China Research

Negative comments on China and its economy are currently increasing. Certain analysts even claim that the next global economic and/or financial crisis will have its start in China but without giving any timing. This brings me to John Frankenstein – a Hong Kong professor and journalist – who often in the 1990s explained to me his own “Frankenstein’s Law”, not really more than the following question: “What do we really know about China?”

The same question still can be raised, followed by “what do we really know about future politics by the General Secretary of the CCP and President of China, Xi Jinping?” Certainly not enough to be provided with more knowledge than so far about China in the forthcoming five years – and thus, we do not know enough about future conditions for foreign (Swedish) companies in China.

More lately, increasing cases of impediments for foreign companies in China are reported. These cases, however, reflect only individual (micro) examples. But what is really known about all this in a larger (macro) context? More examples are given by the European Union Chamber of Commerce in China with its 1600 members, more lately no less than 795 recommendations (Position Papers, 2017/2018, http://www.europeanchamber.com.cn/en/publications-position-paper#download-table-293). Considering all this, improvements are certainly desirable and necessary.

We do know that China normally wants to reform things slowly. This certainly includes also many economic reforms. But will there be new or changing priorities? What about future reforms of the financial system? What does the fight against corruption mean in more practical terms? Could all this make foreign business in China more complicated?

As a concrete question along with Xi’s considerable strengthening of his own position is whether this change may impede more transparency. So far, there was much more of a collective political leadership within the Standing Committee. The new, almighty position of Xi Jinping, however, can possibly lower the speed of moves to more transparency because of this new concentration of individual power. More individual power also means more individual responsibility. We will see.

I am not only talking about lagging transparency when it comes to political decision-making but also related to a maintained or even growing political influence on economic statistics (particularly in a slowing economy). This Chinese statistical phenomenon is always a topic to complain about; or how would one comment that the recent ratio of non-performing bank loans (NPL) at the end of the third quarter 2017 exactly remained on the same spot as three months earlier (1.74 percent of all bank credit volumes). Again: too much accuracy.

Altogether, there is an increasing need of analyzing conditions for (foreign) business in China. Both micro and macro analysis are needed. However, only one side of China has been analyzed above. Not to forget: The other side of the coin of developing China into an economic superpower is still in place. Consequently, China remains exciting – with both opportunities and risks, also on the corporate level.

 

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

 

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Now we also have the answers to the three – maybe four – most important questions we had ahead of the National Congress: Who will be the new members of the Standing Committee of the Politburo of the Chinese Communist Party? Will China’s Core Leader Xi Jinping introduce a possible successor? Will the number of the members of the Standing Committee be enlarged? How may future economic policy look like?

Some answered  questions
First – as expected – the number of members of the Standing Committee stayed at seven which easily can be explained by Xi’s strengthened position and therefore in his eyes no real need to enlarge the number of the highest decision-makers.

Second, Xi Jinping found obviously no reason to introduce his probable successor. This fact strengthens the assumption that he may run for a third term as China’s core leader after 2022. This actually would be a new phenomenon in modern China politics. It may be the case that Xi thinks that he may need at least one more term for guiding China on the necessary track to a real superpower status.

Third, the five new members of the Standing Committees are, of course, well received in China but also visibly in (parts of) the Western hemisphere. This may be also due to the re-appointment of Prime Minister Li Keqiang who has a relatively good reputation outside China as a reform-minded executive of economic policy reforms.

One important question, however, remains unanswered. What do the new core leadership of Xi and the obviously somewhat weakened position of Li mean to the future course and determination of economic policy reforms? Economic history gives us lots of examples that demonstrate that very strong individual leaders at some point run difficulties compared to a democratic or stricter collective political leadership. It may – psychologically – become more difficult for a strong leader to reverse bad or wrong policy decisions. And opposite or questioning positions may be expressed much more carefully vis-à-vis the strong leader.

So far, the Standing Committee itself was a kind of high-level decision forum also for different views (which I many times in China got explained as the Chinese version of democracy). The new model with Xi Jinping’s core leadership – which now also is anchored in the constitution – makes it even more urgent to regularly follow developments in China  for foreign (Swedish) corporations, also as regards economic policy. Future Chinese economic policy may become more uncertain – but not necessarily.

That is exactly why regular China analysis will be needed – and not only in times when corporations outside China are about to prepare a new budget for activities in China for the coming year.

 

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

 

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Certain Western analysts have judged the opening speech of Xi Jinping, Chairman of the Communist Party and President of China, at the National Congress as too general and leadership-oriented.

According to the point of being too general, I do not really agree. One can find a lot of strategic ideas and more concrete details in Xi’s recent speech (and much more than we are used to get from political leaders directly after elections in our part of the world). But not very much of what Xi said on October 18 is really new. However – at this stage of creating the modern China – it also feels good to get certain objectives and commenced reforms repeated.

As regards the second observation, I only can add the following question: Had anyone expected something different after Xi’s strong own political positioning – and also from the CP itself?

Xi Jinping reconfirms strongly the need of building “a great modern socialist country” and of “ensuring the Party”s leadership over all work”. In the short run, Xi wants to see China as a “moderately prosperous country” by 2020. Then he wants China to go for  modernized socialism in two steps: the first step during 2020 to 2035 in basic terms and the second one from 2035 to around 2050 by changing China into a “prosperous, strong, democratic, culturally advanced, harmonious, and beautiful country”. The meaning of “democratic” is not further explained.

In other words: there is no intention to abolish socialism and Marxism – and the goal to find a modern Chinese stance of the socialist ideology remains in place (which Xi, by the way, recommends to other developing countries, too). Xi also refers to apply the rule of law and more openness in the society (economy) which both hopefully will be given more concrete emphasis in the future. The continuous fight against corruption also receives priority by Xi, the elimination of poverty in the forthcoming years likewise.

Further marketization of the economy
And what did Xi say about the Chinese economy? Quite a lot actually – and somewhat more than I expected myself. Let me briefly sum up most of the important points of the future being mentioned by China”s political “core leader” Xi Jinping for the National Congress:

– globalization (“stick together through thick and thin”),

– better economic policy co-ordination,

– further supply-side reforms (better access to goods/services and downsizing of SoEs),

– deepening institutional reforms (“zero corruption tolerance”),

– the major infrastructure project “Belt and Road “,

– significant easening of market access for FDI in China,

– international promotion and co-operation on production capacity,

– supporting the growth of private business,

– making SoEs “stronger, better and bigger”,

– breaking administrative monopolies and favoring market prices,

– improvements of manufacturing quality and technological development,

– improvements of the state-owned sector,

– boosting the role of private consumption in GDP growth,

– making China’s interest and exchange rates more market-based,

– improvements of the financial regulatory finance system,

– reforms of financial systems, etc.

The two key issues remain open. How much of these – mostly – reasonable objectives will be implemented in reality? And how much has been achieved so far?

Unclear areas
Thus, quite a number of reform areas has to be defined and developed further (despite the satisfactory approach on paper). This shortcoming could have been expected.

Of course, it is still hard to see what the concentration of political power to Xi Jinping and the composition of the new Standing Committee of the Politburo will mean to future reforms.

Contradictory is currently how the more lately somewhat increasing public influence on parts of Corporate China is in line with the clearly outspoken marketization  plans. The marketization of financial markets is still insufficiently transparent.

Within the domestic banking system, there seems to be more competition because of the shrinking margins. Capital markets on the other hand remain underdeveloped – despite some progress in recent years. This is true of both the stock market and the bond market – with both markets suffering from insufficient liquiduty and turnover. Linked to this issue is also the challenging public and private debt situation. The National Congress has not decreased my worries in this specific respect.

Altogether: More continuous analysis of China’s politics and economic developments will be inevitable if one tries to understand China and the world economy.

 

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

 

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