China Research

China has been topping the headlines quite a bit in recent weeks and months. Referring to myself, I try to summarize in this blog my answers to some of the most frequent questions from different groups in the society – questions that reached me more recently after the Swedish holiday season.

1. What do we really know about the state of the Chinese economy?
   – Not enough. Transparency is still poor. In this respect, the U.S. government has a point. China is an important global player. Markets and we all should indeed know more about the second largest economy in the world. Quarterly GDP numbers develop too predictably and give therefore very limited guidance.
2. How serious is China’s economic slowdown – is it temporary or structural?
   – There are three elements in this slowdown. One element is related to the business cycle, another one can be seen as a negative reaction on the trade war, and the third element can be explained by insufficient structural progress. The continued support of non-profitable state-owned enterprises, for example, does not give enough space for more growth- and profit-oriented companies.

3. What are the real reasons for the trade war between the US and China?
   – There are different reasons, both with short-term and more long-term angles. Certain observers believe that president Trump and his supporters want to avoid that China will become the world champion in new technology. This aspect plays certainly a role, anchored by the official objective of “Made in China 2025” and its intended technological quantum leap. Here we have the medium- and long-term view. But there is also a short-term view. Probably, president Trump and his government are also highly irritated about China’s current interpretation of fair trade and fair rules for foreign companies in China. These already existing impediments for foreign companies in China have also been, for example, criticized by the European Chamber of Commerce in China for quite some time https://www.europeanchamber.com.cn/en/publications-position-paper (download manually). However, the Chamber also stresses that (higher) tariffs should not be used as an appropriate tool for reducing current shortcomings for foreign companies in their commercial and technological relations with China. This is the right conclusion.

4. Is it possible that pressure from the U.S. can get China on a more reforming and opening track?
   – Certain Western observers have this position. However, it does not make sense because the ongoing trade war has too many losers. There is hardly any research area in economics where scientists have such a unified view on as the advantages of free trade between countries.

5. Can China be regarded as an exchange rate manipulator?
   – China has been frequently accused of currency manipulation for a long time. There should be made three comments on this issue. First, before summer 2005 – when the yuan was allowed to strengthen after around a dozen years of almost fixed rates vis-à -vis the U.S.dollar – China was indeed manipulating its currency. Then the yuan started to appreciate but not enough in the eyes of many American politicians and economists. Continuous pressure from Washington gave no major strategy changes in the past 15 years.
   Second, it has to be said that exchange rate policy in principle is a national issue. This is exactly as the U.S. regards the topic these days itself since president Trump himself is working for a weaker dollar. Third, the recent weakening of the yuan could have been even stronger – if market forces really had been applied – because of China’s weakening fundamentals. According to the rules set by the U.S. itself, China is not on the official list of currency manipulators – despite the harsh comment by secretary Steven Mnuchin in the beginning of August. In my view, China’s non-interventional currency decision and, thus, accepting a weakening yuan some weeks ago was not “unfair” and clearly within the limits of an acceptable managed floating policy.

6. Which are the main tools for economic policy and short-term economic growth in the current situation of dampened GDP growth?
   – Probably, the Chinese are already applying the short-term tools they mainly have: (temporary?) delay of the more painful structural reforms (state-owned enterprises, SoEs) and monetary policy. Easening monetary policy will not mean frequent cuts of interest rates but rather lowering the banks’ cash requirements in the People’s Bank of China to enable more new credits (also to unprofitable SoEs). Despite seven cuts of cash requirements since the beginning of last year, they are still on a relatively high level http://chinaresearch.se/. However, there are two disadvantages of such an expansionary monetary policy: the loss of momentum in the necessary restructuring of industry and the further injection of fresh money in China’s already very high debt levels.

7. How are China’s relations to Russia and the EU developing?
   – Relations to Russia are obviously improving. There is even a plan to double trade between the two countries in the forthcoming five years. Beijing is certainly aware of the recently more unified position of the EU vis-à-vis China. China is clearly hoping for good and improving relations with the incoming new EU commission – also when it comes to the fight against protectionism.
   

8. Is Hong Kong still as interesting to political leaders in Beijing as it has been in the past?
   – The importance of this link is partly questioned these days. An important argument for such a position is the forecast that Shenzhen will replace Hong Kong more and more – also as a financial center. This latter development may be partly in the cards. However, for political leaders in Beijing the increasingly expansionary role of Shenzhen does not allow for paying less attention to Hong Kong.
   

9. How much do we know about the progress of all the structural reforms (own addendum: which were initiated in 2012/2013 by China’s new political leaders)?
   – By far too little. There is an evaluation of the structural economic progress planned already for 2020 http://www.china.org.cn/china/third_plenary_session/2014-01/15/content_31203056.htm.
   Verbally, positive results will certainly be presented next year in the evaluation paper or statement. But what will really be behind these probably encouraging statements? One has to raise the following question: Why is the general public in China and abroad so insufficiently informed when structural progress really has been taking place in the past years and when structural improvements are expected to remain on a promising track? The trade war and the general slowdown of the economy mean most probably a substantial delay of necessary structural reforms.
10. What do we really know about “Made in China 2025”?
    – We do know about “Made in China 2025” that this strategy means a state-led industrial policy to make China globally dominant in high-tech manufacturing. We know which the preferred ten industrial high-tech sectors really are. But we do not know very much to what extent these plans can be met or not. https://www.merics.org/en/papers-on-china/evolving-made-in-china-2025. Maybe this is not possible yet. However, there is not much official noise about “Made in China 2025” anymore. This is not easy to interpret. The main objectives of this strategy and plan, however, still seem to be alive.

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

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Larmtecken från Kina

Sammanfattning / Summary

Kina har gjort det igen – sänkt kassakraven för bankerna i centralbanken People’s Bank of China. Det är den sjunde gången på knappt två år och redan den tredje gången under innevarande år. Det bör tas som ett larmtecken trots förekommande tillförsikt av en del analytiker och kapitalförvaltare. För mig är bankernas kassakrav en vida viktigare konjunkturindikator än, till exempel, Kinas två inköpschefsindex. Reducerade kassakrav ökar också risken för försummat och eftersläpande strukturarbete.

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It happened again: Chinese decision-makers lowered the banks’ cash requirements in the People’s Bank of China (PBoC) by another 0.5 percentage points for larger banks (and even more for smaller banks), already for the third time this year. This step means a relief by 900 billion yuan (or equivalent to 126 billion USD on September 6) that can be used for new credits.

In my own interpretation, this latest reduction is another clear signal by Chinese political decision-makers – obviously mainly promoted by Prime Minister Li Keqiang – that the economy keeps on giving strong reasons for concern. Furthermore, the latest reduction is already the seventh since the beginning of last year – i.e. the beginning of the trade war with the U.S. (or the other way around if you want). This is quite a trend. It also could be added that I did not find any remark about this important policy measure on the website of the PBoC (hopefully I missed it myself).

It should not be overlooked that the further loosened credit conditions also increase the risk of undermined structural changes and improvements – as already in detail decided six years ago at the Third Plenum of the Communist Party. Evaluation will take place next year!

Also in this blog, I have often expressed that reductions of cash requirements in the PBoC are a good indicator for growth problems in the Chinese economy. In such a situation, GDP numbers use to become less reliable. Thus, I give more analytical attention to this ongoing real monetary policy than to the forthcoming statistical GDP numbers for q3 and q4, close to (most probably) 6 %.

Anyway, a clear result of the American-Chinese trade war can be seen also in the American trade numbers. In the first half of 2019, American imports from China declined by 19 percent – and American exports by remarkable 12 percent as well (with Chinese export values four times higher than the American). This loss of American exports to China indicates clearly that trade wars are not “easy to win”, contrary to what President Trump commented some time ago. Even global losses are obvious these days!

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

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Konsten att förstå Kina

Sammanfattning / Brief summary in Swedish

Ekonomiska bedömningar avseende Kina kräver god förståelse för kinesernas psykologi och politiska värderingar. Det stora problemet med Kina-analyser och kommentarer som görs i vår del av världen är att det mestadels sker utifrån en västerländsk synvinkel och värderingsansats. Detta fenomen leder ofta till felaktiga slutsatser.

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It can be observed that more and more analysts comment these days on China. Of course, a lot is written and said about developments in China. Thus, some new knowledge about China can be acquired quite easily. One special problem, however, is not recognized sufficiently in many cases: the frequently existing inadequacy of applying Western logic when attempts are made to explain the Chinese and their (future) actions and reactions.

For this reason, the headline of this blog is set as “the art of understanding China”. Interpreting many Chinese conundrums is indeed an art. However, a substantial number of conundrums are not regarded as such phenomena by most Westerners.

President Trump frequently accuses the Chinese of unfair behavior in international business. This criticism is not unmotivated and has in recent years also been taken up frequently and concretely by the European Union Chamber of Commerce in China. It is therefore urgent that the EU in the foreseeable future can achieve a workable common China strategy – however, in a more gentle way than the U.S. has been and still is applying.

What the Chinese dislike

Achieving an acceptable EU strategy also for the Chinese assumes, however, that the EU looks at China in a kind of diplomatic way and not from a “Europe first position”. President Trump’s “America first position” vis-à-vis China certainly was received by the Chinese as extremely unfriendly. It should not be neglected that the Chinese still are very proud of their long-term history and also the (economic) achievements in the past four decades.

In general terms, attitudes that point at humiliation and arrogance by foreigners are always strongly disliked by the Chinese. History also tells us that the Chinese used to become very upset when American officials regularly argued for a stronger currency (RMB, yuan). An important conclusion: It is not so much what you say it but the way you say it (even if there are issues you never should mention for the Chinese).

Below, I link to a summary of Chinese and Western values and logics. There may be certain moves going on into a new direction, for example in China from repetition to innovation or from unity to individualism. But the link still provides China analysts with nicely applicable guidelines for understanding Chinese logics and behavior. Without doubt, the search for such insight promises to be beneficial                          https://www.chinahighlights.com/travelguide/article-chinese-and-western-thought.htm .

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

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