China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

An interesting impression from HongKong

June 22, 2016

The economic performance of Hong Kong is quite poor these days. The PMI shows that the private sector should do much better. Tourism and retail sales are also badly hit – partly reflecting the slowdown of the mainland economy. Major progress does not seem to be possible in the forthcoming months or quarters.

Most analysts dealing with Asia are probably aware of these problems in Hong Kong. I recently started talking with a businessman from Hong Kong about his city during a flight back to Stockholm, touching upon quite a different topic. He informed me about a development at home which really was striking me.

According to my neighbor on this flight, one third of Hong Kong’s population will be 65 years or older by 2035. This I knew. But I was not aware of the enormous need of apartments for the retired residents who are not sick or disabled – who are indeed healthy. There is obviously a major apartment shortage for these people.

This need urges for creative new business plans, incentives, solutions, practical planning, and partnerships for this major residential construction.  Could Swedish companies participate in these developments?  If yes and they were successful, a lot of the experience from Hong Kong could be applied to Mainland China simultaneously or shortly after the Hong Kong experience. Also to Stockholm?

Despite the current problems in the Chinese economy, we should not forget all the future opportunities in Asia and Greater China. Many of them are still there.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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Re-visited (2): China’s status as a market economy

June 1, 2016

The topic of China’s future status as a market economy (or not) is getting hot in Brussels and some EU-member countries – but not really in Sweden. Recently, the European Parliament put a lot of pressure on the European Commission, expressed in a resolution that the EU should not grant China the attractive status as a market economy any time soon (see also blog contributions by Langhammer, March 2, and Fromlet, April 26, in www.chinaresearch.se).

Fifteen years after WTO entry in 2001, Chinese officials think that being accepted as a market economy should happen more or less automatically – a position that the European Parliament does not want to share. This rejection has, however, to a high extent political angles. This includes the possibilities of trade impediments and sanctions against China when rules for cross-border trade obviously have been violated, particularly when it comes to price dumping. There are certainly also labor market considerations.

As I have argued before, the market-economy decision should exclusively be based on the answer to the question if China really meets the economic and institutional criteria of a market economy (or not). The whole issue should not be more complicated than this.

In other words: Does China stick to the rules of a market economy – or not?

 

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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China – bad loans could become a malign neglect

May 16, 2016

Recently, I read again that more skeptical analysts nowadays exaggerate their concerns about China. These words came – not very surprisingly – from a prominent hedge fund manager. I guess that this guy never had looked somewhat deeper into the Chinese debt problem.

I easily can agree that Chinese non-performing loans are a conundrum. However, the risks are most probably much more on the worse side than to the better. The Chinese have a gigantic debt problem which has been increasing during and in the aftermath of the subprime crisis to unsustainable levels, currently 200 percent according to official estimates and may be around 250-260 percent of GDP according to private sources. Nobody knows the exact number because of unclear definitions of loans, unknown local debt amounts in reality, implicit central government debt and hidden credit volumes of the shadow banks. I feel worried about this black box, particularly when considering that the above-mentioned credit ratio in 2008 still was as low as around 115 percent.

The credit boom contributed to artificial or doped GDP growth in the past seven years or so which certainly cannot be maintained anymore. Still, financing Chinese debt is not in danger since the money is created domestically without net borrowing abroad (as a result of the positive balance on current account). But what happens the day when China possibly cannot create surpluses in the current account anymore and/or the capital balance has been widely or completely deregulated? In a bad or worst case scenario – with free cross-border capital movements and debt crisis – bank refinancing could become much more difficult or even impossible.

There are, consequently three major risks arising from the Chinese credit boom:

¤  reduction of GDP growth if/when credit growth is slowing down,

¤  delayed or even strongly reduced deregulation plans of the cross-border capital balance and other financial reforms,

¤  explosion of an asset price bubble (property markets?).

Sure, nobody knows the end of this story. In my eyes, however, the analysis of the Chinese debt problem is widely a malign neglect, supported by the obviously too politically driven – quite benign – China analysis of the IMF.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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