much as possible. The degree of urgency may be somewhat uncertain – but certainly not the need of putting China fundamentally and structurally forward by new strategies and reforms in a lot of political, social and economic areas.

One should acknowledge that a lot of strategies that are needed for avoiding the trap of a middle-income country according to modern literature (also Agénor et al 2012), actually can be found in the Communist Party’s  60 different reform chapters of the Third Plenum from November 2013.

Interestingly, Agénor and his co-writers add in their article in general terms: “The middle-income trap is avoidable if governments act early – rather than late, when the benefits of cheap labor and the gains from imitating foreign technology are all exhausted  –  and decisively to promote innovation.”

To sum up: China faces the concrete risk to be caught in the middle-income trap – but it is probably not (quite?) there yet.  Many of the most needed urgent policy changes, however, are part of the Third Plenum’s envisaged strategy changes and improvements. Following Agénor’s advice, there is no time to lose for China’s political leaders to meet their own – reasonable – strategies and plans from the Third Plenum with courage and decisiveness.

References

Agénor, P-R et al (2012), “Avoiding Middle-Income Growth Traps”, Voxeu, December 21.

Aiyar, S et al (2013), “Growth Slowdowns and the Middle-Income Trap”, IMF Working Paper 13/71.

Eichengreen, B et al (2013), “Growth Slowdowns Redux: New Evidence on the Middle Income Trap”, NBER Working Paper No 18673.

Langhammer, Rolf (2012), “China Ahead of a Middle-Income Trap?” LNU blog:  www.chinareserach.se, from February 6.

Third Plenum (2013), “The Decision On Major Issues Concerning Comprehensively Deepening  in Brief”, Communiqué: http:/www.china.org.cn./china/third_plenary_session/2014-01/16/content_31212602_15htm

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

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The Purchasing Manager Index (PMI) serves as a well-known and quite reliable short-term indicator in an increasing number of countries. When I introduced the PMI for Sweden at Swedbank together with SILF in the year 1994, this indicator had its history only in the United States. Neutral analysts consider the quality of the Swedish PMI as fairly good, too, particularly since we then did not rush into this new indicator for “marketing reasons”. Our tests and seasonal adjustments took quite some time. In a number of other countries, the PMI preparations took considerably less time until publication. Whether the increased speed of preparation has been affecting the quality of the PMI in different countries more negatively, I am not really sure about. Nowadays, the PMI can be found all over the world, China included.

I had some comments on the two Chinese PMIs in a previous blog (from June 7, 2013). Today, I would like to make some further comments and repeat some of my previous ones (which to a high can be applied generally as well).

First, analysts and media should handle smaller monthly changes of the PMI more carefully – particularly when the PMI moves upward but still relatively closely to the 50-index level, i.e. around 51-53. An improvement from 51.4 to 52.0 does not mean a lot of a change.

Second, the PMI is a so-called diffusion index. This means that the monthly changes of the PMI – particularly when the changes are more limited – do not really express the strength of the individual changes in the index. In other words: analysts should not only focus on the direction of the PMI but also on the level. This is not always the case. The experience from Sweden is that more positive times and improvements of the business situation tend to show up more clearly when the PMI starts exceeding levels around 55. This thumb rule may, however, vary from country to country.

Third, less monthly random can be achieved when also 3-months moving averages are added to the usual graph or numbers. Thus, a limited trend interpretation is made possible.

Fourth, when it comes to China we really do not have any idea about the composition and representativeness of the selected “PMI companies “(which users of the PMIs in our part of the world do not either; but statistics in the Western part of the globe tend to have – with certain exceptions – higher statistical standards compared to statistical quality in China).

Fifth, the PMI could be the best Chinese short-term indicator all the same. When longer time series will be available, this thinkable record will be very interesting to analyze more thoroughly. And the other point to summarize is that small moves of the PMI – up or down – should not be interpreted too exactly. However, the PMI remains an interesting, fresh and quickly calculated economic indicator in many countries. Hopefully in China, too!

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

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