China Research

Surprisingly, one still can find people who believe that statistical quality in China has been improving in recent years. I myself cannot find evidence for such a conclusion, neither can our LNU China Panel (https://blogg.lnu.se/china-research/files/2018/05/ChinaPanelSurvey-May-2018.pdf ; at least there is no marketing or concrete information on such a desirable change coming from Chinese authorities. Still, there is a lot to wonder about.

One discrepancy that still makes me puzzled concerns statistics on GDP, industrial production and the Purchasing Manager Indices (PMIs). It may be added that I feel quite sure to understand the technical mechanisms of PMIs since I myself prepared and introduced the Swedish PMI almost 25 years ago together with my colleague Åke Gustafsson from Swedbank. Sometimes, statistical correlation between these micro and macro indicators is questioned ; and I myself – following my own historical experience – cannot either see sufficient consistency right now between the Chinese PMIs and Chinese industrial production or GDP – possibly or probably as a result of insufficient statistical quality rather than non-existing correlation.

Two PMIs in China

Let’s look at some numbers. There are actually two PMIs in China. One is produced by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchases (CFLP) with focus on 3000-4000 larger companies including SoEs, the other one by Caixin/Markit with 430 private, mainly medium-sized and smaller companies. According to statistics for August 2018, the NBS/CFLP PMI for manufacturing rose slightly from 51.2 to 51.3 compared to the month before, whereas the corresponding Caixin/Markit index fell to 50.6 from 50.8. These numbers – not very far from the “borderline” of 50 between better and weakening growth – have been in these numerical regions for quite some time.

Abroad, the Caixin/Markit PMI tends to receive better recognition than the NBS/CFLP index because of no or only limited governmental influence. However, both indices are interpreted and commented very strictly when it comes to the borderline of 50. Just above 50 is usually regarded as positive and just below 50 as negative. But users of the PMI indices should be aware of the fact that both PMI series are calculated as diffusion indices that do not really reflect the strength of changes in the participating individual companies – and, consequently, only the direction. For this reason, I cannot warn enough for putting too much positive focus on numbers slightly above/below 50 and too encouraging/discouraging oral and written comments on further expansion or contraction. Some months of observation and/or moving averages could be useful.

It should be kept in mind that the Caixin /Markit PMI seems to be a notch closer to industrial reality than the official NBS/CFLP index – and, consequently, better capturing the currently fading export performance of Chinese industry.

Do Chinese PMIs reflect reality?

My view is that China’s PMI numbers during the past quarters have come in on (somewhat) too high levels. Again, a number not too much below 50 does not mean that a recession is going on – instead, for some time, only a declining rate of growth; and a number slightly above 50 does not necessarily point at an further improving industrial activity any time soon.

My strong feeling is that the real state of the Chinese industry seems to be (somewhat?) weaker these days than recent PMI indicators for manufacturing slightly above 50 may indicate. American protectionism hurts.

However, lagging transparency may mean that not all my conclusions necessarily are correct. One should be cautious and humble when interpreting Chinese statistics, also those for the PMIs.

Anyway, the globe’s second largest economy, China, still has a lot of institutional homework to do, improvements of national statistics included.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
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No doubt, China has not given encouraging growth signals during our European holiday season. I am here not so much focusing on weaker official statistics (GDP, public investment, real growth in retail sales, etc.) but rather on analytically mostly unwatched or neglected signals.

But also hard statistical data were not really favorable – neither the PMI nor production indicators. The escalation of the trade war with the U.S. dampened business confidence, even if Chinese  trade numbers so far did not give particularly negative results (which according to experience and textbooks indeed could take some more time). But the Chinese currency yuan weakened visibly (not so much hidden this time but not very much related to growth concerns by the analysts); so did the two Chinese stock exchanges.

In this analysis, I do not focus very much on hard Chinese statistics. Major parts of Chinese are not (completely) reliable or have their quality shortcomings for other reasons. However, it is worth-while  paying increasing attention all the same when the Chinese themselves publish (slightly) weakening statistical numbers; such an indication came also in July from rising urban unemployment. In this also officially confirmed negative statistical sense growth could indeed be on its way to move in  a more dampened direction.

On the other hand, two developments outside the statistical sphere – which usually are not really observed by Western analysts in a more specific growth perspective – make me usually particularly curious in an economic growth context. They are

– (unexpected) loosening of monetary policy without interest rate cuts, and more than a very temporary weakening of the yuan.

Loosening of monetary conditions (by  decreasing cash requirements for the banks) has indeed taken place more recently despite the debt problem of local governments, firms and private households. It should be observed whether there is more to come in the nearer future.

The real reasons for the weakening of the currency yuan (also called the renminbi,  RMB) in 2018 may be in reality somewhat more opaque. First, there may be fundamental explanations for the drop of the yuan based on the existing  economic imbalances and also at least some negative impact from the trade war with president Trump, which means induced by market forces. Second, there may also have been Chinese political efforts to drive the currency down. My own guess is that reality may include both components. Perhaps the strong fall of the RMB was somewhat overdone but remarkable all the same.

Anyway, there is good reason to believe that Chinese GDP also officially will continue to slow down in the foreseeable future – but slightly and not very visibly apart from probably or possibly (net) exports. GDP growth around 6.5 percent for 2018 seems still be achievable in official real terms.

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

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We are living in a rapidly working and changing (economic) world. This development also leads many times to less profound analysis and reading. Conditions have been – and are – changing both on the analytical demand and supply side. More people express their opinions – but decreasingly based on profound skills. And less people want to spend much of their limited time on deep intellectual penetration of different special areas. The demand for good, deep and comprehensive general knowledge seems to be declining.

I do not motivate these brief conclusions by the latest results from economic and social research. Instead, I apply many years of my own experience from industry, financial markets and academia – and also proven and undisputed results from (academic) research.

What really worries me is the obvious fact that so many articles and reports on China obviously are reflecting semi-knowledge. Good understanding of Chinese politics and economic conditions or developments is certainly not an issue one can deal with briefly or occasionally – which unfortunately often seems to be the case. Analysis of China may be knowingly or unconsciously. In my view, the latter alternative is dominating.

Here we come to Nobel Prize winner Robert Shiller. In his book “Irrational Exuberance” (p 142), Shiller discusses a phenomenon called “overconfidence” which he defines by writing “people think they know more than do. They like to express opinions on matters they know little about, and they often act on these opinions …”

In other words: semi-knowledge exists indeed and can become very risky. Ambitious and future-oriented countries should not become dependent on strived special skills in IT and AI – but should also do a lot for improvements of general knowledge. I believe that the Chinese have understood this dualism better than many political and corporate leaders in the West. At least I still cannot find good evidence that necessary educational efforts for improving general knowledge are really taking place on a broad scale in our part of the world. It may be a structural problem in times of speed, electronic games and modified spare time with – probably – less interest in reading. Updated research on this area would be very interesting.

Conclusion:

A good understanding of China assumes deep and regular studies of this – by its enormous size – continental country. Overconfidence is always risky – but particularly when it comes to China.

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

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