China Research

China’s currency reserves are shrinking, in January again by almost USD 100 billion after an even somewhat higher amount in December. This means in absolute numbers a downturn from the peak of 3993 billion in June 2014 to 3230 billion in January this year – a downturn that is more than USD 750 billion! This is quite an amount.

Two factors are reflected by this development. First, the weakening Chinese exports play certainly a role. More important for the latest development, however, is the fact that China’s central bank – the PBOC – still intervenes on currency markets to avoid a too obvious weakening of the currency RMB. Chinese leaders have recently announced quite frequently that they do not want such a distorting trend.

Following the textbooks and historical experience, they are right. During all the years I have been watching and analyzing currency markets, I only can remember a few successful interventions for a persistent support of a currency (which also the Riksbank should know!):

¤ either when several central banks acted together in a concerted action (by, e.g., the Plaza Accord),

¤ or/and when a new direction of the currency already had become visible.

The so-called Asian crisis in the end of the 1990s crisis may also help to support memory. I remember very well the comments by financial markets that large current-account deficits in Thailand and Malaysia at that time were not very challenging because of the relative high foreign reserves these two countries had. These buffers, however, did not prevent these two – and other – Asian countries from major falls of their currencies. Being under growing pressure can mean much faster currency outflows than initially expected.

Sure, China still controls its cross-border capital flows – but China should not speed up cross-border capital deregulation too ambitiously. The main objective – also for the currency – should be for the time being to do everything possible to increase transparency, credibility of economic policy and statistics. These factors are, of course, interconnected.

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

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This morning, China’s GDP-growth figures were published for 2015 as a whole and for the past quarter (Q4). This happened even one day earlier than last year – and certainly very early in a new year when referring to Western publication habits. So, why is that GDP publication done so early again?

In my view, there is particularly one explication for this strange behavior: the Chinese had the ambition to present quite a decent growth number without delay as an attempt to reduce still ongoing fears of stock market players and other – domestic and foreign – decision-makers who all felt increasingly concerned in recent weeks about growth developments and prospects. Until yesterday, I said to everybody who asked me about the probable GDP growth in Q4 that it will be 7 percent +/- 0.1 percent – because ”it has to be there”. This turned out to be the case.

The “new normal”

“It has to be there” came up because I concluded that this strategy would be applied in order to calm financial markets – but also to present China as positive as possible for the whole world, especially as a host nation for the IIF-G20 conference in February in Shanghai. Therefore a strict application of behavioral economics seems to be motivated also in this context – and should not be underestimated. Psychology is needed when analyzing China.

Sure, some downsizing of growth perspectives is regarded as an unavoidable precondition for future (medium- and long-term) economic progress by major parts of the Chinese people (and analysts). But the “new normal” – as Chinese political leaders call the dampened output caused by moving growth from exports and investment to more consumption (services included) – should certainly not be too low. Close to 7 percent now and around 6 ½ percent each coming year in this decade is officially considered to be about right (in Swedish: “lagom” which is an almost untranslatable word). The government also talks about the objective of a “well-off society by 2020”, the final year of the recently started Five-Year Plan. “Well-off society” certainly includes a development without major social tensions – and such a performance assumes a kind of reasonable GDP growth mentioned above.

Purely numerically regarded, GDP statistics published today are still in line with the objective of a well-off society (GDP growth 2015: 6.9 % compared to 2014, 7.3 % in 2014 compared to 2013; 2015q4: 6.8 % yoy, 2015 q3: 6.9 %, 2015 q2: 7.0 %, 2015 q1: 7.0 %). The annual GDP-growth rate below 7.0 percent means to me that the real development last year was weaker than this when regarding China’s economic development as a whole and the major falls of commodity prices. There is an obvious risk that the officially expressed growth objective – around 6.5 percent for every year until the end of the decade – may lead to (somewhat) fudged numbers in the future as well. This seems to be the experience of the past. Hopefully, I am wrong on this point.

As I wrote in my previous blog piece on China, it would increase the credibility of GDP statistics if the Chinese allowed for – or managed – more visible fluctuations and revisions of quarterly GDP growth than so far. Such a change would be natural and mean important progress.

What do the figures from today’s GDP statistics tell us?

Obviously, all the quarterly GDP-growth numbers of 2015 are very close to each other. Consequently, the question comes up again: are the published GDP data for the past year too positive to be true? There seems to be good reason to believe so.

First, published GDP-growth rates have – technically expressed year on year – (almost) a linear behavior. This seems to be unrealistic – as pointed out in previous blogs of mine. Second, why is the accounting of GDP and its aggregates – inventories included – still such a conundrum and incomplete in official releases? Third, also recent research shows that certain composed sets of non-GDP indicators still tell more about economic activity in China than GDP alone – despite some supposed, ongoing improvements of GDP quality in the past few years, at least according to Fernald, Hsu and Spiegel (“Is China fudging its figures? Evidence from trading partner data”, BOFIT Discussion Papers, 2015, No 29; these authors have constructed an index consisting of electricity consumption, rail freight, raw materials supply and retail sales, finding out that adding GDP only “modestly” gives more information than the index – a conclusion which actually is very much in line with Prime Minister Li Keqiang’s alternative activity index to GDP from his time as a provincial leader in Liaoning).

Services matter

It also should be mentioned that the share of services in relation to total production has been increasing further during 2015. Hopefully, these statistical numbers belong to the more correct ones. If this really was the case, the restructuring of the Chinese economy at least partially would be on the right track. However, considerably more high-tech production and efficiency should be achieved by industry as well.

In the past 10-20 years, China’s economy has been benefiting a lot from the nation’s optimism and forward spirit. In recent weeks – on the other hand – doubts about the future became visible, expressed by the pressure on the stock exchange and the currency CNY. Psychology matters also in China. Too many analysts still have not dealt sufficiently with this quite simple conclusion.

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

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