The Chinese economy gives some (partly) new worries

October 19th, 2018 by Hubert Fromlet, Kalmar

In my last blog, I defined and discussed some different kinds of conundrums one can find in the Chinese economy. Unfortunately, I have to add a partly new one only a few days later.

GDP growth in Q3 as expected

Sure, I noticed this morning that Chinese GDP growth during the third quarter still was officially on track (6.5 percent yoy). But we know that Chinese exports these days are confronted with U.S. protectionism and that investments in construction have been cooling down more lately.

We also know that China still is working on its important objective to double GDP per capita between 2010 and 2020. In 2021, the Communist Party will celebrate its 100th anniversary – and certainly success stories have to be presented.

Meeting this long-term objective requires a GDP-growth rate at around 6 1/4 percent on average until 2020. This is one of the reasons why China’s insufficient GDP statistics simply have to show GDP growth above 6 percent. Another reason is to demonstrate growth stability which is clearly underlined by extremely small official growth fluctuations – actually limited to 0.2 percent maximum yoy in a dozen consecutive quarters.

I think no other country in the world has such a track record. Officials explain that phenomenon by pointing at China’s unique economic stability in all general terms. However, economic stability cannot be expressed well by even stable Chinese numbers for GDP-growth during so many quarters. Reality looks differently.

Some shift in economic policy

As a consequence of obvious growth concerns – which by the way also are expressed occasionally by officials, directly or indirectly – some (slight?) shifts in economic policy currently can be watched.

More focus is now put again on what economists call the demand side of the economy compared to some programmatic priority of the supply side since the Communist Party’s Third Plenum in 2013. Monetary policy is currently easened by lowering the banks’ cash requirements in the People’s Bank of China and, thus, give more room to new credits – despite the big debt problem. Fiscal policy is also put on a (somewhat) more expansionary track, meaning altogether more growth stimuli than before.

This – at least somewhat – revised economic policy stance could lead to delayed structural reforms which by definition would not be favorable at all.

However, the Chinese define demand and supply side policy somewhat differently from what we are used to in our part of the world. More supply side policy means in Chinese terms rather to provide the Chinese people and Business China with more and better goods and services that are needed for consumer satisfaction and modern corporate demand; the latter alternative could also mean cuts of industrial capacity to give a more balanced supply in line with market economy principles.

Supply side policy according to Western textbooks, however, is more concentrating on giving incentives to private households, companies and municipalities in order to, for example, save more, work more, increase personal flexibility on the labor market, learn more, give more education to the corporate staff, to increase R&D, to invest more, etc.

Watch the priorities of economic policy!

Only regularly updated knowledge about Chinese priorities in economic policy provides a reasonable chance to single out where Chinese economy may be heading in the medium and the longer run. The analysis of China is indeed difficult.

Today’s conclusion: Do not focus too much on Chinese GDP numbers!

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