China Research

After the German general election, China’s National Congress will be another major globalt political event. The various sessions start on October 18, revealing also the names of the new Standing Committee of the Politburo. This will be an extremely important event and will give us further indications on China’s future economic reform policy.

It also seems to be a safe prediction that the two remaining two members of the Standing Committee, President Xi Jinping and Prime Minister Li Keqiang want to present China’s economy in a positive shape in the middle of October.

Looking at China’s latest economic statistics, these ambitions can be met – at least on the paper. Some examples can be mentioned:

– GDP +6.9%, q1-2 2017, stabilized growth downturn (2010: +10.6%);

– industrial production +6.8%, 2017/1-7, probably reflecting structural progress in industry (2010: +15.7%);

– retail sales +10.7%, 2017/1-7, shrinking growth but still not bad (2010: +23.3%);

– fixed investment +8.3%, 2017/1-7, necessary slowdown (2010: +23.8);

– gross exports on dampening trend but in 2017 slightly stronger than in 2016 – and still surplus in the current account in July 2017 (+0.7% compared to 3.9% of GDP in 2010);

– stabilization of the still very high currency reserves after a period of shrinking numbers (billion 3081 USD in July 2017).

When it comes to government budget deficits, it is often unclear whether local governments are included in statistics or not (usually not because of more favorable debt numbers for the central government). Officially, the Chinese consider public fiscal debt being under control.

To summarize, official statistics confirm that a remarkable and officially desirable downsizing from the overheating year of 2010 has been taking place.

But how much in reality? This we really cannot know because of all the statistical shortcomings. Anyway, China’s political leaders will present an economy at the National Congress six weeks from now in line with objectives and positive expectations.

There will be no alternative to this description – despite still existing needs od structural changes and reforms. However, most of these structural challenges and reform needs will be mentioned by the political leaders. This kind of economic openness has indeed improved in the past few years.

Hopefully, I won’t be wrong on this latter point.

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

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Back from a long summer vacation, I have indeed a feeling that I missed a lot of interesting news about China. In an attempt to catch up with my information deficit, I found some striking news. Let me mention a few.

1. GDP remains at its ( easily) predictable growth path

GDP growth for the second quarter came in at 6.9 percent (yoy). Some Western analysts claimed that this was higher than expected. However, what are these small deviations from expectations really worth when we simultaneously know that Chinese GDP statistics hardly fluctuate and regularly land in line with forecasts and objectives of the politicians and government authorities?

There is no doubt that the official growth objective for 2017 will be met (“6.5 percent or somewhat more”) – particularly in the light of this fall’s Party Congress. No major (economic) accidents are “allowed” to happen any time soon.

Probably five new members of the the so-called Standing Committee will be appointed during the Party Congress to join the only continuing top leaders of the current Standing Committee, i. e. President Xi Jinping and Prime Minister Li Keqiang. It is important to keep in mind that the Standing Committee clearly must be regarded as the most important decision-making institution in China.

Thus, the importance of this forthcoming event in – presumably – October should not be underestimated. The future of the economic reform process will to a high extent depend on the new names in the Standing Committee and their relations to Xi and Li .

2. Strong rise of profits in state firms

According to the Ministry of Finance China’s state-owned enterprises (SoEs) increased their profits in the first half of 2017 by strong 23 percent due to “structural supply side reforms”. (Supply side policy means in China capacity adaptations – mostly reductions – and improved/new access to goods and services. In our part of the world, however, we see supply policy more aiming at more fundamental, growth-supporting structural conditions for private households, companies and governments).

However, China’s has already decided on an ambitious strategy for SoEs but as late as during the so-called Third Plenum in fall 2013. Thus, the above-mentioned remarkable increase of profits should have come after only 2 1/2-3 years of structural changes – if we trust the calculations. Is there reason to do so? Some doubts are probably motivated – despite the obvious downsizing of particularly not really competitive exporting SoEs.

3. New China-Europe transport links

Really amazing news was the message about the introduction of the freight train service between Zhengzhou (Henan province) and Munich. This can be regarded as another little step toward the verification of the so-called Belt and Road initiative, an extremly ambitious China-led project aiming at the support of transports and economic growth between China and as far as to Western Europe.

While reading the article about this issue, I unfortunately got my doubts again about the quality of economic information.

Nothing very serious – but one has to wonder how the reporting Chinese agency can put together a description like this in the same article: “Munich is renowned for its auto industry and is home to brands such as BMW, Porsche, Mercedes Benz, and Bosch.”

However, all the three latter companies have their main offices in Stuttgart. This is not really a secret.

4. Surprising expansion of Huawei

In the first half of 2017, the major Chinese cell-phone producer Huawei achieved more or less the same market share as the pioneers of Apple. This is a surprising development – at least in my eyes.

We have to learn and to accept that China increasingly will surprise with globally successful companies – even if it still is hard to predict the velocity of such a development. But ears and eyes should be kept open.

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

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Here we have a topic I frequently use to discuss with students and companies. Two factors play in this context a decisive role for the corporate sector: the geographical location of the headquarters (home country) and the volume of activities.

If we concentrate the answer on a non-Chinese and probably not very small company, the following areas or departments of the company may feel or will/may be affected by the results of the new economic policy (if business with China is not too limited): strategy, sales (marketing), purchasing, product development, production, finance, human capital formation, investor relations, etc., i.e. major parts of the company in the case of quite extensive business with China. However, smaller foreign companies with more limited commercial relations to China may be affected by China’s economic reform policy as well.

The composition of Chinese imports from the developed world will in the future change a lot compared to the past two or three decades – the demand patterns of the young and urban population included. The application of digitalization will certainly increase rapidly in the – so far – second largest economy in the world. Digitalization will also affect many production processes. China wants to establish itself as a technological and an economic superpower – and means it seriously.

Consequently, many foreign companies will be forced to develop new business models and/or products for China. In certain cases may, for example, even future or potential reforms of the Chinese tax and fee system or educational reforms become parameters of interest for Western corporations.

It should be added that also many Chinese companies will have to change their business models, either to maintain current good positions, to expand in the future or in order to survive. This angle should not be neglected – and it will also affect purchasing managers in OECD countries. Competition within China will increase, too.

More could be mentioned. The objective of this little article is not to give a comprehensive answer to all possible effects of China’s new economic policy on corporate strategies and decisions in the rest of the world – but to indicate that there will be effects.

However, all the different kinds and volumes of these reform effects cannot be singled out today. More hints may come from the – probably – five new members of the Politburo’s Standing Committee. They will be selected at the 19^th National Congress of the Communist Party of China this coming fall.

Do not hesitate to continuously watch political developments in China. The link to business with China is obvious and will become increasingly important!

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

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