China Research

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

LNU’s China Panel No 22 – December 28, 2016

December 28, 2016

Temperature Indicator rises – but no real progress

Summary

Between November 22 and December 16, we made our regular fall/winter survey on business conditions in China. More than 15 prominent China experts participated, coming from Europe, North America and Asia.

¤  Our so-called growth-temperature indicator for the Chinese economy rose this time from 4.0 in spring this year to 5.2 (on a scale from 10 = very good, to 1 = very bad). Despite this improvement, 5.2 is reflecting one of the weakest numbers since the survey started in 2004.

¤  For 2017, our panel sees GDP growth at 6.1 percent which is slightly below consensus and official forecasts at around 6 ½ percent. Even 6.1 percent would probably be still acceptable for China’s political leadership – but not lower than this. Only 29 percent think that planned reforms from the Third Plenum in 2013 are on track.

¤  More than 90 percent of the participants believe that there is still a dangerous price bubble on the Chinese real estate market – but not really on the stock market (23 percent).

¤  The three major short-term concerns for the next few years are (ranked):
debt/non-performing loans, bursting housing bubble, persisting overcapacity in industry.

¤  General confidence in the Chinese economy in the forthcoming five years is located at 2.6 (scale 5 to 1, 5=very good). This is slightly weaker than in February 2016 (3.0), reflecting somewhat increasing doubts about China’s economic future more recently.

gdp_fall2016

 

Read the full article here. chinapanelsurveydecember2016.pdf

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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China is really slowing down

December 13, 2016

In the past, I have been writing a lot of lines on the insufficient quality of Chinese statistics – on this page, too. Today I wonder how the state of the Chinese economy really looks like. Could it be worse than most people think?

It is hard to tell since statistical transparency does not belong to China’s major strengths. But one has to think twice when analyzing current economic statistics. Certain numbers have come down quite visibly in 2016 and even much more sharply since, for example, the strong stimulation year of 2010. Some numbers can show developments more clearly (changes in %):

2010 2015 2016 (period)
GDP growth (yoy) 10.6 6.9 6.7 q 1-3
Industrial production (yoy) 15.7 6.1 6.0 1-9
Fixed investment (yoy, nominal) 23.8 10.0 8.3 1-10
Retail trade (yoy, nominal) 23.3 14.7 10.3 1-10
Current account balance (%/GDP) 3.9 3.0 2.2 q 1-3
Sources: NBS, BOFIT

There is now doubt: The Chinese economy has been slowing down substantially in the past few years. This is even confirmed by official GDP-growth statistics. Some indicators show also a rapid deceleration of important growth indicators since last year – but without affecting GDP-growth rates very much. This may be another conundrum.

If the slowdown of Chinese GDP growth cannot be stopped soon, this could be bad news for Chinese economic reform policy and the main political leaders as well – particularly since the major part of the Standing Committee has to be replaced next fall (but most probably not the Chairman and the Prime Minister).

Conclusion: Politics will become more important during next year in China as well – not only initiated by the next president of the United States but also originated in China. This should be kept in mind!

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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India’s attempt to escape from corruption and low taxation ethics

November 21, 2016

What a surprise to the Indian people when Prime Minister Modi two weeks ago without notice banned people from using the most popular 500- and 1000-rupee notes, making these notes worthless on the spot in retail trade, services etc. Some GDP damage – probably short-term – cannot be ruled out. A distorting shortage of cash showed up immediately in this gigantic cash-using country. The total enforced withdrawing of 84 percent of India’s cash currency created directly a severe chaos, despite the still existing possibility of changing the old notes into new ones by year-end and/or of opening deposit accounts, based on the currently commercially invalid bank notes.

Two – on the paper plausible – reasons led to this drastic decision by the Indian government. First, it is regarded as an important step against India’s enormous corruption. Second, the attempt to move more and more financial transactions to credit cards and bank accounts is aiming at improving tax-paying honesty which really is extremely low in India (i.e. in a country where only 3 percent of the population prepare tax bills and just 1 percent is paying taxes in reality). The institutional shortcomings of corruption and the black economy are really severe.

The main question, however, remains: to what extent can the recently taken measures contribute to fundamental institutional improvements? I see these note eliminations rather as symptomatic steps. History from the 1970s reminds us that similar steps at the time definitely were not successful.

However, the world has received a reminder by the Modi government of the major need to improve India’s fundamental institutional conditions – one of the major assumptions for sustained high growth rates. The globalized world is changing continuously in many respects. But many or most principles of economics are still in place – institutional economics most certainly included.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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