China – weakening financial resources for investments abroad (FDI)

15 May, 2019

Kina – sämre finansiella förutsättningar för investeringar utomlands (FDI)

Sammanfattning / Summary in Swedish

# På senare tid har det utvecklats en hel del oro över de kinesiska direktinvesteringarna (FDI) i vår del av världen. Man befarar främst ett för snabbt växande kinesiskt inflytande på den egna hemmamarknaden och på de viktigaste exportmarknaderna. FDI-statistik visar emellertid att siffrorna för den faktiska kinesiska FDI-utvecklingen utanför Kina alltjämt ter sig klart mindre skräckinjagande än vad tongångarna i den offentliga debatten återspeglar.

# Utvecklingen av den kinesiska bytesbalansen borde framöver ägnas mer uppmärksamhet än vad det på bred front varit fallet under det gångna årtiondet. Utvecklingen av bytesbalansen spelar en avgörande roll vad gäller den kinesiska potentialen för framtida FDI-satsningar. Det aktuella läget ser klart mindre lovande ut för kineserna än vad vi vant oss vid under rätt många år.

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The analysis of a balance of payments (bop) receives clearly less (careful) analytical focus these days than ten or twenty years ago. The reasons for this development are not easy to single out. One reason may have been that global trade tensions until Donald Trump’s takeover received decreasing attention by global (financial) markets, policymakers and papers or articles – and that bop problems indeed became less acute and/or irritating.

More recently, however, things started to be reversed – mainly triggered by the American president and his hostile trade position against China and to a (still) milder extent against the EU (Germany). These tensions should indeed provoke a better understanding and practical application of bop studies.

Where does the money for Chinese outgoing FDI come from?

In general terms, there are only a few ways for a country to create foreign money for so-called direct investments outside China. Fresh foreign money can be made available

– by attracting new FDI (normally the best way as the invested money usually comes to stay),

– by borrowing money in foreign currency (but an ever increasing foreign debt hurts later on),

– by selling stocks and bonds to abroad (risky as foreigners may decide on sudden sales),

– by selling foreign currency from the own reserves (cannot last for a long time).

However, one can assume that the Chinese preferably would like to return to reasonable surpluses in the current account and to persisting good inflows of FDI to China for being able to make more strategically important investments abroad. Is this a realistic objective?

Are German (Western) concerns about Chinese FDI exaggerated?

In Germany and quite a number of other Western countries doubts about Chinese FDI have become more noisy. However – at least so far – such doubts are not confirmed by statistics, particularly when it comes to the number of different new FDI projects. Obviously, Chinese FDI in Germany represent mostly a limited number of larger FDI – but they are not broadly spread (se IfW, Kiel, 2019, April).

Another issue in this context remains more or less undiscussed – China’s strongly weakening current account. Through many years, China noted remarkable surpluses – with a record at 10.1 % in 2007. In 2018, however, the current account came in close to zero (+0.4 % of GDP). This quite weak result has certainly to a high extent been caused by trade protectionism and a still lagging development of new competitive products for exports. Thus, there may be both temporary and structural components in the the nowadays more or less balanced current account.

The outlook – less Chinese money for FDI around the world

China’s foreign trade faces currently very tough challenges and will continue to do so in the foreseeable future. These challenges are both linked to international political developments and domestic reform achievements. In this latter respect, both exports of goods and services need to be modified and modernized, and imports substantially substituted by domestic production; all this according to textbooks for getting back on track for a stronger balance on current account and improved new resources for future FDI. As indicated above, borrowing heavily abroad for FDI in other countries is certainly only a short-term option. Creating major capital inflows to China by attracting high amounts of portfolio investments from other countries should be regarded as risky and assumes far-reaching further financial reforms and deregulations of the capital balance (the counterpart of the balance on current account).

Altogether, all these possible attempts to achieve a rejuvenation of the current account balance need time to become successful. With current conditions, the outlook for the Chinese current account balance seems to be neutral in a sense that no return to major surpluses seems to be in the cards any time soon – but no major deficits either.

Consequently, financial resources for future Chinese FDI in other countries seem to develop less rapidly than in the past. This means that China – if it wants to remain an active investor in other countries – needs also to reorganize its strategy for the already existing financial assets, for example by gradually reducing the big share of American bonds and t-bills in Chinese portfolios.

Obviously, it becomes increasingly important to find the relevant statistics for these assets – and to become familiar with the interpretation of the balance of payments and its sub-balances.

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

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The naivity of financial markets about U.S.- China trade negotiations

6 May, 2019

Only a few days ago, I read all the positive comments on the ongoing progress of trade negotiations between the U.S. and China. A trade deal any time soon was almost anticipated by financial markets.

However, new signals and threats are now coming in about the trade war between the U.S. and China which may be even escalating in the near future – developments that I have pointed at several times before in this blog (e.g. on chinaresearch.se from March 18 on the last page).

A big problem is that many analysts neither understand the psychology of the American president sufficiently since he regards China really as a major and unfair competitor nor do they understand the psychology and culture of China very well.

This means indeed poor conditions for interpreting the negotiations between the world’s two largest economies. One should be careful. Trade talks continue to be complicated.

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

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India election 2019 – the economy and Modi versus Gandhi

17 April, 2019

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Indien – maktkamp mellan Modi och Gandhi i det pågående valet

Svensk sammanfattning

Det stora och komplicerade parlamentsvalet i Indien pågår för närvarande för fullt. Sittande premiärministern Narendra Modi rankas alltjämt som favorit. Gandhi-dynastin är dock på väg tillbaka. Många eller rentav flertalet västerländska finansmarknadsaktörer verkar tydligt starkare sympatisera med Modi än med Gandhi. Vissa ekonomiska framgångar har Modi också uppnått. Dessa är dock inte riktigt i linje med alla västerländska applåder. Behovet av omfattande strukturförändringar kvarstår som mycket stort.

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The big election event

India is currently heavily occupied with its ongoing election for the federal government, the Lok Sabha (“House of the People”). 900 million people have the right to vote but as much as 300 million of them are illiterate. The result of this major event is expected for May 23. “Major event” seems even underestimating the magnitude of the Indian election with its 11 million public election workers and more than 1 million polling stations in 29 federal states and 7 territories – in all respects also an enormous logistic challenge. Election costs are estimated at incredible USD 10 billion.

In PPP terms, total Indian GDP is already the third largest economy in the world after China and the U.S. (but, of course, not when measuring as GDP per capita). India has indeed developed into a global player in the past 10-15 years or so. On the other hand, comparing India’s total GDP to China’s also shows that India – with almost the same population as China but a younger one – not even reaches half of China’s GDP. Regarding this fact, India’s current GDP growth of around 7 percent is not particularly high as India’s former central bank governor and outstanding economist – Raghuram Rajan – has been pointing at more lately.

More about the political background

Certain economic and political background information was already given in my blog from February 26 this year, including the probable need of a broader majority in parliament – both with re-elected Prime Minister Narendra Modi (BJP) or with Rahul Gandhi from the oppositional Congress Party as the new Prime Minister.

There is no doubt: The Gandhi Dynasty is moving forward again. More recently, this is true of Rahul, the son of assassinated former PM Rajiv Gandhi and grandson of assassinated former PM Indira Gandhi. But Rahul Gandhi’s charismatic and empathic sister Priyanka Gandhi right now is gaining new sympathy points even faster than her brother. Many observers see her as a future prime minister. This time, however, a potential Rahul Gandhi-led coalition must find extremely strong support from Modi opponents. On the other side, the BJP suffers from sensitive losses in two important federal state elections at the end of last year. Generally spoken, Modi’s overwhelming victory from 2014 will not be repeated this time even if he remains in office.

When it comes to foreign policy, Modi achieved obviously some improvement of India’s relations to the U.S. and to China. However, tensions with Pakistan escalated more recently again, including some exaggerated noise from India.

Remaining homework

Going back in history 20 years or so, there is no doubt that India has achieved remarkable economic progress. When I came to India for the first time in the early 1990s, India was in many respects a different country. Progress is visible at least in the urban areas. Modi managed, for example, the implementation of a unified VAT system (after attempts during many years before him), revised bankruptcy laws, achieved re-capitalization of banks, FDI reforms and improved water (toilet) quality. However, the puzzling money reform was not really successful and damaged many small companies.

Altogether, reform needs are still enormous, partly because of India’s mostly very slow legislative procedures through all the federal states. Provided the assumption that no very negative exogenous or domestic shock occurs any time soon, reform velocity between a Modi or a Gandhi government will not make any dramatic difference. This means continued moves forward but in most cases cautiously and relatively slowly. In other words: the remaining homework is substantial.

Finally, some examples of areas that need real improvements (the sooner the better):

¤  institutions (corruption, etc)

¤  infrastructure,

¤  education on a broad scale,

¤  youth unemployment (also for academics) and other job creation,

¤  agriculture (employs still around half of the working population),

¤  conditions for small businesses,

¤  energy,

¤ national health,

¤  tax system and government finance/debt,

¤  efficiency of the political system.

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

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