China Research

Foreign policy and international trade policy by the United States are certainly confusing these days. Trade frictions with China get new dimensions almost daily. This is also worrying for the rest of the world.

I do not want to discuss here why China and many other countries do not want to buy more American goods. And I do not want to check further to what extent China would be theoretically able to reduce its trade surpluses with the U.S. by as much as 200 billion dollars; this has indeed been done before in a number of well-informing articles.

Instead, I want to concentrate this blog on an angle that – as far as I know – has not been illuminated at all or at least very much neglected. As many observers of China know, China has been fighting for a long time to be recognized as a market economy – an objective that has been turned down regularly by the U.S. (and by the EU). In my view, this rejection remains motivated since the Chinese economy and corporate sector still are based on a lot of government influence, permissions and decisions – despite the fact that more than half of the country’s GDP is produced by officially private firms.

But we also know that the influence of the Communist Party more recently rather has been increasing than the other way around. At the same time, smart Chinese political leaders have certainly found out that political interventions to achieve drastically reduced trade and current account surpluses with the U.S. certainly cannot be brought in line with the goal of gaining recognition as a market economy.

In other words, Trump wants China to break against the rules of a market economy and at the same time to maintain the arguments against China for not being mature as a market economy. It is like squaring the circle. We can be sure the president Xi Jinping understands the dimensions of this side of the trade problem. This is one of the reasons why he has been strongly revaluing foreign policy more recently, also by important personal appointments and his own increasing involvement in foreign policy.

However, nobody knows how the Trump administration’s conflict with China will end. In the longer run, the trade conflict between the U.S. and China is certainly not good for the global economy.

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

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More recently, political and economic analysis in our part of the world has become more skeptical about China. This is no surprise when considering recent political autocratic changes inside China, heavy political challenges from abroad (Trump), and domestically expressed concern about the burdening indebtedness. Furthermore, foreign analysts are getting more uncertain or even worried about the speed of implementation of all the planned economic reforms. Unfortunately, transparency remains poor also in this respect.

Three Chinas

It is probably wrong to speak unsophisticatedly about “one China”. In my view, there exist three different Chinas – divided as follows:

1. The “traditional” and conservative China.
   Here we talk about sticking to traditional values about “Chinese socialism” and remaining strong political influence on individuals and major parts of the corporate sector (state-owned enterprises, of course, included), recently again underlined by China’s strong leader Xi Jinping.

2. The slowly reforming China.
   This part of China is probably quite large even if there is no chance to quantify the share of the slowly reforming China in percentage terms – but it seems to be probable that the size of this second type of China could be essential. More cautious but not really pessimistic foreign China forecasters should be mainly found in this segment – experts who probably also focus on the economic imbalances.

3. The rapidly changing China.
   Optimists about the economic future of China prefer to give China’s strong technology efforts their main momentum and see it as a driver of future GDP growth. Artificial intelligence (AI) is expected to play a crucial role in this development. Consequently, future progress in this third – the rapidly changing – China is predicted to clearly outperform the two above-mentioned Chinas and less promising definitions of the three Chinas.

In my own view, I also consider the time horizon very carefully. In the forthcoming few years, options 1 and 2 may dominate. In an even longer perspective, option 3 could gain clear momentum. But how much progress can be achieved in the lagging parts of China until this – maybe – new era of production and GDP growth may show up openly and recognizably? This is one of the future key questions, potentially of more importance than future tensions derived from international politics.

More cautious forecasts

Unfortunately, the quite recently finalized 13^th National People’s Congress did not really give much detailed information on the current status of all the announced and necessary economic reforms. In other words: Transparency shortcomings are still remarkable.

This is also concluded by the well-known and competent Finnish research institute BOFIT (The Bank of Finland Institute for Economies in Transition) in their recent forecast on the Chinese economy. BOFIT writes in its recent China forecast from March 27 that “major economic reforms have not been carried out as previously expected and some reforms even reversed. Concrete reform execution plans were notably missing from the addresses made at the National Congress … In coming years, dealing with financial risks and China’s massive pollution, problems are inevitable … We expect growth to slow to around 5.5 % in 2019 and to around 5 % in 2020 … (after 6.5% in 2018, own additional remark)”.

BOFIT also singles out that official Chinese (forecast) numbers should be analyzed with “considerable scepticism”. This should be indeed the case. In my view, GDP growth will continue to meet the projections of China’s political leadership because of performance pressure – whatever the real development might have been. Therefore GDP growth will be 6.5 percent in 2018 as China’s political leaders have emphasized during the National People’s Congress – or even 6.6 or 6.7 percent, despite the first preference of reducing the problems of China’s private and local government debt.

The goal conflict between the reduction of financial risks and GDP growth will go on – with financial risk reduction most probably in the first place, at least in practice. Reasonable economic growth and poverty reduction should also have continuous high priority – at the expense of the environment?

Maximizing the reduction of the debt problem, the achievement of future high GDP growth with reduction of poverty and also a clearly better environment seem to be an impossible trinity. Thus, increasing doubts about the Chinese economy are motivated. Hopefully a wrong view at some point in the future …

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

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