China Research

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

China’s new GDP numbers – what do they tell?

January 19, 2016

This morning, China’s GDP-growth figures were published for 2015 as a whole and for the past quarter (Q4). This happened even one day earlier than last year – and certainly very early in a new year when referring to Western publication habits. So, why is that GDP publication done so early again?

In my view, there is particularly one explication for this strange behavior: the Chinese had the ambition to present quite a decent growth number without delay as an attempt to reduce still ongoing fears of stock market players and other – domestic and foreign – decision-makers who all felt increasingly concerned in recent weeks about growth developments and prospects. Until yesterday, I said to everybody who asked me about the probable GDP growth in Q4 that it will be 7 percent +/- 0.1 percent – because ”it has to be there”. This turned out to be the case.

The “new normal”

“It has to be there” came up because I concluded that this strategy would be applied in order to calm financial markets – but also to present China as positive as possible for the whole world, especially as a host nation for the IIF-G20 conference in February in Shanghai. Therefore a strict application of behavioral economics seems to be motivated also in this context – and should not be underestimated. Psychology is needed when analyzing China.

Sure, some downsizing of growth perspectives is regarded as an unavoidable precondition for future (medium- and long-term) economic progress by major parts of the Chinese people (and analysts). But the “new normal” – as Chinese political leaders call the dampened output caused by moving growth from exports and investment to more consumption (services included) – should certainly not be too low. Close to 7 percent now and around 6 ½ percent each coming year in this decade is officially considered to be about right (in Swedish: “lagom” which is an almost untranslatable word). The government also talks about the objective of a “well-off society by 2020”, the final year of the recently started Five-Year Plan. “Well-off society” certainly includes a development without major social tensions – and such a performance assumes a kind of reasonable GDP growth mentioned above.

Purely numerically regarded, GDP statistics published today are still in line with the objective of a well-off society (GDP growth 2015: 6.9 % compared to 2014, 7.3 % in 2014 compared to 2013; 2015q4: 6.8 % yoy, 2015 q3: 6.9 %, 2015 q2: 7.0 %, 2015 q1: 7.0 %). The annual GDP-growth rate below 7.0 percent means to me that the real development last year was weaker than this when regarding China’s economic development as a whole and the major falls of commodity prices. There is an obvious risk that the officially expressed growth objective – around 6.5 percent for every year until the end of the decade – may lead to (somewhat) fudged numbers in the future as well. This seems to be the experience of the past. Hopefully, I am wrong on this point.

As I wrote in my previous blog piece on China, it would increase the credibility of GDP statistics if the Chinese allowed for – or managed – more visible fluctuations and revisions of quarterly GDP growth than so far. Such a change would be natural and mean important progress.

What do the figures from today’s GDP statistics tell us?

Obviously, all the quarterly GDP-growth numbers of 2015 are very close to each other. Consequently, the question comes up again: are the published GDP data for the past year too positive to be true? There seems to be good reason to believe so.

First, published GDP-growth rates have – technically expressed year on year – (almost) a linear behavior. This seems to be unrealistic – as pointed out in previous blogs of mine. Second, why is the accounting of GDP and its aggregates – inventories included – still such a conundrum and incomplete in official releases? Third, also recent research shows that certain composed sets of non-GDP indicators still tell more about economic activity in China than GDP alone – despite some supposed, ongoing improvements of GDP quality in the past few years, at least according to Fernald, Hsu and Spiegel (“Is China fudging its figures? Evidence from trading partner data”, BOFIT Discussion Papers, 2015, No 29; these authors have constructed an index consisting of electricity consumption, rail freight, raw materials supply and retail sales, finding out that adding GDP only “modestly” gives more information than the index – a conclusion which actually is very much in line with Prime Minister Li Keqiang’s alternative activity index to GDP from his time as a provincial leader in Liaoning).

Services matter

It also should be mentioned that the share of services in relation to total production has been increasing further during 2015. Hopefully, these statistical numbers belong to the more correct ones. If this really was the case, the restructuring of the Chinese economy at least partially would be on the right track. However, considerably more high-tech production and efficiency should be achieved by industry as well.

In the past 10-20 years, China’s economy has been benefiting a lot from the nation’s optimism and forward spirit. In recent weeks – on the other hand – doubts about the future became visible, expressed by the pressure on the stock exchange and the currency CNY. Psychology matters also in China. Too many analysts still have not dealt sufficiently with this quite simple conclusion.

 

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

 

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Poland – why it succeeded so far

January 13, 2016

Newspapers and politicians all over the world currently show a high degree of disappointment about Poland’s political development after last year’s general elections. Fears of markedly reduced democracy are expressed quite loudly. Economists, however, are more silent. This fact may confirm once more that foreign analysts at financial institutions and elsewhere usually are not well informed about economies outside the traditional OECD area (though Poland nowadays is an OECD country). This is – by the way – also true of China for which herd analysis usually dominates even outside the country, particularly among most financial players.

In my view, recent developments in Poland should not be underestimated. Poland’s strong emerging role during the transition to a working market economy was indeed impressive. Poland was even the first country among the former planned economies in (South) Eastern Europe that reached pre-1989 GDP levels. I have seen Poland’s impressive development many times with my own eyes since its opening-up in 1990.

The secret behind Poland’s success story until recently was without doubt that Poland – more or less – never moved backward in its reform policy. Sometimes Poland moved somewhat more to left of the road, sometimes a little more to the right – and the pace of reforms was during certain periods quite slow and during other periods more accelerated.

But the direction was always forward – and never really backward! This is probably the most important explanation of Poland’s political and economic recovery in the past 25 years. My own research has also confirmed in a number of studies that reliable and steady – sometimes quite slow – moves forward usually mean more to sustained economic growth than a mixture of fast structural improvements and following setbacks.

So, why should Poland want to jeopardize its achieved, good international credibility position? Foreign companies have invested a lot in Poland and, thus, contributed strongly to Poland’s fairly good international competitiveness. In other words: it should not be ruled out that reality and memory can take this quite large European country back to frameworks that are in line with nowadays valid European standards. However, good psychological feeling should be applied – particularly by Poland’s partners in the EU and in NATO. Such a position seems to be more promising than threats – if I understand Polish mentality correctly.

Anyway, the analysis of Poland’s political and economic development should be intensified in many international institutes and commercial organizations. We should keep in mind that Poland is an important European country – though often underestimated.

 

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

 

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Current problems on the Chinese stock exchanges – a matter of lagging confidence

January 7, 2016

Today, the two stock exchanges in China were closed again after having dropped by 7 percent. As I have been emphasizing many times on this page, developments like this should not be surprising at all. Finally, China has to pay for all the shortcomings in transparency and statistical quality. Markets cannot know how serious and sustained the Chinese growth problems really are.
Consequently, confidence in reasonable growth prospects is shrinking. Right or wrong, current behavior of financial markets is logical. For this reason, China should do everything to restore this lost confidence. Improvements take, of course, time. But certain steps can be taken any time soon.
For instance, by calculating and revising GDP numbers closer to reality. In other words, by getting to something else than a 6.9, 7.0 or 7.1 percent in GDP growth for the fourth quarter of 2015 and by allowing for more fluctuations and revisions between the quarters. Not to forget: it really should take more time to make the quarterly GDP calculations applicable than it is still the case.
I’m sure, the whole world will look very carefully at the GDP results for 2015 which probably will be presented already three weeks from now. No other country has such speedy statistical calculation process of GDP as China shows year after year. Or will there be a change already this time?

 

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

 

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