China Research

China is currently changing dramatically in different respects – politically, economically, technologically, and socially – but not that much institutionally. Despite all these ongoing structural changes, many (or most?) Western governments and corporations still seem to apply their China strategy as implemented in the 1990s and as started, continued and conducted after China’s entry into WTO in 2001 – expressed by official appreciation of China as a rapidly expanding trading partner country and by mainly paying courtesy visits to China’s political leaders (and simultaneously hoping for coming home with some major commercial deals and promises). Consequently, general political considerations and/or political risk analysis played so far no major role in Western business strategies for China.

Russia and China are not comparable – China’s position of today is very different from Russia’s ten years ago

Critics against believers in future firmly and safely expanding Chinese markets argue often that China’s role in the future world will be much stronger and much more dominating than today – and therefore potentially more dangerous than the Russian risks were supposed to develop in a worst-case scenario in the beginning of the past decade.

However, Europe (Germany) was not able to tackle its growing dependence on Russian oil and gas all the same – and relied wrongly on the benefits of pipeline Nord Stream 2 from Russia to Germany. Things went wrong though the forecast error of Russia’s eventually unchanged politics had only one dimension – i.e. only linked to Putin and his foreign policy (with all serious consequences).

On the other side, predictibility of China’s developments and challenges in the next 15-30 years – an investor’s perspective – must be regarded as extremely limited due to many different risk dimensions. Some of these unforeseeable factors are also about dangerous risks. These dangerous risks – if verified at some point – may even affect the whole world politically and economically because of China’s still enlarging global superpower status (which Russia did not have twelve years ago). Altogether, the different China risks can be classified as follows (other risks may emerge or strengthen at a later stage):

¤ Economic risks: One should try to find out, for example, more about China’s potential GDP growth (on trend), productivity, labor markets, demography, distribution of income, marketization (particularly of financial markets and SOEs), bad loans by banks and non-banks, debt of provinces and municipalities. Many of these indicators must develop positively over time for motivating assumed good GDP growth and return on investments.

¤ Political risks: A lot can – and will – happen in the forthcoming years and decades, within and outside China; inside China there may be links to the almighty position of president Xi Jinping, and outside China to uncertain results of Chinese /Russian co-operation, trade restrictions (possible political reactions at some point from the West), the Taiwan issue with its inextricable outcome and consequences (hopefully without war).

¤ Institutions: Here we have an area for major improvements aligned with politics – such as transparency, bureaucracy, laws and their application, corruption, education, health, financial markets and their control.

¤ Technology: Nobody asks whether China will be able to meet all its technological ambitions as only recently declared at the National People’s Congress (NPC) – or will China technologically even perform better than expected at home and abroad. Finally, the question may be motivated how will China handle and develop AI and digitalization in the future – in an acceptable way also in a Western view or context?

¤ Environment: There is no doubt anywhere that China needs a better environment – and that it will be working on it. But how much and how fast?

Chinese politics will matter more than in the past

The list above on different uncertainties and risks indicates clearly that Western corporate investment strategies for China obviously should contain more political analysis. Interdisciplinary analysis approach is badly needed, including politics, institutions, psychology, and social issues in various angles including the environment

Visible institutional improvements may be supportive to Western business with China. Social expectations and needs are also linked to political decisions (e.g. social insurance, pensions, civil rights for urban migrant workers in metropolitan areas, etc). Meeting (roughly) social expectations would certainly support China’s development. Scenarios on Chinese politics and possible Western (American) reactions should also be an important parameter to Western investors in China.

In my view, the so far“comfortable” strategy of separating commercial business strategies from simultaneous political considerations about China cannot – or should not – be applied anymore. Both approaches will become increasingly interlinked – if we like it or not!

The non-Chinese business sector should also learn how to understand and handle Chinese attempts to underline the importance of working for good commercial relations between China and the West, as China’s new Prime Minister and political No 2 – Li Qiang – pronounced the other day at the China Development Forum.

A positive explanation for this statement by the Prime Minister may be that China has recognized that world trade is not only made in China. Being the number one trading nation in the world (services excluded) urges for better recognition of China by the West – maybe the most positive scenario for China one can find these days. A more negative interpretation could be that China’s political leadership now is concluding that China’s recovery after covid and medium-term outlook may be more reluctant than previously anticipated and that potential GDP growth may go down further. This could jeopardize many social, demographic, educational and environmental projects – projects that could mean a lot to China’s future development.

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

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2022 was quite a poor year for the Chinese economy – with an official GDP increase by only 3 percent. This weak performance could be related to a large extent to the finally failing zero-covid strategy – a growth burden that eventually became embarrassing and uncomfortable for the political leadership. For this reason, the zero-covid strategy was abandoned unexpectedly in December 2022. I would guess that this action was a result of political emergency – with probably a positive growth impact in 2023.

How much GDP uncertainty is still there?

The abolition of the zero-covid strategy will probably give some stimulus to GDP growth this year (when applying ceteris paribus assumptions, for example by ruling out unforeseeable foreign-trade restrictions or distortions, bursting asset-price bubbles, major moves of the  exchange rate, etc.).

However, no one can be sure about the exact starting-point level of total GDP in the beginning of 2023 because of at least previously motivated doubts about the quality of GDP statistics and, consequently, a wrong GDP-calculation history during quite a long time. Have these doubts in the meanwhile become unfair or are they still in place? The new official target for 2023 year’s GDP growth of around 5 percent may be in line with statistical reality – or not (quite yet). We simply do not know.

This is exactly a situation I have been warning for since many years back. How can one recognize an existing improvement of statistical quality? There was a time when (official) GDP statistics looked too easy to predict because GDP fluctuations were kept very low from quarter to quarter – just about right to meet the official growth goals at the end of the year. Thus: Without then having applied normal quarterly fluctuations, good statistical GDP quality seemed to be quite far away during a considerable period of time leading to the explained statistical trust problem.

By now, statistical quality of GDP may have improved. But no Western analyst knows about this exactly. However, one can see that the very recently at the NPC proclaimed official GDP-growth objective of around 5 percent in 2023 surpasses the outcome of 2022 by as much as 2 percentage points. 5 percent may not be quite easy to achieve but is definitely not out of reach because of all the (possible) statistical GDP effects from the low base in 2022 and a more expansionary economic policy this year.

Altogether, it remains interesting to look at the official objective for GDP growth that was announced on March 5 at the first session of the new14^th National Party Congress (the 15^th NPC starts in March 2028). Almost 3000 representatives from all over the country participate in this currently ongoing annual “parliamentary” convention of the Communist Party – a convention with a usual acceptance rate for all suggestions and laws of 100 percent.

What comes up at the NPC?

Even if the agenda of the ongoing NPC session is widely known, interesting confirmations or news can be expected. In this context, one may mention

¤  the formal installation of Presiden Xi Jinping’s third (unprecedented) term
¤  the presentation of the new Premier, probably Li Qiang (also China’s no 2)
¤  the presentation of the new governor of the People’s Bank of China
¤  the government’s annual work report for developments in 2022
¤  details, guidelines, goals for the society and economy in 2023 and beyond
¤  first initiatives how to meet the crucial demographic challenges (with now  decreasing population), etc.
¤  a further strong rise of military expenditure – with a potential risk of not meeting the minus 3-percent budget objective.

The most remaining impression from the whole NPC is certainly the new and now even larger power of Chairman Xi Jinping. Also the probably new Chinese Prime Minister Li Qiang, is a close political ally of Xi. A logical conclusion should be that Xi Jinping in the future will meet more individual responsibility because of the high concentration of political power to him alone and his protégés. Looking at China’s many existing conflicts of goals, the challenge of concentrated power will not be easy to manage over time.

What s behind the new – fairly confident – GDP objective?

Finally, there may be a need of trying to elaborate a little bit more on the chosen numerical objective for this year’s GDP growth – “around 5 percent” which is a smartly chosen number, allowing for both 4.5 and 5.5 percent and everything in between. One can easily imagine that Chairman Xi Jinping definitely must have felt disappointed about last year’s weak GDP groyth and probably also worried about the emerging protests and social tensions in early winter as a consequence of the tough covid lockdowns at the time.

Thus, it certainly felt appropriate for Xi to lead the country into 2023 in a positive mood. Indeed, such a change of tone could be observed already in the past month. More optimism about the Chinese economy showed up domestically and outside China as well – strongly pushed by positive official comments but also additionally all over the whole globe by private institutions/analysts and their upward revisions of GDP for 2023.

Another psychological explanation for more optimism may have been/may be that Chairman Xi Jinping with his concrete ambition to develop China visibly into an economic global economic (and political) superpower simply did not/does want to be confronted with another weak economic year. Instead, Xi obviously wants in 2023 to contribute to more confidence on China – via some more expansionary policy action, keeping inflation down at planned 3 percent this year (as announced at the NPC), improving innovative reputation and attraction, and – also taken up at the NPC – by more open doors for foreign direct investors. Exemplified psychological tools!

Thus, we are reminded again that the analysis of China needs a lot of psychological understanding which is not easy to acquire! The Chinese often have another logical thinking than Westerners.

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

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