China Research

More recently, political and economic analysis in our part of the world has become more skeptical about China. This is no surprise when considering recent political autocratic changes inside China, heavy political challenges from abroad (Trump), and domestically expressed concern about the burdening indebtedness. Furthermore, foreign analysts are getting more uncertain or even worried about the speed of implementation of all the planned economic reforms. Unfortunately, transparency remains poor also in this respect.

Three Chinas

It is probably wrong to speak unsophisticatedly about “one China”. In my view, there exist three different Chinas – divided as follows:

1. The “traditional” and conservative China.
   Here we talk about sticking to traditional values about “Chinese socialism” and remaining strong political influence on individuals and major parts of the corporate sector (state-owned enterprises, of course, included), recently again underlined by China’s strong leader Xi Jinping.

2. The slowly reforming China.
   This part of China is probably quite large even if there is no chance to quantify the share of the slowly reforming China in percentage terms – but it seems to be probable that the size of this second type of China could be essential. More cautious but not really pessimistic foreign China forecasters should be mainly found in this segment – experts who probably also focus on the economic imbalances.

3. The rapidly changing China.
   Optimists about the economic future of China prefer to give China’s strong technology efforts their main momentum and see it as a driver of future GDP growth. Artificial intelligence (AI) is expected to play a crucial role in this development. Consequently, future progress in this third – the rapidly changing – China is predicted to clearly outperform the two above-mentioned Chinas and less promising definitions of the three Chinas.

In my own view, I also consider the time horizon very carefully. In the forthcoming few years, options 1 and 2 may dominate. In an even longer perspective, option 3 could gain clear momentum. But how much progress can be achieved in the lagging parts of China until this – maybe – new era of production and GDP growth may show up openly and recognizably? This is one of the future key questions, potentially of more importance than future tensions derived from international politics.

More cautious forecasts

Unfortunately, the quite recently finalized 13^th National People’s Congress did not really give much detailed information on the current status of all the announced and necessary economic reforms. In other words: Transparency shortcomings are still remarkable.

This is also concluded by the well-known and competent Finnish research institute BOFIT (The Bank of Finland Institute for Economies in Transition) in their recent forecast on the Chinese economy. BOFIT writes in its recent China forecast from March 27 that “major economic reforms have not been carried out as previously expected and some reforms even reversed. Concrete reform execution plans were notably missing from the addresses made at the National Congress … In coming years, dealing with financial risks and China’s massive pollution, problems are inevitable … We expect growth to slow to around 5.5 % in 2019 and to around 5 % in 2020 … (after 6.5% in 2018, own additional remark)”.

BOFIT also singles out that official Chinese (forecast) numbers should be analyzed with “considerable scepticism”. This should be indeed the case. In my view, GDP growth will continue to meet the projections of China’s political leadership because of performance pressure – whatever the real development might have been. Therefore GDP growth will be 6.5 percent in 2018 as China’s political leaders have emphasized during the National People’s Congress – or even 6.6 or 6.7 percent, despite the first preference of reducing the problems of China’s private and local government debt.

The goal conflict between the reduction of financial risks and GDP growth will go on – with financial risk reduction most probably in the first place, at least in practice. Reasonable economic growth and poverty reduction should also have continuous high priority – at the expense of the environment?

Maximizing the reduction of the debt problem, the achievement of future high GDP growth with reduction of poverty and also a clearly better environment seem to be an impossible trinity. Thus, increasing doubts about the Chinese economy are motivated. Hopefully a wrong view at some point in the future …

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

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Not very surprisingly, the very recent 13^th National People’s Congress was not dominated by economic issues but by the even further strengthened political power of Xi Jinping, General Secretary of the Communist Party, President of the People’s Republic of China and also Chairman of the Central Military Commission. Xi received now even more personal power by some important constitutional changes than he already had created before, giving him the opportunity to continue his presidency also beyond 2022. Xi’s core status was also underlined by the new guiding ideology in the Constitution, expressed by the now included formulation that “the leadership of the Communist Party is the defining future of socialism with Chinese characteristics” – more exactly the “thoughts” of Xi Jinping.

In my view, “Chinese characteristics” also should be applied when it comes to economic analysis which so far has been made very superficially in our part of the world. Prime Minister Li Keqiang’s latest forecast for 2018 – predicting 6 ½ percent for GDP growth – does not imply any deceleration of economic growth as interpreted in a number of Western newspapers. Furthermore, a little bit higher GDP growth than predicted remains certainly in the cards – particularly for giving Xi recognition for successful economic leadership. However, Li’s comments on major risks seem to be more interesting, i.e. mainly his concerns about financial risks, poverty and the environment which are indeed embedded in a number of major goal conflicts – goal conflicts that I have pointed at frequently in this blog and published papers of mine.

Xi Jinping’s strengthened core leadership urges now for a number of analytical changes and attempts to find answers to difficult questions. Below, there are some examples:

¤  How will Xi handle relations to the U.S. and Trump’s protectionism?

¤  To what extent does Xi want to  stick completely to the reform plans by the Third Plenum from 2013 – and will there be new priorities and solutions to the related conflicts of goals?

¤  Now – with so much power in the hands of one single person but also rising direct personal responsibility – how determined will Xi handle potential failures or setbacks?

¤  How good are the chances of, finally, improving or even maintaining transparency in the potential  case of increasing problems – and what about the necessary qualitative development of statistics?

¤  Where could the domestic warning signals come from if things go in the wrong direction?

These are only a few examples and questions related to Xi’s strong leadership. It should be clear that also economic analysis – especially when applying a longer perspective – much more should be based on politics than in the past. Noting a certain number for GDP growth – even when exceeding (official) expectations – is about to become a (further) weakening guideline for future GDP growth and other macroeconomic forecasts. Careful political and – may be – psychological analysis has to be added to macroeconomic forecasts and conclusions.

Conditions are changing within China – and also China’s international relations. For this reason, economic analysis tools for China should be developed further as pointed at above. Official GDP growth is certainly not enough at all for analyzing trends in the Chinese economy.

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

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Political issues dominated the 13^th National People’s Congress (NPC), topped by the constitutional reform giving China’s leader Xi Jinping the possibility to remain in office also beyond 2022 which would not have been possible without this constitutional amendment. The re-election of Xi as China’s president and Prime Minister Li Keqiang’s re-endorsement were, of course, also important political events – not to forget the establishment of the new corruption-fighting super agency named National Supervision Commission.

When applying a purely economic and financial view on the results of the NPC, the unofficial upgrading of financial concerns and the increase of power for China’s central bank – the People’s Bank of China (PBoC) – seem to be the most important news to consider. Sure, one could read about quite some sharpened warnings by Xi and Li already in recent months – warnings that also were stressed very recently by the multinational central bank of the central banks, the BIS in Switzerland (www.bis.org/publ/qtrpdf/r_qt1803e.htm). But this time was – or rather is – different.

Despite the fact that official China tries to play down the very strong concerns of the BIS – where China by the way is a member – the very clear strengthening of the PBoC during the NPC convergation demonstrates all the same that China’s political leadership now worries more about the state of the financial sector than before. Now, the PBoC will be responsible for the macroprudential supervision of both China’s banks and insurance companies; it has also received the mandate to implement supervisory laws and regulations. For better decision-making, supervision of banks and insurance companies will be merged into the so-called China Banking and Insurance Regulatory Commission (CBIRC) under the aegis of the PBoC. The objective is obviously to create more efficient early warning signals and to implement well-working tools against misleading developments in the financial sector.

Altogether, the growing official awareness of structural problems in the financial sector and the approved improvements and changes of financial supervisory institutions have to be considered as positive. However, improvements of transparency should be achieved as well – whenever necessary and/or appropriate.

During the days of the NPC, a lot has been said by political leaders about the need of ever improving confidence. Better information on non-performing loans (NPL), shadow banks, new financial products and their risks should be part of such a strategy. The PBoC has now a good chance to contribute to a confidence-increasing development if China’s political leadership really wants to support such a positive change – and if a modern and forward-looking PBoC leader will succeed retiring, well-respected Governor Zhou Xiaochuan.

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

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