China Research

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

India – changing or not?

December 21, 2015

I have been analyzing India since the late 1980s. Consequently, I feel quite familiar with most of the structural changes in this big country and the economic development that could be noted in the past twenty years. India of today is certainly very different from India of the early 1990s – at least in most economic respects. India has been changing.

Improvements have been achieved in many areas – but not in all. There are still important bottlenecks for the efficiency of reforms.

First, India remains a slowly moving country. Indian colleagues and journalists still tell me regularly that this phenomenon mainly can be explained by the fact that democratically based changes often need time-demanding compromises (which China does not need to consider, Indian experts usually add).

Second, the different states in the federal system of India make the conditions for unified reforms over the whole country many times very difficult or in certain cases even impossible. This situation can also be regarded as very different from China.

Third, lndian capitalism is softer than, for example, the more ruthless capitalist part of the Chinese economic model. Sympathy for the first or the second version of these two capitalist applications may differ among foreign observers. Western analysts and companies dislike in this context many times the inflexibility on Indian labor markets.

Anyway, India belongs obviously to the group of emerging markets where foreign country analysis tends to focus insufficiently on the strong  relationship between politics and economic development. This is a decisive shortcoming.

Expectations were indeed high when Narendra Modi from the conservative Bharatiya Janata Party (BJP) in 2014 became India’s new prime minister. In the beginning, reform plans looked promising. Today, however, historical reality seems to be back – i. e. the usual reality of delayed moves forward. Sure, prime minister Modi and his plans and strategies for economic policy still seem to be supported by the Indian corporate sector. But political opposition in Indian parliament(s) gets tougher and tougher.

Today, for example, the political opposition works against the introduction of a new goods and services tax for in the same way as the current government did during their time in opposition. Furthermore, plans of more relieved rules for purchases of land by companies and the liberalization of many tight labor market rules have also been canceled from the near-term agenda.

Altogether, India is changing into the right direction – and at the same time it is not. Policy orientation itself toward better structural growth conditions seems to be in place – but the tools to speed up the processes of implementation are still too inefficient or even absent.

Here we the key to many promising future structural economic reforms in India!

 

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

 

Back to Start Page

Asian housing: Ride the cycle

December 14, 2015

 

 

 

 

By John Calverley, CEO Calverley Advisors, Markham ON, Canada

John Calverley – an appreciated colleague, author of different books about financial crises and risks and also former chief economist at important global financial institutions – sent me recently a very interesting piece on Asian housing markets which he wrote for Standard Chartered Bank. He kindly gave me the permission to establish a link to his article in my blog. Thanks indeed, John!

Read on! Enjoy!

Hubert Fromlet

https://www.sc.com/BeyondBorders/wp-content/uploads/2015/11/2015-11-XX-BeyondBorders-Report-Asian-housing-Ride-the-cycle-Final.pdf

The RMB made it – what does it really mean?

December 7, 2015

China finally made it. The International Monetary Fund (IMF) has now met China’s strong desire to get its currency – the renminbi (RMB) – accepted as the fifth currency of the IMF’s artificial currency basket by the name of Special Drawing Rights (SDR). Until now, SDRs contain only the U.S.dollar, the euro, the yen and the Pound Sterling.

Understandably, the Chinese are celebrating this event. Current Chinese enthusiasm reminds strongly of China’s entry into WTO exactly 14 years ago. International or global recognition is something Chinese politicians really appreciate. One should also add that China’s WTO entry – purely economically – most certainly was a much more important event than now becoming part of the SDR basket.

For this reason, it is not quite easy to understand the strongly praising words by Christine Lagarde, the head of the IMF. Lagarde said among other comments that “the decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy in the global financial system”. She adds officially that “it is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.”

I have my doubts about the prestigious way of presenting the RMB inclusion in the SDR by the IMF. Why is there so much noise about this step from both the IMF, Western players on financial markets and journalists? The laudation may be justified later on retrospectively – but not under current conditions. Five questions or arguments make me skeptical.

First, SDRs have currently not really an important function as an international reserve asset. Their market share is only a few percent (read more on this by Maurice Obstfeld, “The SDR as an International Reserve Asset – What Future?”, International Growth Centre, LSE, March 2011). Could it be the case that the IMF via the RMB entry now starts working for an active revival of this almost forgotten IMF tool? Something to remember: private institutions do not hold or use SDRs.

Second, has the RMB inclusion mainly happened for political – and not for economic – reasons?

Third, the presented glamour around the IMF decision puts too much emphasis on China’s international financial relations whereas the need of further domestic financial reforms currently is much higher and more urgent – despite a number of improvements at home more recently, particularly when it comes to the processes of setting interest rates.

Fourth, how substantial are the accomplished improvements of the financial system – which Lagarde so strongly pointed at during the press conference – in Chinese reality? How much are they worth in relation to all the potential Chinese bad loans of the official and the shadow banking sector that we have so little information about? What about the real size of the local government debt? What about bubbles in the housing market and local industry parks? And where are the improvements in Chinese transparency that Lagarde has been talking about during the press conference? I haven’t found very much myself, particularly not in the statistics that are analytically important to China and the rest of the world.

Fifth, it can be discussed whether RMB really had met the second criterion for joining the SDR which demands that the currency is “freely usable”. I could not find any clear definition of what is called “freely usable” in this specific Chinese context. Did I miss something?

Initially, i.e. from October 2016 onward, the RMB is given 10.92 % in the revised SDR basket. The U.S. dollar received 41.73 % (before 41.90 %), the euro 30.93 % (before 37.40 %), the yen 8.33 % (before 9.40 %) and the British pound 8.09 % (before 11.30 %). China’s new share seems to be relatively high, compared to both the euro, the yen and the British pound. And why did the euro and the pound lose that much ground whereas the U.S.dollar remained roughly unchanged? Sure, I know there is a revised formula for the share calculations. But how scientifically and statistically strong are the criteria of the components of the new formula? The information given by the IMF, however, still keeps a number of answers quite open. More research on this issue could be interesting (which I may deal with myself).

I know from unofficial sources that the ECB has been very irritated about the considerably decreasing weight of the euro in the revised SDR basket. Information to the ECB about the forthcoming downgrading of the euro in the SDR system did obviously not work very well – an issue that the IMF probably could have handled more smoothly.

To avoid misunderstandings, nobody can blame China for having tried and succeeded. That’s not the point. The point is the insufficient transparency of the IMF in certain parts of the decision process. What about the theory that the IMF – by sticking strongly to this recognition of China – mainly intended to encourage China to speed up and/or intensify further economic and financial reforms?

Anyway, for the time being, financial improvements and reforms of the domestic financial system will be much more important to China’s future than ambitiously deregulating the cross-border capital balance. Hereby, the issue of sequencing should not be forgotten – i.e. implementing the reforms in the right order (look here, for example at the works of S. Edwards and P-R Agénor).

Still valid also for China: stability begins at home!

 

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

 

Back to Start Page