China Research

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

Back to Start Page

Today, the two stock exchanges in China were closed again after having dropped by 7 percent. As I have been emphasizing many times on this page, developments like this should not be surprising at all. Finally, China has to pay for all the shortcomings in transparency and statistical quality. Markets cannot know how serious and sustained the Chinese growth problems really are.
Consequently, confidence in reasonable growth prospects is shrinking. Right or wrong, current behavior of financial markets is logical. For this reason, China should do everything to restore this lost confidence. Improvements take, of course, time. But certain steps can be taken any time soon.
For instance, by calculating and revising GDP numbers closer to reality. In other words, by getting to something else than a 6.9, 7.0 or 7.1 percent in GDP growth for the fourth quarter of 2015 and by allowing for more fluctuations and revisions between the quarters. Not to forget: it really should take more time to make the quarterly GDP calculations applicable than it is still the case.
I’m sure, the whole world will look very carefully at the GDP results for 2015 which probably will be presented already three weeks from now. No other country has such speedy statistical calculation process of GDP as China shows year after year. Or will there be a change already this time?

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

Back to Start Page

China finally made it. The International Monetary Fund (IMF) has now met China’s strong desire to get its currency – the renminbi (RMB) – accepted as the fifth currency of the IMF’s artificial currency basket by the name of Special Drawing Rights (SDR). Until now, SDRs contain only the U.S.dollar, the euro, the yen and the Pound Sterling.

Understandably, the Chinese are celebrating this event. Current Chinese enthusiasm reminds strongly of China’s entry into WTO exactly 14 years ago. International or global recognition is something Chinese politicians really appreciate. One should also add that China’s WTO entry – purely economically – most certainly was a much more important event than now becoming part of the SDR basket.

For this reason, it is not quite easy to understand the strongly praising words by Christine Lagarde, the head of the IMF. Lagarde said among other comments that “the decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy in the global financial system”. She adds officially that “it is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.”

I have my doubts about the prestigious way of presenting the RMB inclusion in the SDR by the IMF. Why is there so much noise about this step from both the IMF, Western players on financial markets and journalists? The laudation may be justified later on retrospectively – but not under current conditions. Five questions or arguments make me skeptical.

First, SDRs have currently not really an important function as an international reserve asset. Their market share is only a few percent (read more on this by Maurice Obstfeld, “The SDR as an International Reserve Asset – What Future?”, International Growth Centre, LSE, March 2011). Could it be the case that the IMF via the RMB entry now starts working for an active revival of this almost forgotten IMF tool? Something to remember: private institutions do not hold or use SDRs.

Second, has the RMB inclusion mainly happened for political – and not for economic – reasons?

Third, the presented glamour around the IMF decision puts too much emphasis on China’s international financial relations whereas the need of further domestic financial reforms currently is much higher and more urgent – despite a number of improvements at home more recently, particularly when it comes to the processes of setting interest rates.

Fourth, how substantial are the accomplished improvements of the financial system – which Lagarde so strongly pointed at during the press conference – in Chinese reality? How much are they worth in relation to all the potential Chinese bad loans of the official and the shadow banking sector that we have so little information about? What about the real size of the local government debt? What about bubbles in the housing market and local industry parks? And where are the improvements in Chinese transparency that Lagarde has been talking about during the press conference? I haven’t found very much myself, particularly not in the statistics that are analytically important to China and the rest of the world.

Fifth, it can be discussed whether RMB really had met the second criterion for joining the SDR which demands that the currency is “freely usable”. I could not find any clear definition of what is called “freely usable” in this specific Chinese context. Did I miss something?

Initially, i.e. from October 2016 onward, the RMB is given 10.92 % in the revised SDR basket. The U.S. dollar received 41.73 % (before 41.90 %), the euro 30.93 % (before 37.40 %), the yen 8.33 % (before 9.40 %) and the British pound 8.09 % (before 11.30 %). China’s new share seems to be relatively high, compared to both the euro, the yen and the British pound. And why did the euro and the pound lose that much ground whereas the U.S.dollar remained roughly unchanged? Sure, I know there is a revised formula for the share calculations. But how scientifically and statistically strong are the criteria of the components of the new formula? The information given by the IMF, however, still keeps a number of answers quite open. More research on this issue could be interesting (which I may deal with myself).

I know from unofficial sources that the ECB has been very irritated about the considerably decreasing weight of the euro in the revised SDR basket. Information to the ECB about the forthcoming downgrading of the euro in the SDR system did obviously not work very well – an issue that the IMF probably could have handled more smoothly.

To avoid misunderstandings, nobody can blame China for having tried and succeeded. That’s not the point. The point is the insufficient transparency of the IMF in certain parts of the decision process. What about the theory that the IMF – by sticking strongly to this recognition of China – mainly intended to encourage China to speed up and/or intensify further economic and financial reforms?

Anyway, for the time being, financial improvements and reforms of the domestic financial system will be much more important to China’s future than ambitiously deregulating the cross-border capital balance. Hereby, the issue of sequencing should not be forgotten – i.e. implementing the reforms in the right order (look here, for example at the works of S. Edwards and P-R Agénor).

Still valid also for China: stability begins at home!

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

Back to Start Page