China Research

… but it is (more or less) neglected by the international press and (financial ) analysts. I’m talking about the recent speech of China’s president Xi Jinping in Seattle during his ongoing visit to the U.S. (without having checked myself many American sources). Anyway, financial markets focused at the same time very much on the Caixin PMI (which was considerably below 50 – certainly not an encouraging signal on Chinese industry and GDP growth in reality). For my own analysis, however, I found the president’s exposé more interesting.

Xi told the invited guests that China feels very committed to reform policy and people’s well-being – and also to a policy that “forestalls risks” and keeps the economy at a medium-, high-growth level.

This is exactly the message I like to hear. In theory. Structural reforms and maintaining reasonable GDP growth would be a dream scenario – and particularly the following conclusion that reforms and reformers are still in place.

But there is a catch. We do not know how far the deceleration of the economy already has gone. Probably further than statistical numbers express. Furthermore, it is hard to summarize the reforms that already are taking place and what is to come soon. What has really been done in reform policy since 2014 after the Communist Party’s Third Plenum in November 2013? Transparency is still by far too low. So is the quality of statistics. Consequently, it is still hard to find out what’s really happening in the economy.

It is certainly a pity that China has not been working sufficiently for opening up (economic) information flows. If this had been the case, I certainly would have appreciated president Xi’s speech. Now, I don’t know.

But why shouldn’t Chinese leaders from now on work more ambitiously with economic transparency? It would be a win-win situation for both China and the rest of the world. And it would be much easier to conduct a financial deregulation policy which Chinese leaders put so much (verbal) emphasis on, particularly when it comes to the deregulation of cross-border capital flows.

The decisive question remains: How could China ever successfully open its capital account vis-à-vis other countries and envisage a working full convertibility of its currency yuan without at least having a roughly transparent economy?

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

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Reading the Fed’s press release from September 17 about unchanged short-term rates in the U.S should lead to reflections why the global nervousness about China was not mentioned explicitly. It could have been for diplomatic reasons. But it also could have been the case that the Federal Reserve feels confused about the real China risks. The words being used in the press release from September 17 about the China risks were as follows: “Recent global and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”.

The questions are: do the Fed’s worries about China mainly concentrate on the enormous drop of the stock market in summer and – possibly – on the mini devaluations of the RMB? Or do general fears of a more pronounced economic downturn in China make the Fed particularly nervous about growth prospects, even for the whole group of emerging countries and the U.S. itself? Does the Fed see more deflationary effects that may come from such a possible negative growth development? Or has the Fed – like global financial markets – only recently started to deal with China risks more systematically which may include all the political, social and economic challenges that China will be confronted with in the forthcoming months and years (and which I discussed and also summed up in this blog many times before). Did the Fed finally find out that the uncertainty about China should be considerably larger than assumed before?

We do know by now, however, that the Fed cares about China. We can come to the same conclusion when it comes to the Swedish central bank – at least when reading the comments of some decision-makers during the previous policy meeting on September 2. But what is their real concern about China more concretely? Is it limited to the possible impact on future inflation in the own country, such as Sweden (which would be too simple)?

It would be nice to know somewhat more about this latter issue, both from the Fed, the Riksbank and other central banks. Finally: What can be said about the China expertise in central banks outside China? I know that the Federal Reserve Bank of San Francisco and Finlands Bank (BOFIT) as part of the ECB are doing ambitious research on China. But what about all the other central banks?

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

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This week, China announced a change that I have been pleading for many times in the past few years. Finally, Chinese authorities have announced that they will abandon the cumulative GDP accounting (for q3: q1-q3 total minus q1-q2 total). Instead, q3 will be calculated and published separately. This will happen for the first time on October 19. In theory, it is a step in the right direction.

The Chinese tell us now that GDP calculations will be more precise. Hopefully! One indication will be if the National Bureau of Statistics (NBS) will be allowed to go for more visible growth fluctuations. This hasn’t been the case so far. Another positive signal would be the publication of quarterly results for the GDP aggregates such as private and public consumption, investments, net exports, inventories, etc.

So far, trust in GDP statistics has been low. The above-mentioned reform of GDP calculations does not automatically increase trust and transparency. Gaining trust takes time and needs continuous efforts, as I wrote in my last blog. It will take time to find out whether the accuracy of China’s GDP calculations will be improving by this methodical change, as promised by the NBS.

Despite all uncertainty, it is absolutely certain that China must improve its statistical standards and its transparency if it really wants to become a positive player on global financial markets and an appreciated partner country to invest in.

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

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