China Research

It seems, for example, credible that the role of the service sector has been strengthened more recently. This is a cornerstone in the new economic policy. The exact degree of this improvement is not known but the tertiary sector’s share of total production may now in reality be slightly more than 50 percent of GDP compared to roughly 40 percent for manufacturing (applying calculations by the National Bureau of Statistics).

Some further marketization of the financial sector and improvements in financial supervision can also be observed since 2014. The yuan has become a more international currency. Institutional shortcomings like corruption seem to be counteracted more strongly these days than in the past. The residential registration system (hukou) is about to be modernized, although probably not fast and broadly enough. Urbanization as a main driver of economic growth is going on, and let’s not forget the planned new Belt and Road Project with investment magnitudes that could become very high if everything goes to plan.  Focus on innovation, (mass-) entrepreneurship, e-commerce and other IT developments, pollution and the “new normal” with lower potential – but qualitatively better – GDP growth has been intensified by the Chinese decision makers and has also led to concrete measures.

An interesting detail is the introduction of a bonus and penalty system for pollution in an increasing number of cities in order to meet the compulsory government reduction targets of the current five-year plan. Further plans for pricing reforms should also be mentioned.

Thus, Chinese political decision makers are certainly not passive. Improvements have taken place recently and will happen in the future. However, insufficient reform steps and compromises will also be noted. Modern country and corporate analysis has to consider the promising parts of the reform policy but also the major difficulties that China will be confronted with in the forthcoming years.

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

Back to Start Page

China wants to receive the market-economy status (MES) from the EU by December 11 at the latest, exactly 15 years after its WTO entry. This request is no surprise since China would see such a promotion as juridically justified and as a prestigious move toward further international recognition.

There are opponents to such a step which would give China cheaper penalties for price dumping on international markets. Experts like Rolf Langhammer (see our blog from March 2) believe, however, that economic reasons for granting China the MES are strong enough.

Here we come exactly to the point. In my view, purely economic reasons are needed for China’s potential MES. Political strategy and tactic on the part of Europe vis-à-vis the powerhouse of China should not be a guideline at all. Today, the Chinese economy is still characterized by a lot of government involvement, maybe too much for receiving MES. On the other side, Chinese leaders move structurally in the right market direction – but how fast?

Nobody can tell. But according to the decisions by the important Third Plenum of the CPC in 2013, China is intended to develop as a country that should give the market economy “a decisive role”. China argues at the same time that Europe is developing away from a genuine market economy which is partly true. These diverging trends make an economically based MES-decision even more difficult – despite China’s simultaneously still imperfect status as a market economy.

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

Back to Start Page

China’s new economic policy will have – or should have – an impact on many corporate decisions, both within and outside China. To what extent, of course, depends on the future success of the ongoing economic reform policy and its specific advances. Both the financial and the non-financial sector will be affected. Success or failure will be characterized for the time being by what economists since almost 100 years ago call “Knightian uncertainty”, i.e. that the outcome of an event or a development cannot be given any probability.

Anyway, China’s political leaders want to raise the quality of economic growth by achieving more value-added products in industry and a considerable relative increase of the service sector in total production – created by education, research, innovation, new (green) technology, IT and mass entrepreneurship. All this is based on the forward-looking decisions of the Third Plenum in November 2013, a kind of manifesto for China’s new economic policy which is relatively well based on Western economic research.

It is important to be aware of the fact that many of these reforms will have an impact on countries and corporations all over the globe. For this reason, many foreign and domestic Chinese companies will have to revise their business models for the Chinese market, adapting to urbanization, demography, more competitive products, new preferences of consumers, new environmental rules and many other challenges.

New commercial opportunities and challenges will become increasingly logical and transparent in line with the realization of the new economic policy and the “Made in China 2025”upgrading strategy. But gradually – for structural reasons – weakening markets in China should also be recognized on time. More academic field research may be a promising supplement in these respects.

China’s new economic policy will lead to many major and minor changes. Temporary and unsteady analysis of the economy becomes more and more inadequate. China has to be analyzed continuously and not only on special occasions when a new global forecast or sales plan has to be prepared for the company itself or for its customers. Quantitative (statistical) macroeconomic analysis has, however, many shortcomings and should thus not be relied on too heavily. Instead, more emphasis should be placed on the qualitative improvements of economic growth (which is not easy) and also on the possible risks that may show up in the forthcoming years.

Traditional brief macroeconomic analysis – the “automatic” assumption of unchanged political conditions included – cannot be applied anymore to a country that will likely change to a great extent in the next decade in order to be able to maintain or achieve what Chinese top politicians call a “moderately prosperous society in all respects“– and to escape from or avoid the middle-income trap. More interdisciplinary research that includes politics, institutions, sociology, psychology, the environment, health, etc., is certainly needed. China has to be analyzed from different angles, much more rigorously than many analysts have done in the past.

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

Back to Start Page