China Research

China continues to disappoint the rest of the world. In the beginning of 2023, many countries over all continents based their own recovery forecasts to a high extent on the internationally widely expected post-COVID recovery in China. However, these positive expectations could not be verified so far – and probably will not do so during the remainder of 2023. Furthermore, weak fundamentals raise doubts about China for the longer run as well.

Poor economic developments increase global concerns about China’s economy…

China’s economy reveals currently quite some weak economic numbers: e.g.for GDP, exports and imports of goods, inflation (lately quite low, contrary to many other countries – and even causing deflation fears), producer prices (PPI), the PMI, etc.

In this context, we should keep in mind that the quality of Chinese statistics has been questioned many times in the past (also by myself), particularly when reality seemed to be weak. But how could/can too positive numbers be measured? Here we have an issue that never could be singled out so far, and certainly not these days either. Can the current weak macroeconomic numbers be even weaker in reality?

Lagging transparency still does not allow for an illuminating answer. Perhaps we can see today a development that I have been pointing already quite some years ago – the possible start of better statistical quality without being recognized on time because of all the historical confidence gaps.

Some late macroeconomic statistics with bad results look as follows:

GDP q2: 0.8 %, qoq (versus 2.2 % in q1, qoq) and +6,3 % yoy (due to low base last year)

Exports (of goods), July: -14.5 % (in current prices, now weakest for more than three years)

Imports (of goods), July: -12.4 % (in current prices, reflecting weak domestic demand)

CPI July: +0.2% mom, -0.3% yoy (but no deflation so far – needs persistently falling CPI)

PMI (for manufacturing, Caixan), July: 49.2 (from 50.5 in June); Caixan is to a high extent based on exporting companies in coastal regions whereas the official PMI (via NBS) reflect broader geographical analysis all over the country and also contains distinctions between different corporate sizes, July: 49.3 (from 49.0 in June).

… while China strengthens its political efforts in emerging countries

China has an obvious strategy in its foreign policy – directed against the U.S. This happens partly also in mental co-operation with Russia or directly by increasing the political and financial influence in particularly emerging African and South American countries – i.e. on continents that indeed have been neglected in the past few decades both by the EU as a whole and important EU countries.

In recent months, China’s President & CP Chairman Xi Jinping visited several strategically important emerging countries (looking for commodity deals). At the same time, a substantial number of high foreign officials came to China, well reflecting China’s strategic ambitions outside OECD countries.

This Chinese international policy approach is certainly appreciated at home   – but how do many or most Chinese look at the development at home and, consequently, at Xi’s leadership? We know by now that the economy develops poorly, resulting in consumers’ declining confidence. Young people’s fading positive visions for their future point at bad mood, too (mainly caused by record-high youth unemployment, officially for youngsters at the age of 16-24 years – in June as much as 21.3%, among them many academics; according to Western experts’ guess it could be even twice as much). Also the ever-lasting concerns about the real estate sector, local public debt and probably increasing bad loans should mean psychological worries with impact on the economy and possibly social stability at some point.

Thus, China needs clearly improved GDP growth. But where should it come from more than very temporarily? The number of options and possible progress in GDP growth seems to be very limited, at least under current conditions. Investments in infrastructure may be strengthened further after last month’s stimulation package – but now without being able to induce major growth contributions. In my view – which I have mentioned many times before – China could at least in the longer run benefit from better political relations to the West and economically from wide-ranging supply-side reforms at home, including particularly better institutions with more openness, transparency, better conditions for foreign investors and less nationalism.

Simultaneously, less nationalism would also be a good step forward for many Western countries.

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

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Germany’s Foreign Minister Annalena Baerbock visited China only recently without sending kind diplomatic signals to China’s political leadership. Rather the opposite – by mentioning a number of critical points that really are sensitive to Chinese top politicians, such as human rights and the complicated relations to Taiwan. Scarcely surprising, Foreign Minister Wang Yi answered very clearly that China does need any instructions from the West.

This kind of Chinese reaction on foreign critical comments or “recommendations” certainly cannot be regarded as something new. I remember very well how irritated the Chinese reacted 15-20 years ago when American presidential administrations regularly exhorted Chinese political decision-makers to finish their unfair exchange rate policy and to, consequently, finally strengthen the renminbi.

However, China never listened to these direct American attempts to influence domestic policy decisions. They will not either in the foreseeable future.

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This time, I also want to recommend two articles with interesting views on international developments.

First, I find the paper of Pinepoli Goldberg(Yale University) and Tristan Reed (The World Bank) about the possibility of deglobalization very interesting. They see a slowdown of globalization but – contrary to other economists – no a reversal (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4413852&dgcid=ejournal_htmlemail_nber%3Aworking%3Apaper%3Aseries_abstractlink and NBER Working Paper No. w31115.

Second, I would like to focus on the illuminating article by Rolf Langhammer (Kiel Institue for the World Economy) on the increasing cross-border service trading and the difficulties in factfinding, mainly demonstrated by the German example (https://www.ifw-kiel.de/fileadmin/Dateiverwaltung/IfW-Publications/-ifw/Kiel_Policy_Brief/2023/KPB_166.pdf)

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

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