China Research

Summary of the presentation by senior professor Hubert Fromlet at the conference            

 

“ Baltic Sea Region and China Day” 

October 11, 2016, Linnaeus University (Linnéuniversitetet), Kalmar

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The readers of this blog may remember that I wrote several articles and research papers about China’s plans for economic reforms which were launched during the so-called Third Plenum of the Communist Party in November 2013. 16 major reform areas and 60 subareas were decided on by China’s most important political leaders. Interestingly, most of the economic reforms are well covered by Western economic research and textbooks.

Thus, China’s planned economic reforms look very nice on the paper. The big question, however, is to what degree all these promising plans can become reality. According to the time schedule, all these economic reforms should lead to good results by 2020, the evaluation year. Six years is certainly not a long time to implement such a comprehensive package of economic reforms.

Why such a hurry? One good reason may be that China really is in need of many economic and institutional reforms. Another reason may be related to the fact that China’s Communist Party was founded in 1921 – and becomes 100 years old in 2021. This anniversary will be celebrated very intensely – hopefully provided with good results of reform policy.

But delays will most probably be unavoidable, partly due to the big volume of intended reforms. There is, however, also a substantial conflict of goals within the framework of the 60 different subgoals of the reform program. Not all objectives can be met at the same time. This certainly leads to the conclusion that reform policy either will need compromises or that certain plans will have to be canceled completely.

Consequently, 100 percent of the reform package cannot be achieved – and probably not either in a longer perspective. But any percentage more than half of the plans – and visibly more than 50 percent for the most important reforms – would be a good move into the right direction and pave the ground for a more favorable long-term development of China. This can be said even if temporary economic shocks seem to be unavoidable in the forthcoming decade or so (obvious risks: the survival of ineffective state-owned companies, bursting real estate bubbles, major imbalances on financial markets, bad loans of the banks, social distortion, uneven distribution of income, environmental problems and their impact on health, political problems, increasing global protectionism, etc).

In order to capture an uncertain future with different possible results, analysts often construct different scenarios. In the case of the Chinese of economic reforms, the scenarios may look as follows:

1) Roughly all the planned reforms will be in place by 2020 – or only slightly delayed
⇒ very good for long-term growth;

2) most of the planned reforms will be implemented and/or on their way quite soon beyond 2020
⇒ relatively good for long-term growth;

3) reforms are lagging in terms of volume and the time schedule compared to the second scenario – but a substantial number of changes still take place
⇒ more limited positive impact on long-term growth;

4) certain reforms are happening but by far too little and too slowly
⇒ in the best case: limited negative impact on long-term growth

5) the political leadership of China does not want to continue its intended reform policy and abandons planned reforms more or less, moving back towards (Keynesian) demand side policy
⇒ very negative impact on long-term growth.

Looking at these different reform scenarios, I rule out number 1 and number 5, i.e. the most optimistic and the most pessimistic one (but you never can tell). Thus, it sounds reasonable – under current conditions – to predict future developments of Chinese reforms according to scenario 2 or 3 or 4. However, these relatively precise alternatives may be wrong as well. It certainly seems possible or even probable that the implementation and development of reforms may move periodically from one scenario to another in the forthcoming years and be somewhere between number 2 and 3 or somewhere between number 3 and 4, i.e. either moving in the right or the wrong direction.

My own feeling is that scenario 3 (or close to 3) will dominate in the years to come. If this scenario can be verified, it would not bad for Sweden and the entire global economy. At the same time, there is still hope for a better outcome than scenario 3. However, the risk of shocks and a bias toward 4 should not be underestimated. The new composition of the Standing Committee of the Politburo after the selection of five new members could give an important guideline in fall 2017. 

Conclusion: This outlook for different scenarios of the planned economic reforms in the forthcoming years urges for flexibility and continuous analytical updating of the development in China. Otherwise changes in reform policy are not observed and (Swedish) companies cannot adapt their strategy to (suddenly) changing conditions – because they do not see them in time. Both a successful implementation of Chinese reform policy and a damaging failure of reform policy would have obvious consequences for (Swedish) business with China – but, of course, with a very different content.

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

 

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