China Research

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

What’s so Strange about Chinese Exchange Rate Policy?

August 13, 2015

Chinese mini devaluations in the past few days have caused a lot of reactions on global financial markets. I don’t regard these steps as particularly dramatic – particularly not after all developments during the past year or so.

1. We have known for quite a while that China has been affected by weakening exports. And at the same time the U.S. dollar has been strengthening – a currency the Chinese renminbi (or yuan) has been and still is closely linked to (without knowing the official weights of the Chinese currency peg).

2. We have known – and seen by action – for quite a while that China wants to give its currency more weight on international markets (see my blog www.chinaresearch.se). For this reason, it is easy to understand that China wants to have some more market aspects for its future currency fixing.

3. We also know that China has launched the view on more market-oriented fx rates already a couple of times before. Let’s wait and see to what extent Chinese authorities will stick to this old and new view in the future.

4. We also know that China wants its currency to be included in the composition of the SDR by the end of this year (which I questioned as an urgent step in a previous China blog). However, this calls for more market orientation.

5. We also know – or should know – that strategic exchange rate policy decisions are made by the small group (7 people) of the Standing Committee of the Politburo, not by the People’s Bank of China (PBoC). This is China’s most important political decision forum. The recent devaluations probably have a strategic and political character determined by the Standing Committee. This assumption should underline the relevance of the devaluation steps.

6. We should know – or at least learn by now – that the recent days have shown that China’s future financial deregulation steps will become increasingly difficult the more the currency and the capital account will be deregulated. I have written quite a lot of lines on this issue in the past years. Some of them you can find in my China blog at Linnaeus University chinaresearch.se

7. We should know and understand that economic analysis of China is very difficult. Newcomers may feel this is not the case. But it is! I am quite sure that future challenges – may be a couple of years from now – will be much larger than the current one. More on this can be read in my article “Otillräcklig analys av Kina” in Dagens Industri from July 31.

 
 

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

 

Back to Start Page

China’s Strive for Quality of Growth and Growth Data – Challenges for Economic Analyses and the European/Global Corporate Sector

August 12, 2015

Abstract

Economists – particularly foreign financial analysts, also in Europe – focus mainly on the Purchasing Manager Indices (PMIs) and quarterly GDP changes when analyzing Chinese growth. This is understandable since these data are easily available. More recently these data did not produce an optimistic picture for China’s economy. But does this information really provide reliable information on China’s growth performance and outlook? Does this analytical approach capture the strategy and policy changes announced during the Third Plenum in November 2013?

Certainly not. Consequently, foreign and even domestic investors run the risk that portfolio and particularly more long-term investments are too heavily based on short-term indicators that do not reflect ongoing structural improvement measures or policy changes.

The paper will summarize past and current discussion on Chinese GDP data and deal with the alternatives for assessing economic growth and its quality. Merely relying on an improved and widened analysis of Chinese reform policy since November 2013 is difficult and has its limits. But better analysis can be created by economists themselves even under current conditions. Transparency is still by far too poor. Improvements should not be that difficult to achieve all the same. Some ideas are given in this paper – and also hints how and where to find information on structural improvements that have taken place or are planned concretely for the nearer future.

Better insight into Chinese reform policy and underlying GDP-growth conditions could give a sounder input for decision-making by domestic, European and global investors, Swedish and German companies included. The ambition of the paper is to contribute to a move from too much short-term to more medium- and long-term analysis of China’s development – an approach that should be promising also from a European corporate perspective.

JEL:   E60, F23, F 60, O53, P21, P48.

Read the full article here,
China’s Strive for Quality of Growth and Growth Data.pdf

 

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

 

Back to Start Page

The Baltics in Search for Exports

June 3, 2015

In 2014, Estonia grew by 2.1%, Latvia by 2.4%, and Lithuania by 2.9%. Flash estimates for Q1 2015 report GDP growth dipping to 1.2% YoY in Estonia and Lithuania (contraction of 0.3% and 0.6% QoQ), and 2.0% in Latvia (still up 0.4% QoQ). Investment activity has been quite weak for a couple of years whereas consumption growth has remained by and large robust. Thus, the key reason for the dip in growth seems to be external, i.e.: (i) collapse in Russian demand, and (ii) subpar EU growth.

If subpar EU growth has tamed the upside for the Baltics (overall it still holds good growth prospects as the EU demand is still rising), Russian contraction and especially the rouble depreciation have an outright negative hit. The reason for Russia’s contraction is its chronic structural weaknesses (excessive dependence on oil, poor rule of law, weakness of market institutions) – reinforced by sanctions (impaired access to finance and technologies due to the sanctions from the West, but also Russia’s own imposed embargo on food imports) due to the Russia-Ukraine conflict.

Flash estimate for Q1 2015 reports Russian GDP to have shrunk by 1.9% YoY. Real household incomes are down about 10% YoY as are retail sales; investment activity seems to have fallen through the floor. It could have been worse… with oil prices gradually picking up, the rouble has stabilized at somewhat stronger levels than expected, which means that inflation, though still at about 16%, seems to have peaked and is likely to start retreating. Industrial output has reported small positive numbers. Still, Russia is set to shrink further this year and recession is likely to end only in 2016. Moreover, when recession will end, recovery will be bleak low single digits as its old oil-driven growth model has run out of steam and there is nothing broad and strong enough to substitute for it. So, there is not much hope for strong demand growth from Russia over the longer term either, even when ignoring the lagging rule of law, investor protection and geopolitical risks.

How does this Russia trouble affect the Baltic economies? It has cut sharply into the Baltic exports – in Q1 2015, goods exports to Russia fell by 29% for Latvia, 34% for Lithuania (-60% for Lithuanian origin goods) and 49% for Estonia from one year ago. More difficult to measure, but confidence must also have suffered, reducing investment activity. Yet, the overall impact is not that devastating at all. Despite the massive drop of exports to Russia, total exports have grown a tad for Latvia (up 0.4% YoY), and only marginally inched down for Estonia (-0.4%) and Lithuania (-3.8%; -4% for Lithuanian origin goods).  Thus, the good news is that the massive fall in the exports to Russia have been compensated with expansion in other (mainly EU) markets. So far we see only limited and contained impact – within certain sectors or companies – on corporate profitability and liquidity.

In short, the Baltics are coping quite well with this. One of the reasons is that it is not the first time the Baltics see something like that; during the 1998 Russian crisis, for example, dependence on trade with Russia was much larger than it was before the current watershed, so companies have been diversifying their markets for a long time. As to the sanctions – Russia has had a habit of introducing one off sanctions against specific goods already before and also quite regularly (e.g. there was a ban specifically on Lithuanian milk products in 2013). Companies know how to react in such instances. Yes, this is costly, but companies have seen it before and know what to do.

We expect the Baltic goods exports to Russia to fall by 30%-50% in 2015, and trade links with Russia to weaken substantially. Russia’s share in goods exports has been shrinking, e.g. for Latvia, from 9.4% in Q1 2013 to 6.8% in Q1 2015. To compensate for the shortfall in Russia, there has been a spectacular growth to many so far for quite exotic markets for the Baltic exporters such as Middle East, China or Japan. But the major volume growth has been already established to the core partners of the EU. The share of destination EU has risen, e.g. for Latvia from 70.9% in Q1 2013 to 75.4% in Q1 2015, and it is likely to continue going forward. If political alliances for the Baltics have clearly been with Europe, fast and lucrative export growth to Russia and its peripheral trade partners at times may have put politicians in a situation to weigh among political and economic alliances… now political and economic alliances are likely to become closer aligned, which will add to stability – and this is good.

We see the dip in early 2015 as temporary since a gradual pick up in EU growth (supported by ECB quantitative easing stimulus) must lift European demand and thus the Baltic exports and consumer spending. Overall, we expect the Baltics to grow by about 2% in 2015 and 3% in 2016. Slower than before, but not that bad either.

Annual_Growth_of_Goods_Exports_3M_Average

 

 

 

 

 

 

Mārtiņš Kazāks
Swedbank Deputy Group Chief Economist and Chief Economist for Swedbank in Latvia

 

Back to Start Page