China Research

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

Was the current China crisis predictable?

October 13, 2023

Presentation by Hubert Fromlet, Linnaeus University (Linnéuniversitetet), at the Baltic Sea Region/Emerging Markets and China Seminar 2023 in Kalmar

The Chinese economy develops currently very disappointingly. Market expectations from earlier this year were obviously not met – and certainly not positive expectations from earlier years either.

The following question remains interesting: Was the current economic crisis predictable? The answer should be – “yes indeed”.

Too little profound analysis in time

China became the number 1 exporting nation in 2009 and the number 1 total GDP nation in 2016 (in PPP terms). Thus, there were many years to increase knowledge about China. However, foreign (Western) analytical curiosity about the Chinese economic system remained by far too limited ever since the beginning of China’s era as an economic superpower. In many cases, final enlightenment happened as late as in 2022 during the Chinese covid-19 disaster or only this year caused by the serious real estate crisis.

Since the millennium change, I have singled out four kinds of foreign China analysts. They are

¤ specialized researchers at universities and institutes with focus on China,

¤ full-time and part-time China journalists at home or with location in China,

¤ politicians and ambassadors with long-time experience from China,

¤ analysts on global financial markets and forecasters without special analytical skills and focus on China.

Considering these four groups, it seems to be clear that there has been a number of experts indeed well understanding the forthcoming problems in the Chinese economy – but not so many people could be counted. This implies that financial markets – generally expressed – during many years have been standing for the lion share of the foreign interpretation of the Chinese economy; unfortunately, naively based on (wrong) Chinese statistics and the neglect of poor transparency. However, a positive change may be started in the foreseeable future – hopefully giving us conditions for better China analysis also on a global scale.

The visible and neglected warnings signals

One of the main difficulties for economists or other risk managers is the question about the timing of possibly bursting (financial) bubbles or the misery of other serious accidents. This is mostly impossible since aggravating developments usually happen “step by step”. However, “step by step” or gradually should not make managers to forget about a quite early stressed problem or risk. Let’s now turn to some recognizable early warning signals (which may have been given as much as 15-20 years ago):

Warning signals for China’s economy in the past decade   

About bad transparency:

Bernanke/Olson, 2016,

Fromlet, 2013,

Comment: Persistent bad transparency impacts negatively on potential growth.

About poor statistical standards

Ravallion/Jalan, 1999,

Fromlet, 2013, see above

Comment: Statistical shortcomings could/can be found when it comes, for example, to GDP, (youth) unemployment, inflation, government debt and particularly local debt, housing market, bad loans of the banks, subsidies, government support of state-owned companies etc. These shortcomings make economic policy too difficult.

About previous and the current real estate crises

Lu Gao (ADB), 2010,

Fromlet, 2014,[1].pdf?sequence=1

Comment: Developments on Chinese housing and commercial real estate markets should permanently be watched very closely since these two sectors mean so much to the whole economy.

About banks and financial markets

Poon/Wu/Ahmad, 2023,,report%20from%20S%26P%20Global%20Ratings.

Fromlet, 2001,

Comment: Financial risks will remain a top issue for China analysis in the foreseeable future – also in a psychological respect.

About political developments

McBride/Chatzky, 2019,

Fromlet, 2017 (October 26),

Comment: Politics and the economy belong together, particularly in a country like China.


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


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Tough discussions in Germany on Chinese FDI

October 31, 2022

Germany is the largest economy in Europe and the EU. For this reason, the recently intensified German debate about the planned Chinese FDI in the harbor of Hamburg looks both interesting and dramatic. Fundamentally, the real reason for this domestic political conflict is mainly about Germany’s future political and economic dependence on China.

The original plan was to allow the Chinese shipping company COSCO to purchase 35 percent of one of the terminals named Tollerort. However, even within the German government a lot of opposition was raised against the planned Chinese harbor deal, particularly by the Greens – thus also criticizing German Chancellor Olaf Scholz who initially supported the 35-percent deal. Finally, the government agreed with a compromise to allow a Chinese participation of 24.9 percent – i.e. an enforced change from a strategic investment in line with the BRI-plans to a financial investment. (BRI means Belt and Road Initiative, see my article in Swedish in Ekonomisk Debatt

After dependence on Russia a heavier dependence on China?

In the past few months, former German governments and top politicians have been sharply criticized for their contributions to the burdening gas dependence on Russia. This political failure explains very well German fears of a future, even more challenging dependence on China. Maybe, the German concerns have been enlarged further by the latest political powerful political manifestations at the Chinese Communist Party (CCP) Congress.

It should be added that Germany’s dependence on China already now appears purely economically much larger than it ever has been on Russia – i.e. the Russian war consequences excluded. Two important questions show up in this context:

¤ Will other European countries join German skepticism against Chinese outbound FDI?

¤ Will European companies voluntarily re-consider their (planned) FDI strategy in China?

We will see. Obviously, German Chancellor Scholz does not want to close the door to China completely at this point. This week he will visit China together with a delegation of German business leaders.


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


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”The Chinese economy and its conundrums”

October 16, 2018

Presentation by Hubert Fromlet, affiliated professor at Linnaeus University (Linnéuniversitetet), Kalmar/Växjö at the Baltic Sea Region and China Day 2018, October 16

According to a large number of conclusions on the Chinese economy – in most cases coming from Western press and financial economists – the current state and also the future of the Chinese economy seem to be quite obvious. However, this view should be modified. My own experience – after having studied the Chinese economy during several decades – looks somewhat different. I would rather differentiate conclusions and forecasts on the Chinese economy between

¤ more or less obvious ones (little or no conundrum),
¤ more or less uncertain ones – but still logical and understandable (limited conundrum),
¤ more or less intransparent ones (total conundrum).

Applying the above-mentioned differentiation to current conditions, almost any evaluation of the Chinese economy becomes more complicated. At the same time, it becomes more obvious that the Chinese economy cannot be analyzed only occasionally. Instead, regular studies of the Chinese economy must be considered as inevitable.

Below, there is an attempt to use the suggested conundrum classifications in a practical and updated sense. This kind of analysis pattern could serve as a kind of analytical guideline for corporations and financial experts.

More or less obvious interpretations/conclusions

¤ Ongoing slowdown of the Chinese economy:
Statistics still do not show a visible weakening of the Chinese economy. GDP growth uses to vary with only around 0.1 percent from quarter to quarter since around three years ago. Official objectives and expectations are met. This phenomenon is very unusual, also for emerging economies. We are waiting impatiently for official GDP statistics for Q3 on October 19 – and the “allowed” deviation from (official) expectations and forecasts.

Also the Purchasing Managers Index (PMI) appears too stable; numbers above and below the borderline of 50 are interpreted and defined too strictly. The current official NBS number of the PMI at 50.8 is therefore not safely above the positive borderline since the different corporate answers to the PMI diffusion index do not measure the strength of possible changes on individual corporate levels – but only the categories “stronger/unchanged/weaker”.

My own interpretation of the currently (somewhat) decelerating growth path of the Chinese economy is preferably based on official statements, speeches and interesting headlines in the Chinese press. Some recent examples can be given here.

“China to adopt more proactive fiscal policy” (Xinhua Oct 8) – a signal for the need of some growth injection

“China cuts banks’ cash reserve requirement” (China Daily Oct 8) – the fourth cut in 2018 points at GDP worries

“Manufacturing growth slower in September…partly due to weakened export performance” (China Daily, Oct 1)

“No need to worry about China’s economy…” (China Daily, Oct 1) – why saying so if there are no concerns?

It should not be neglected that these quoted – and other – articles also include encouraging comments on the resilience and modernization of the manufacturing industry and the assumed ongoing progress of the service sector. But in my view, Prime Minister Li Keqiang by using the words “current pressure on the economy” should be taken more seriously than the more positive comments by less highly ranked officials.

On the other hand, it is indeed obvious that China is working hard on education and innovation systems, co-operation with foreign countries and companies included. This is badly needed for moving forward. The New Growth Theory (NGT) of this year’s Nobel Prize winner Paul Romer is at least partly applied in China.

“Chinese premier says foreign talent important to China’s innovation” (China Daily, October 1)a relatively safe conclusion about Chinese awareness of what is needed to compete globally.

More or less uncertain interpretations/conclusions

¤ The current state of economic reforms – we have too little knowledge about it:
In November 2013, the Chinese political leadership’s Third Plenum set up 60, quite concrete strategic objectives – to be met by 2020. Most of the objectives mean marketization and improved institutions – in line with the broad definition of institutions by Nobel Prize winner Douglass North; they would bring China forward substantially if implemented ambitiously.

However, more concrete discussions or presentations on already achieved reform progress are still absent or extremely rare. Transparency is by far too limited also in this specific respect (even if it has been improving on trend at least for the economy). This is a serious shortcoming and could damage China’s image in the whole world – and criticism may be at some point even become wrong or unfair once improvements really have taken place. Comments on the strategic reform policy issues are usually formulated like this:

The central bank “will optimize financing and credit structure so that the private sector will be better served” (Xinhua Sep 30) – confirmation that the private sector should receive better financial conditions, but how/when?

“Tasks set out for advancing law-based governance in China”(Xinhua, Oct 4).

¤ Correct indebtedness probably the largest conundrum – psychological links not to forget:
Here we come to parts of the Chinese economy where guiding conclusions seem to be impossible. But more or less totally lagging transparency also means that related risks from total China’s total indebtedness – may be around 275-300 percent of GDP and roughly twice the ratio of ten years ago – cannot be considered in an appropriate way. The risks can either be underestimated or overestimated. It may even happen also in this context that really happening improvements will not be recognized or appreciated because of the historical credibility deficits. This special – somewhat different – kind of risk is also linked to behavioral economics and behavioral finance.

¤ Institutional conditions five to ten years from now:
Quite a number of economic researchers (North, de Soto, Acemoglu, Blanchard, etc.) consider well-working institutions as the key – or at least a main key – for economic development. Sometimes, however, institutional improvements are conflicting with political positions or strategies. Altogether, there is a clear political strategy in China to improve institutions. Thus, institutional progress will be made – but how fast and how wide-ranging will these institutional reforms be at the end of the day?

The broad range of possible new opportunities
This article is mainly based on the risks of future development. Conundrums do exist – however, also as regards the possibilities – which good economic, educational and institutional policies plus technological achievements indeed may offer. Some more progress is certainly in the cards. However, there should be doubts about the verifications of the opportunities in their entirety. Nobody knows – whatever so-called China experts pretend to know. This conclusion makes it necessary to steadily remain updated.

Impossible interpretations/conclusions

Here we have special cases of conundrums that cannot be judged at all what concerns size, time and reactions. China offers a number of these conundrums, both when it comes to political, social and economic conditions.

¤ Final success or failure of intended economic reforms
There is no way to foresee the outcome of all economic reforms. There are many good plans, many of them in line with Western economic research. But economic and political goal conflicts exist which may mean obvious impediments to the future growth potential.

¤ Coming deflation or continuous strong inflation of the credit bubble?
One of the main economic questions of the future: Will China trigger the next global financial crisis because of its enormous debt problem and possible/probable contagion to other countries?

¤ Non-performing loans of the Chinese banks:
“Government support for major banks will remain strong in China to keep public confidence and systemic stability healthy” (China Daily, October 2) – however, why is government support actually needed?

There are few areas in the Chinese economy where official numbers and private estimates differ as much as it is the case of non-performing loans (NPLs). Nobody knows exactly the real NPL-numbers of the bad bank credits and the off-balance financing operations by the banks; and even less people are aware of the corresponding statistics for the so-called shadow banks which – surprisingly for many analysts – use to have direct links to the big banks. If we then, for example, add implicit and hidden bad loans coming from state-owned enterprises, the conundrum of the total amount of non-performing loans becomes totally puzzling. We do know about the problems of NPLs per se – but we have not got a clou about the real dimension of this conundrum; however, the official number for 2017 for NPLs of commercial banks appears by far too low and unrealistic (1.74 % of total loans) .

¤ Local debt – who and what is right?
I wrote already in 2013 an article on this topic which is found at (search yourself):

Still, my uncertainty about the size of local government debt has not declined. Chinese officials point at their version that current debt levels of local governments do not indicate major problems in the future – very much contrary to what financial markets and more critical experts believe with their much more pessimistic stance – including also, for example, comments directly from China (“China battles hidden local government debt”)

¤ Protectionism in the longer run:
Potential future protectionist threats cannot be analyzed well these days – and do not at all allow for any meaningful long-term prediction. Analysts are confronted with a total conundrum. At least in the short run, China may suffer from damages of the global supply chain.

¤ The sustainability of the current account surpluses and the opening of the capital balance:
China has been – and still is – a country with surpluses in the current account. This phenomenon gives (partly) a position of strength on global financial markets since China by definition does not need net cross-border capital inflows as long as these surpluses exist; instead, China is able to work with net exports of capital – either by short-term (portfolio) investments or long-term investments (FDI) abroad or by granting credits over the border.

However, the surpluses in the current account have been shrinking in recent years. Regarding possible further enlargement of foreign protectionist pressure, further concentration on loans for private consumption at home and more imports, and also more widening protectionism could finally make the current account more vulnerable – and, consequently have an impact on the future speed of opening the capital balance for free financial cross-border transactions of stocks, bonds and foreign currencies. All these theoretically possible developments are not foreseeable at all; we find here a most puzzling conundrum.

¤ Social conditions five to ten years from now:
Here we have another, completely secret box which cannot be opened any time soon. What we do know about this is the experience and results from research that there is an often existing relationship of the economy to social developments or the other way around. There is no doubt that the Chinese need more and better social security.

Final conclusions:

The discussions above should show that China’s short-term economic outlook – despite certain (statistical) problems – seems to be more predictable than the structural long-term perspectives. This can be concluded despite the current shortcomings in Chinese statistics, transparency and communication (which make also short-term forecasts more complicated than necessary). Altogether: China’s economy is characterized by many conundrums – but not all of them with completely unforeseeable outcome.

It will, for example, be interesting to see whether China will keep up its opaqueness also when it comes to the development of digitalization and artificial intelligence. China is still a country that can surprise – hopefully in an increasing number of cases in a positive sense.

But I also remember the words coined by an outstanding China expert in Hong Kong in the 1990s who repeatedly during each and every meeting there reminded me of his own “law” – simply asking the following question: What do we really know about China?

Today, economic transparency is better – but still insufficient. This is exactly the reason why this article deals with different alternatives of conundrums in the political and economic powerhouse of China – from quite limited conundrums to very large ones.

However: Despite all these conundrums, China will remain a most exciting country, for both analysis and business.

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


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