How is China doing?

09:00 by Hubert Fromlet, Kalmar

Chinese remained also in 2021 in the headlines – but in recent quarters with more focus on politics than on the economy. Politically, China has increasingly gone its own way without considering or following international “rules” and frameworks of behavior. This could be watched in China’s aggressive rhetoric against a number of Western democracies, its rising nervousness about Hong Kong and Taiwan, the absence of China’s President from COP26 in Glasgow, and China’s ambiguous willingness to do everything possible for major environmental progress. Hopefully, the loosely – during COP26 – agreed future cooperation between China and the U.S. can mean a little step forward.

China has been changing style

I have been thinking quite some time about the answer to the question what has led to the changed, less convenient political style of China’s main political leader(s). In my view, there are the three following possibilities:

¤ China’s harsher political tone may reflect increasing fundamental economic and social weaknesses at home – resulting in diversionary maneuver from the domestic to the international (global) arena.

¤ China may have been trapped by the urge to manifest its self-proclaimed global supremacy as much as possible.

¤ There may also exist very different reasons for the strong mutation of China’s political style – i.e. strengthening the power of the Communist Party and particularly of its Chairman Xi Jinping in personam. Observers are currently even discussing whether Xi could be on his way to create a life-time presidency. Looking at all this, one looks back nostalgically to the years times when China still ambitiously tried to receive international recognition.

Personally, I believe that all the three above-mentioned arguments to some extent may explain China’s ongoing political trend – probably with the last-mentioned factor in the first place. At the same time, however, I wonder if China will benefit from this currently chosen direction. My view is rather that an internationally cooperative China would be better off in the longer run – also at home – than the current isolationist and divergent political course can offer.

Weakening economy – but deep interpretations remain difficult

As described above, China’s political strategies are difficult to interpret more deeply. Also when it comes to the economic development, I always felt – and still feel – quite some uncertainty about the usefulness of Chinese statistics, particularly when it comes to GDP, unemployment, inflation, bad loans (NPLs) and local government debt. Limited access to relevant statistics and insufficient (statistical) transparency have shown up as analytical obstacles during many years, at least in my view.

But let’s look at some available economic developments all the same for getting at least some idea about the current state of China’s economy.

GDP: GDP in Q3 was disappointing again (+4.9 % yoy; +0.2 % qoq compared to expected +0.5 %; q2: +1.2 %; q1: +0.6 %). Q3 meant in other words the weakest quarterly GDP-growth rate since the eruption of the corona crisis in early 2020. Consequently, doubts seem to be motivated whether the official GDP-growth objective still can be met (“more than 6 %”).

Car registrations: A fall by 9.4 % yoy was noted in October – very much due to different exogenous shortcomings.

PMI: Purchasing managers reported a slight drop for manufacturing in October to 49.2, down from 49.6 in September.

New loans: Banks granted in October new yuan loans amounting to only half of the number from September. This may have had seasonal reasons but may also reflect some weakening of the business cycle. One should not forget that also Chinese manufacturing output and supply to investors and consumers have been influenced by the global shortages of semiconductors, other intermediate goods and bottlenecks in transport capacities.

Inflation: Inflation is currently causing a lot of debate. On the one hand, the Producer Price Index (PPI) rose with a very high number (13.5 %, yoy) – the highest since 1995. Furthermore, October has been the tenth consecutive month with a rising PPP number. On the other hand, the Consumer Price Index (CPI) came in at only 1.5 % – a gigantic differential to the PPI which really points at both micro- and macroeconomic imbalances in the Chinese economy.

Conclusion – the Chinese economy has lost some momentum

Altogether, those written lines are only a very brief analysis of the Chinese economy. However, it may be somewhat difficult to finally come up in 2021 to the official GDP-growth goal at 6 % or more. Provided that the generally – in most countries and international organizations – predicted visible recovery of global growth can be verified, China could manage somewhat higher GDP growth in 2022 than the year before – particularly if willing to contribute to declining global political tensions.

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