China Research

Presentation by professor Hubert Fromlet at LNUs Baltic Sea Region/Emerging Market/China Day, October 23, 2024, in Kalmar

In recent years, China and India have been frequently quoted as the main future challengers for Western economies. This may still be the case but things are changing. Both countries have their future opportunities. But they also have their future risks and challenges – risks and challenges that are, however, increasingly drifting apart from each other in these two giant countries.

Conclusion 1: The mentioned diverging trend of risks and challenges between China and India should be watched closely by business economists in the forthcoming years. However, China and India cannot be measured and analyzed with the same yardstick.

The conumdrum of the latest growth-supporting stimuli – however, long-term trends are more important

The official Chinese GDP-growth objective for 2024 has been set at “around 5 percent” in the beginning of this year. After +4.6 percent in Q3, the numerical goal of 5 percent may not be quite achievable for the whole year. However, Chinese leaders probably still want to meet their growth target.

During many years, Chinese GDP-growth numbers were extremely predictable due to ex ante politically set numbers which were, consequently, (mostly) not correct.

However, having then met the official growth target numerically did not mean that such a result was in line with reality. At least not according to historical experience. One may wonder whether these statistical question marks are still in place.

In the past few years, I sometimes heard that the quality of Chinese statistics finally has been improving. May be – may be not. We simply don’t know. 

These doubts are the price for many years of poor statistical standards. Institutional shortcomings like this are always difficult to repair and need therefore quite some time for gaining new or renewed trust. 

Considering China’s still uncertain statistical quality and all the current existing transparency problems, it seems to be doubtful to expect much progress of the latest Chinese liquidity and fiscal injections for supporting sluggish growth. First, the volumes of these measures are not known. Second, the size of the problems to be addressed such as the bubble in the real estate sector is also terra incognita.

Conclusion 2: It is impossible to predict the effects of the latest stimulation measures. All this is in uncharted waters – despite certain encouraging comments from financial markets. Instead, my own feeling is more skeptical or even pessimistic about the short-term outlook. However, the long-term issues should be more interesting all the same.

China’s long-term future looks may be even gloomy…

Also China’s published GDP- growth numbers have been clearly dampened in the past years, i.e. more than halved. Such a slowdown was certainly not expected by most forecasters – but it was not either unforeseeable when having looked at the already then obvious imbalances.

Many of these “old” imbalances still exist today such as local debt, bad loans, struggling state-owned enterprises and the problems on the real estate market. Today, I would like to focus on three specific issues that really motivate to have a gloomy view on China’s long-term perspectives. They are

¤  the negative impact on markets and growth derived from autocracy  

¤  the ongoing growth-impeding effects of the real-estate bubble

¤  the more or less unmanageable demographic implosion.

China’s nowadays applies a more and more autocratic system which certainly impacts negatively on the market economy, (private) initiatives, entrepreneurship, innovation, risk capital, financial markets, competition, etc. – and, consequently, on economic growth. A change of this political system does not seem to be on the cards – neither in the foreseeable nor in the unforeseeable future.

Despite all lagging transparency, we know that the enormous Chinese real-estate bubble already has been bursting. Almost 100 million apartments seem currently to be empty – in a situation where the real estate sector stands for a quarter of Chinese GDP. The extremely poor development of the real estate sector also had – and will have for the time being – very negative effects on consumer confidence and private consumption. Improvements of this critical issue are not on the cards – most probably not even in a longer perspective. 

When looking at structural impediments to future Chinese long-term growth, the demographic challenges clearly look most worrisome from a long-term investors’ point of view. Today, China has a population of 1400 million people. If we believe in (uncertain) estimates by the United Nations, this number will have shrunk to 640 million by the year 2100. Even if this decrease may turn out to become less dramatic, one can easily single out that China’s demographic outlook will have enormously negative consequences on GDP and the market potential for most (foreign) companies there.

Conslusion 3: Companies with business in China should watch demographic trends carefully because of changing demand patterns

and volumes.

… which makes India to “win” probably in the long run

About twenty years ago, I published an article with the same headline as set as the title of this presentation. At the time, China still was a strongly booming country with high, double digit growth rates. Economic problems were visible – but not really taken seriously by most Western economists and corporations. 

Then, I published an article with the title “The run to China – another example of herd behavior” (Economic & financial review : a journal of the European Economics and Financial Centre. – London, ISSN 1351-3621, ZDB-ID 12001399. – Vol. 12.2005, 3, p. 111-143). By writing this piece, I wanted to point at my view that Western decision-makers then had explored China’s political and economic trends insufficiently, or as one of my friends – then working for a major global company – put it by saying: “We invest a lot in China because all our major competitors are there”. In other words: Decisions were not really based on deeper analysis. Herd behavior dominated.

Areas where China already then was superior to India were in the early years of this century (and still are), for example, GDP per capita, infrastructure, education and health on broad levels, and probably also productivity growth. China started two decades ago becoming a global powerhouse whereas India at the same time still seemed to be quite isolated from the global scene.

On the other hand, India had already in the beginning of the 2000s a number of competitive advantages compared to China, for example: democracy, better – though not good – institutional conditions (transparency), a more developed financial system, more fundamental market economy and what may be called “more Western sympathy points”. Particularly this latter observation has become much more visible in the past few years, partly as a reaction on China’s increasing political autocracy and state interventionist economic policy against market principles.

If we go back 40 years, India’s and China’s nominal GDP were almost about the same. Now China’s GDP is almost five times larger than India’s. These figures demonstrate clearly that China in recent decades has been more successful in GDP terms than India. Also the GDP per capita development points at a much more favorable trend for China. Today, China is the largest economy in the world when measuring in purchasing power (PPP) and India number three (and number two and five when calculated in USD). 

Anyway, three main factors seem to make India to a long-term winner when comparing with China. Advantages for India are mainly

¤  the more favorable population outlook though India may face (slightly) shrinking numbers as well by the end of this century,

¤  at least according to the knowledge of today: a better political rule,

¤  higher potential GDP growth,

¤  more optimism for the future (but for how long?).

Conclusion 4: For the first time, I see now India as the future winner in the overall competition with China.

However, India’s major challenges should not be neglected either. Infrastructure is still poor. Education needs to be improved sharply in order to bring literacy to Chinese levels and for managing global competition. The environment and sanitation must be improved substantially, the access to water included. Economic inequality and the agricultural distress should be tackled much better.

All this means that also India must work hard to meet all the positive expectations inside and outside India.

In this context, it may be guiding to quote Nobel Laureate Paul Samuelson who described globalization to me around 25 years ago as a development that means that “there is no longer room for comfortable ineffectiveness”.

This conclusion is also relevant for India which has in the meanwhile become increasingly globalized – and will so even more in the future.

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