China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

Chinese political leadership shows growing concern about the economy

June 3, 2022

The state of the Chinese economy has been worsening in recent quarters. There is no doubt about this – despite all statistical shortcomings. Which statistical indicators should I use? Despite many years of China research, I cannot discover any economic indicator that really could help me practically to come to applicable conclusions. May be with one or two exceptions in bad times coming from the central bank PBoC: cuts of the deposit reserve ratio for the commercial banks (which actually happened lately in April: https://www.ceicdata.com/en/indicator/china/reserve-requirement-ratio ) or

cuts of the (over-five-year) loan prime rate (LPR, http://en.people.cn/n3/2022/0521/c90000-10099686.html).

Sure, the current economic problems are not only “Made in China”. However, the corona lockdown in Shanghai and some other metropolitan megacities caused a lot of economic losses. The lockdowns were/are certainly based on decisions by China’s political leadership, headed by President Xi Jinping.

Instead of statistics, in my view, the best information about the economy can (currently) be obtained by China’s two main politicians, President Xi Jinping and particularly Prime Minister Li Keqiang, by their comments on the Chinese economy in general terms. Two fresh examples underline this analysis approach.

The Politburo, chaired by President Xi, on April 29: “We will strengthen macroeconomic policy adjustments to stabilize the economy, and strive to achieve the expected economic and social development goals for the full year”.

Prime Minister Li on April 14: “Since the announcement of the policy package, government departments have all taken proactive steps. We must redouble our efforts, in particular to accelerate policy implementation.”

The two examples above demonstrate that the two strongest political leaders sent clear signals of concern already six à eight weeks ago. On May 31 came the answer with 33 measures summarizing the needed stimulation of the economy by applying fiscal, financial, investment and industrial policies (https://www.reuters.com/markets/commodities/china-unveils-detailed-stimulus-policies-support-virus-hit-economy-2022-05-31/).

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

PS: After having dealt with a major project and having benefited from the enjoyable and relaxing Swedish summer, I will be back at the end of August. All the best to you all, Hubert

 

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Increasing understanding of China needed – as much as possible

May 10, 2022

China has been a conundrum for many years – and it still is. This means that China can be (too) difficult to understand – certainly not always but too frequently. However, three conclusions can be made for trying to understand what is or will be going on in China:

  • China is a giant country that needs a lot of deep and careful observation. Occasional articles and subsequent analytical absence from China is certainly not an appropriate way to become an expert on the largest economy in the world.
  • Understanding the Chinese economy means that good knowledge is needed also about the history, the traditions and the culture of this gigantic country.
  • Furthermore, it should be recognized that China is not a transparent country. Insufficient transparency is an institutional shortcoming which can be frequently found in China. For this reason, (foreign) analysts dealing with China should continuously try to improve their institutional understanding as much as possible.

Winds of change

Certainly, China is in many respects a very conservative country. This can particularly be stated when it comes to the supremacy of the Communist Party though this supremacy has been individualized significantly in recent years by President and CP Chairman Xi Jinping’s dominance.

Thus, since Xi Jinping came into power in 2012, also China as a country has been changing. In 1978/1979, China’s then political leader Deng Xiaoping introduced his visionary “Reform and Opening-up Policy” which was the decisive move to internationalization of the Chinese economy. Opening China was a major step forward.

During many years with visits to China, I really had a feeling that China cared about its international economic relations – though many times purely in order to support Chinese cross-border trade or to attract foreign direct investments to China. But China gave many Western political and commercial leaders (mostly) a feeling of beneficial welcome.

In the past few years, however, considerable winds of change could be noticed which were started by President Trump but ambitiously continued by President Biden and joined by President Xi. Contrary to the opinion of most foreign China analysts, it may not be a safe prediction that China for a long time in the future will give international trade relations more weight than the non-peaceful reunification with Taiwan. Sure, China still does so – but for how long? It may be worth-while to add that President Xi in October 2021 has been stating that reunification “must be fulfilled” – obviously without completely ruling out the future use of violence but preferring a peaceful solution.

Consequently, China’s hardening attitudes vis-à-vis Western countries can clearly be recognized, also when it comes to recent negative Chinese comments on the possible enlargement of NATO with Finland and Sweden joining. China seems in this context applying a position that is more or less completely in line with the Russian one (https://www.manilatimes.net/2022/05/07/news/world/nato-inciting-bloc-strife-chinese-envoy/1842671. Without doubt, China feels nowadays as a strong global political leader – more than a couple of years ago.

Yes, there are winds of change in China…

Universities should broaden knowledge about China

Today, China is already the number one country in many different economic respects and, consequently, becoming an increasingly stronger global political and economic player. Already by now, China is the country with the highest total GDP in the world (in PPP terms, not per capita). Despite China’s declining GDP-growth trend since a decade ago, it can be expected that China will increase its global market shares further. However, temporary growth distortions are unavoidable and will turn up occasionally.

Considering this probable or possible future, it will be increasingly important to improve the understanding of China in both (Swedish) universities, the banks, the press, politics and the general public. Recent developments in Russia were completely underestimated ex ante – certainly also in Sweden in the past 20-25 years. Such an insufficient understanding should not happen in the future analysis of China. It takes time when trying to understand China; this should be better understood in Sweden.

Therefore, when now turning to Sweden, professional China researchers – with their main occupation in academia and other research institutions – should be financially supported by the Swedish government and Swedish foundations. Of course, we have a number of good China researchers and journalists at home in Sweden. But there should be more of them.

Hopefully, Swedish university leaders and lecturers will in turn become more active in providing students with broader knowledge about China – both what regards history, politics, culture, economics and management. All these topics should be preferably offered in the same course!

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

 

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The analysis of emerging countries in the light of the Russian war

April 7, 2022

The analysis of emerging markets is traditionally part of my lectures and generally not changing very much from year to year. However, this year (and beyond?) is different. A kind of limited global downturn was already in the cards last fall for the forthcoming quarters. But the Russian war makes the outlook for the global economy both worse and more uncertain about both depth and length of the downturn. The world is indeed confronted with the abominable black swan.

The spillover to emerging markets

Also emerging markets all over the world are affected badly by the ongoing terrible war development in the heart of Europe. There are clear spillover effects on the less advanced countries as well. Of course, the Ukraine and Russia itself are hit the most. But there are many other countries in the emerging world that are now meeting worsening conditions that are directly or indirectly linked to the Russian war.

When considering the already existing economic troubles before the eruption of the war Russian war, the timing for the commenced war in February could not be less favorable for emerging countries. But emerging countries are not equally hit by all the deteriorating political and economic developments. In very general terms, one may say that less advanced countries far away with, for example, energy and food resources tend to be better off than countries with corresponding shortages. Altogether, more details should be examined.

Reliable calculations are currently not possible     

I feel pretty sure about the conclusion that accurate point forecasts for individual emerging countries and emerging regions currently are not possible – at least not without precise assumptions about uncertain parameters like the supposed depth and length of the war, energy and other commodity prices and – not to forget – transports and delivery times.

However, when a major event like a big war in Europe happens with a military superpower involved, our models do not work anymore because of the lacking historical experience in a comparable war. Using another one or two different assumption baskets about depth and length of the war, a number of different scenarios could be developed. But still, we are not talking about a forecast. Instead, it is about scenarios.

Thus, further studies on war developments with impact on emerging markets would be beneficial. More can be found.

Influence on emerging markets due to the war

Initially, it would be useful to single out a number of different negative global developments that already had shown up globally in 2021. Here we find

  • rising global inflation, interest rate hikes not far away,
  • rapidly rising energy prices,
  • insufficient supply of chips, other IT components, metals plus transport bottlenecks,
  • since last fall worsening GDP forecasts for the beginning of 2022.

What we now can see as a further consequence of the war, are currently worsening trends for several of the negative developments from last year

—>  more inflation (coming from energy, agricultural products, metals, intermediate IT-goods, transport bottlenecks)

—>  further and/or faster global/American interest rate hikes than anticipated some months ago (means higher costs for emerging countries borrowing in foreign / American currency)

—>  higher American interest rates may mean a stronger dollar (which would lead to higher costs for many emerging markets since most foreign credits by emerging countries have been taken up in dollars)

—>  clear weakening GDP growth both in advanced and emerging countries.

—>  slowing FDI from Western companies in emerging countries as a result of increasing general uncertainty and risk aversion.

Conclusion 1: The foreign debt situation will remain an increasingly important indicator for emerging countries (https://databank.worldbank.org/source/quarterly-external-debt-statistics-gdds). Check it out!

Major producers of oil, gas, agricultural products etc., are, of course, better off than less developed countries that need to import a lot of these commodities. Commodity production at home and imports from abroad are other important factors that should be considered when emerging countries are analyzed, particularly now during the Russian war (https://www.worldbank.org/en/research/commodity-markets).

Conclusion 2: Also commodities play an important role for the development of many emerging countries, particularly during the Russian war.

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

 

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