China Research

Recently, China held its fifth session of the 18^th Central Committee of the Communist Party, dealing with the 5-year plan for 2016-2020. Some results and plans deserve attention. Particularly striking is again that the Chinese political leaders focus on specific contributors to economic growth (GDP) and the quality of GDP growth. Quite a number of Chinese growth aspects could actually be picked from textbooks in economics from our part of the world.

Altogether, many intentions are good. However, three questions remain:

• How much of the plans can be achieved?
• Where and how do we find the evaluations of most plans? (Probably only by news picking).
• Can we rely on the achieved and published results?

In this brief blogg, I would like to focus on a few details from the 5-year plan:

1. GDP growth down
   Chinese leaders want to achieve at least 6.5 percent on average when it comes to GDP growth during 2016 and 2020 (in order to meet the objective to double GDP per capita between 2010 and 2020). Such a growth number would mean some official downsizing of GDP projections – but would be still quite alright (if we for a moment trust GDP statistics). President Xi Jinping pointed strongly at the importance of improved growth quality. This is in principle the right approach – but has not yet reached global financial markets. Will this analytical neglect ever change?
2. Poverty relief
   Today, still 70 million people are defined as poor by the Chinese. The official plan is to wipe out defined poverty completely by 2020.
3. More people to join middle-income class – green development, health and fight against corruption emphasized as growth factors
   Interdisciplinary policy approaches gain obviously momentum. Theoretically clearly a good orientation toward a better future.
4. Financial reforms
   In our last blog, we have already clarified that China only gradually will move toward a fully convertible currency; it could even last more than five years. It should also be mentioned that ambitious plans exist of a ”transparent and healthy capital market”. What will be the definition of ”transparent”?
5. FDI
   It should be noted that foreign direct investments (FDI) still receive official priority, both from abroad and by the Chinese to other countries.

Addendum:

Particular attention has been paid by political leaders during and after the congress to innovation and China’s new 2-children policy – both factors being considered as very important to future economic growth. This is certainly theoretically the right conclusion. However, we need to wait for developments in reality to see more exactly the real impact on China’s future GDP-growth trend.

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

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I often get questions by companies and journalists about future growth potential in Chinese regions and metropolitan areas. Historically, I have visited a number of these places myself, but certainly not all of them. For this reason, I am really glad that the Milken Institute recently has developed and published a geographical ranking called the ”Milken Institute Best-Performing Cities China Index”, ranking 34 large tier- 1 and tier-2 Chinese cities and totally 232, somewhat smaller so-called tier-3 cities.

Particularly encouraging is that the whole project has been conducted by Perry Wong from the Milken Institute. Perry Wong – whom I have known and appreciated for quite some time – is not only one the best regional economists in the United States – but he also is familiar with the language. Certainly an ideal combination for an analysis of the most successful and promising cities in China. I am sure that Perry is aware of the statistical limitations in China. However, I am also sure that he carefully considered the nine indicators that finally have been included in the index. An annually updating is planned.

Consequently, the ”Best Performing Cities China Index” for China should be a helpful tool for corporate decisions that concern (foreign) companies’ investments, sales and purchasing in China. I have been waiting for this kind of information for a long time.

       Ranking *

       First- and second-tier cities                 Third-tier cities

1. Chengdu                                               1.   Suzhou
2. Shanghai                                               2.   Nantong
3. Tianjin                                                3.   Yangzhou
4. Dalian                                                 4.   Suqian
5. Nanjing                                                5.   Taizhou
6. Hefei                                                  6.   Qingyang
7. Xiamen                                                 7.   Changzhou
8. Changchun                                            8.   Wuxi
9. Chongqing                                             9.   Ji’an
10. Shenzhen                                             10. Yichang

Source: Milken Institute, Santa Monica

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

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According to different articles in media – also at home – the conclusion could be made that China soon will be introducing full convertibility of its currency, the yuan. Such a step would, of course, have far-reaching consequences for all companies all over the globe dealing with China, Swedish companies included. In previous articles, I have always explained such a surprising and sudden step as risky and premature. Instead, I have been pleading strongly for a very gradual introduction of full convertibility of the Chinese currency. Therefore, the news from this morning made me quite astonished.

However, things do not seem to be that exciting. I have checked different Chinese sources – the press included – and have just found that ”China will gradually make the yuan convertible on the current account…” (Xinhua November 3). The ambitions to internationalize the yuan seem to be much higher at this stage of financial deregulation.

Here we go again: gradual deregulation is the melody of the Chinese. This is certainly the right way to move forward when it comes to financial cross-border deregulation. Improvements of the domestic financial market, however, are more urgent – and should timewise be put in the first place. Sequencing – i.e. domestic financial reforms before the complete opening-up of the capital account and full currency convertibility – matters also in this context.

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

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