China Research

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
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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
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Economic reporting from China to foreigners has certainly improved quite a lot during the past 10-15 years. This is, of course, positive. However, these improvements seem to be mostly appreciated by foreigners who are not looking for special statistical details or more far-reaching results from social or economic research.

Certain daily Chinese newspapers have nowadays printed and even electronic versions in English, frequently with interesting (economic) news. But there are often annoying restrictions or impediments when more detailed information is needed. Trying to find more detailed access to the original authors or publishers of interesting reports usually tends to fail – contrary to what we are used to in our part of the world from our own institutions.

This described problem is indeed not in line for a country aiming at becoming the largest economy in the world and – nota bene – at being recognized as a market economy. So far, I have not even taken up Chinese economic statistics and reports in pure quality terms. However, qualitative shortcomings in these areas can only be found and improved when decent transparency already is in place. Transparency is the key to many positive developments!

Our latest China Panel Survey (https://blogg.lnu.se/china-research/files/2018/05/ChinaPanelSurvey-May-2018.pdf) from May this year still sees the quality of economic statistics at insufficient 4.1 (on a scale from 1 – 10, 10 = very good). There is no improvement in the past few years, according to our experts. And only few China analysts in OECD countries complain about this disappointing institutional development – which probably adds further to China’s lagging analytical transparency.

Perhaps, there is too much semi-knowledge about China in our part of the world – also with professional analysts at financial institutions, political organizations and corporate organizations outside China. Semi-knowledge may induce fewer complaints.

Find more about semi-knowledge in my next China blog!

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

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