How is China doing?

16 November, 2021

Chinese remained also in 2021 in the headlines – but in recent quarters with more focus on politics than on the economy. Politically, China has increasingly gone its own way without considering or following international “rules” and frameworks of behavior. This could be watched in China’s aggressive rhetoric against a number of Western democracies, its rising nervousness about Hong Kong and Taiwan, the absence of China’s President from COP26 in Glasgow, and China’s ambiguous willingness to do everything possible for major environmental progress. Hopefully, the loosely – during COP26 – agreed future cooperation between China and the U.S. can mean a little step forward.

China has been changing style

I have been thinking quite some time about the answer to the question what has led to the changed, less convenient political style of China’s main political leader(s). In my view, there are the three following possibilities:

¤ China’s harsher political tone may reflect increasing fundamental economic and social weaknesses at home – resulting in diversionary maneuver from the domestic to the international (global) arena.

¤ China may have been trapped by the urge to manifest its self-proclaimed global supremacy as much as possible.

¤ There may also exist very different reasons for the strong mutation of China’s political style – i.e. strengthening the power of the Communist Party and particularly of its Chairman Xi Jinping in personam. Observers are currently even discussing whether Xi could be on his way to create a life-time presidency. Looking at all this, one looks back nostalgically to the years times when China still ambitiously tried to receive international recognition.

Personally, I believe that all the three above-mentioned arguments to some extent may explain China’s ongoing political trend – probably with the last-mentioned factor in the first place. At the same time, however, I wonder if China will benefit from this currently chosen direction. My view is rather that an internationally cooperative China would be better off in the longer run – also at home – than the current isolationist and divergent political course can offer.

Weakening economy – but deep interpretations remain difficult

As described above, China’s political strategies are difficult to interpret more deeply. Also when it comes to the economic development, I always felt – and still feel – quite some uncertainty about the usefulness of Chinese statistics, particularly when it comes to GDP, unemployment, inflation, bad loans (NPLs) and local government debt. Limited access to relevant statistics and insufficient (statistical) transparency have shown up as analytical obstacles during many years, at least in my view.

But let’s look at some available economic developments all the same for getting at least some idea about the current state of China’s economy.

GDP: GDP in Q3 was disappointing again (+4.9 % yoy; +0.2 % qoq compared to expected +0.5 %; q2: +1.2 %; q1: +0.6 %). Q3 meant in other words the weakest quarterly GDP-growth rate since the eruption of the corona crisis in early 2020. Consequently, doubts seem to be motivated whether the official GDP-growth objective still can be met (“more than 6 %”).

Car registrations: A fall by 9.4 % yoy was noted in October – very much due to different exogenous shortcomings.

PMI: Purchasing managers reported a slight drop for manufacturing in October to 49.2, down from 49.6 in September.

New loans: Banks granted in October new yuan loans amounting to only half of the number from September. This may have had seasonal reasons but may also reflect some weakening of the business cycle. One should not forget that also Chinese manufacturing output and supply to investors and consumers have been influenced by the global shortages of semiconductors, other intermediate goods and bottlenecks in transport capacities.

Inflation: Inflation is currently causing a lot of debate. On the one hand, the Producer Price Index (PPI) rose with a very high number (13.5 %, yoy) – the highest since 1995. Furthermore, October has been the tenth consecutive month with a rising PPP number. On the other hand, the Consumer Price Index (CPI) came in at only 1.5 % – a gigantic differential to the PPI which really points at both micro- and macroeconomic imbalances in the Chinese economy.

Conclusion – the Chinese economy has lost some momentum

Altogether, those written lines are only a very brief analysis of the Chinese economy. However, it may be somewhat difficult to finally come up in 2021 to the official GDP-growth goal at 6 % or more. Provided that the generally – in most countries and international organizations – predicted visible recovery of global growth can be verified, China could manage somewhat higher GDP growth in 2022 than the year before – particularly if willing to contribute to declining global political tensions.

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

 

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China vs India – who will be the economic winner in the long run?

11 October, 2021

Presentation by Hubert Fromlet at LNU’s
Baltic Sea Region & Emerging Markets / China Day
Kalmar, October 14, 2021

About 15 years ago, I published a paper trying to answer the question whether China or India will be the economic winner in the long run1. I concluded then:

“India and China have very much in common. But both countries are also characterized by major differences. At present, the Chinese economy seems to be in the lead. This analysis shows, however, that it is far from certain that China will maintain the lead 15 or 20 years from now…”

In this paper from 2005, I also made a qualitative analysis of different growth factors. In 2021, I landed at the following confirmed or revised judgments:

My judgments on GDP-growth factors in 2005 and 2021 – China and India compared*

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*Own judgements: ++ substantial lead, + some lead, 0 roughly equal positions.

1Source for 2005:
Fromlet, Hubert, “India versus China – who will be the winner in the long run?”
Economic & Financial Review: a journal of the European Economic and Financial Centre, London, ISSN 1351-3621, ZDB-ID 12001399. – Vol. 12.2005, 3, p. 111-143
2sources for 2021:
own studies of papers, (country)reports, newspapers, statistics.  

 

What will decide – democracy, demography or deregulation?

Looking at growth factors in the table above, the impression seems to be logical that it still remains an unanswered question whether China or India will become the long-term economic winner. India seems having improved its relative position a little bit more than China in the past 15 years. Both countries have achieved improvements of certain factor contributions to GDP growth – but face still also lagging developments. However – when summing up developments – it seems to be impossible to give the different economic growth factors really correct weights for enabling to add up to a total change. How should, for example, the growth indicator “democracy” be weighted?

Obviously, there are also three more growth-driving factors which have not been discussed (enough) in my article from 2005. But they are now mentioned below with the need to be considered more deeply. Here they are:

 

 

 

In my view, the three now emphasized  “D”-growth contributors can play an important role when designing the growth perspectives for the next 15-year- period. But we should be aware of the fact that the obvious relationship between democracy and economic growth is not shared by all economists. I myself believe in this relationship and join therefore the related research by, for example, the famous institutional economists D. North and D. Acemoglu. It also should be relevant for India to maintain what I call “Western political sympathy points”. In a Chinese perspective, choosing realistic positions for meeting future protectionism, presidential changes in the U.S., and the global environment commitments will remain very important issues.

India’s favorable outlook for demography can be seen as a strong growth factor which, however, should be accompanied by enough focus on education – a must if India ever shall manage to pass by China economically.

Summarizing questions: Will China’s supremacy of the Communist Party continue to dominate over Chinese commercial needs? Will the market economy lose further momentum compared to the objective of the Third Plenum in 2013? What will happen to what then was envisaged as “the decisive role of markets in the economy” (chapter 1, 2 in the list of goals)? This goal was, by the way, mainly set by the still ruling strong President Xi Jinping and Prime Minister Li Keqiang. And how much will more deregulation and/or marketization be accepted by the societies in China and India? How big is the future risk for social unrest (which, for instance, may be caused by painful or badly planned deregulation)? We simply don’t know.

But I feel relatively sure that the answer to the questions above and, finally, as regards the long-term economic winner of the two most populated countries in the world – will be decided in Beijing and not in Delhi. However, this does not mean that India can afford underestimating the urgent need of structural domestic reforms – with institutions, education, innovation, infrastructure, digitalization, productivity, and health issues in the first place.

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

 

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Evergrande and other ”accidents” in China – not really a conundrum

20 September, 2021

China’s international reputation has obviously lost further ground in the course of 2021, to a high extent caused by increasing state interventions in people’s privacy and activities of many (foreign) companies. Such a policy orientation counteracts, of course, a necessary structural reform that China badly needs – the improvement of transparency. Lagging transparency is a major shortcoming that I have pointing at for many years (see, for example, my article published already eight years ago by BOFIT in Finland  (https://helda.helsinki.fi/bof/bitstream/handle/123456789/12599/172270.pdf?sequence=1&isAllowed=y).

The debt problem includes massive corporate debt

The source mentioned above puts focus on the insufficient transparency of government debt, both concerning central and local government debt. I have the uncomfortable feeling that my conclusions from 2013 fully remain in place. Looking at data from the multinational central bank BIS (where China is a member) reveals that China roughly doubled its total-debt ratio to GDP in the past decade, nowadays more than 160 % only for corporate debt – a ratio that in my view is underrating reality but impossible to measure exactly in a country like China.

Why? There are so many implicit corporate debt obligations outside accessible and readable corporate balance sheets that any good estimate of total corporate debt and, consequently, total domestic debt seems to be impossible. Even if one applies the debt numbers of the Chinese governmental think tank National Institute for Finance and Development (NIFD) – 270 % of GDP at the end of 2020 – it still would be an awful number. However, this number still seems to be too low. It should be clearly higher (by the way, Sweden’s debt total number is even higher).

Unfortunately, I do not see any chance to make a reasonable guestimate myself but I note that the BIS for Q4 last year noted China’s total debt at 289,5 % of GDP (https://stats.bis.org/statx/srs/table/f1.1) – 20 percentage points higher than the NIFD number). Find more financial statistics for China at FRED  –> (https://fred.stlouisfed.org/tags/series?t=china%3Bdebt&ob=pv&od=desc).

What will happen to Evergrande?

Anyway, whatever China’s real debt may be in relation to GDP, the shortcomings in transparency should have strongly contributed to the immense debt problems in the second largest economy in the world (in USD terms) – and previously also to other “accidents” in the Chinese economy. Most domestic investors in troubled Evergrande had certainly no clue about the enormous debt burden of this gigantic real-estate company. These people are angry. How many more Chinese real-estate companies are in the concrete risk zone as well?

The Chinese political leadership faces in the 100th anniversary year of the Communist Party a completely undesirable dilemma if the situation for Evergrande worsens further:

¤  to save Evergrande for avoiding social unrest, contagion to other real-estate companies, bank problems (NPLs) and bank runs, and possibly also turmoil on bond markets  or

¤  to react in the tough way by demonstrating that not all companies in major troubles will be rescued in the future.

Sure, I cannot give a well based answer on the possibly necessary political solution of this dilemma when writing this blog. However, my historical feeling about Chinese reactions on serious problems tells me that the first alternative seems to be the most probable. On the other hand, the verification of the second alternative would be a major surprise and at the same time meaning a kind of reversal to a more market-oriented Chinese policy approach in a very sensitive issue.

For the time being, global financial markets will watch the ongoing development of Evergrande very carefully.

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

 

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