China Research

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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This morning, one could read in Chinese and international press that the statistical office of China (National Bureau of Statistics, NBS) made a slight downward revision of GDP growth for 2014 – from 7.4 to 7.3 percent. This is exactly the phenomenon my colleague Doris Fischer and I describe in our recent paper “China’s strive for quality and growth data” (SNEE, see also my latest blogs in chinaresearch.se from August/September and in http://blogg.lnu.se/fromlet-bbsresearch/blog/blogg/kina-kortsiktiga-utmaningar-i-konflikt-med-langsiktiga-mal/).

The point is that revisions in Chinese statistics – if they exist – still are tiny and, thus, not really trustworthy. Very small revisions of this kind do not exist over time in our part of the world. Why should they reflect reality in China?

A similar example can be picked from official Chinese forecasts for GDP. In most cases they become more or less exactly verified later on by official statistics. For 2015, the official forecast for GDP growth in China is at 7.0 percent. Consequently, we should not be surprised about the fact that Chinese GDP growth for the first half of 2015 came in exactly at 7.0 percent. It can be added that Chinese officials also announced these days that GDP growth is on track. Following tradition, this implies that the outcome of GDP growth in China will be very close to 7 percent.

What does all this mean? An important conclusion should be that we do not know how much GDP growth currently is in reality. 7, 6, 5 percent – or something else?

Trust in Chinese GDP numbers will be first growing when Chinese leaders allow for more deviation from expectations and official forecasts. To get there, won’t be easy for psychological reasons. The big question is: from which stage become official numbers really trustworthy? Apart from this, we still get confronted with lagging transparency.

But we know from research and experience: gaining trust takes time. Why not start such a process already now?

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

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On June 10 this year, the European Chamber of Commerce in China (EUCCC) presented its yearly Business Confidence Study. Although the glass still is half full many European business feel that the protracted Chinese economic slowdown has become a top business challenge. Pessimism about growth and profitability leads many to significant cut-backs, particularly through headcount reduction: Two fifths are planning to cut costs—a large jump from less than just one quarter in 2014—with most of them planning employee lay-offs.

At the same time China remains a key market and thus European companies want and welcome the ‘new normal’, which means slower but better qualitative growth with consumption as the primary driver of economic growth. To achieve this China wants to move its economy up the value chain. However, European business representatives feel that the regulatory framework has yet to come into place. In particular, a better implementation of the rule of law is seen as the top driver for China’s economic development moving forward, according to the Business Confidence Survey.

The Chinese economy is now entering a paradigm shift, necessitating for the Chinese Government to quickly discard its ‘old toolbox’ of high, fixed-asset investments and export-driven growth, which has created unprecedented overcapacity levels and debt burden in many sectors. In a long-term perspective, China’s economy clearly has room for much more growth. Therefore the vast majority of European business sees China as a key market in which they wish to remain and to grow with.

Innovation will be one of the most critical drivers needed to move the Chinese economy up the value chain. European companies are part of this process, but less than one third of them have an R&D centre in China and for the most part these R&D centres are first and foremost used for product localisation. Innovative companies would contribute more to the Chinese economy if they felt more secure from threats like import substitution and technology transfer attempts, were given better protection under China’s intellectual property rights (IPR) laws through improved enforcement, and their innovative drive and productivity was not curtailed by domestic restrictions to Internet access.

It is the view of the European Chamber in China that it should not matter for a government which kind of ownership of companies conducts R&D, creates work opportunities and generates tax revenues as long as these activities are within the jurisdiction of that particular government.

Success of Chinese reforms and the restructuring of the economy and the society as a whole need the participation of all. European companies are committed to be part of economic growth going forward but are expecting to be equally treated to Chinese companies, and they take for granted that China will create a level playing field for all – so that the market forces will be able to play the decisive role in economic life that China has asked for.

Mats Harborn
Vice Chairman, European Union Chamber of Commerce in China (EUCCC)

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