China Research

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

Survey on China’s new economic and social reform policies

May 6, 2015

April 2015

1. Do you think that the main economic and social reforms that were set up by China’s political leaders at the Third Plenum in November 2013 can be implemented roughly successfully by 2020 – the officially announced evaluation year?

Yes: 54 % No: 46 %

2. Which three envisaged areas will be the most difficult ones to reform (ranked)?

Financial markets

Institutions

Environment

3. Where do you see the three major challenges to the reform policy come from (ranked)?

Politics

Slow moves of institutions

Lack of understanding through the whole system of decisions makers

4. Considering your answers above on the importance of better quality of growth – as stressed repeatedly by the government – what kind of GDP effects do you expect in the forthcoming years

GDP-growth rates will improve until 2020
compared to current growth rates –

GDP-growth rates will stabilize at a level
of 6-7% in the years to 2020 73 %

GDP-growth rates will decline considerably
until 2020 compared to current growth rates 27 %

The quality of data will in the forthcoming years

improve: 27 % deteriorate: 9 % remain unchanged: 64 %

The transparency of data will improve

Yes: 45 % No: 55 %

5. As how important would you grade a relatively successful Chinese reform policy by 2020 for the

(scale 1-5; 5 = very important)

European economy (generally): 3.7 European corporate sector: 3.5

American economy (generally): 3.7 American corporate sector: 3.8

Asian economy outside China: 4.8 Asian corporations outside China: 4.7

 

Comments:

The results of our little survey should be interpreted cautiously since only 11 experts sent their answers to us. But we think that some indications are given all the same.

The respondents are really divided on the future results of the reforms plans (as it was the case one year ago).

Not very surprising: Financial markets, institutions and the environment are considered as the most difficult areas to reform or to improve.

More than 70 percent of the panel participants believe that China’s GDP growth rate will stabilize between 6 and 7 percent in the forthcoming years; this would be quite a satisfactory development with (probably) improved quality of growth at the same time. Regrettably, no major progress is expected what concerns the quality of statistics.

A relatively successful Chinese reform policy is regarded as quite important to the European and American economy – but also to the corporate sector of these two continents. In our view, the Chinese impact will be even higher beyond 2020 if Chinese reform policy were to fail. Understandably, the rest of Asia will be even more dependent on developments in China, the panelists conclude.

 

 

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

 

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Russia’s Economic Growth will be much Slower in the Future

April 1, 2015

During the boom years between 2000 and 2008, Russian GDP grew by almost 7.5% per annum. This boom was caused by two interlinked factors: The global economy was growing at a very rapid pace, and the price of crude oil rose throughout the period. When the financial crisis hit major parts of the world, Russia’s economy was badly affected along with everybody else, but subsequently Russian growth has been slower than before the crisis. In addition, Russian GDP growth has decelerated almost continuously from 2011 onwards. (Figure 1)

Figure 1 Russia’s GDP growth

Source: Rosstat and own calculations

There was no obvious single reason for this slowdown, but some important factors should be noted. First, Russia’s working-age population had started to decrease, which automatically slows down GDP growth, ceteris paribus. Second, Russia’s fixed capital investment remained low, between 21% and 22% of GDP after the global financial crisis. While this would not be problematic for a country like, say, Germany, Russia’s investment ratio remained much below rapidly growing emerging market countries. Third, growth in productivity had become much slower already before the global financial crisis (Voskoboynikov and Solanko, 2014). Last, the price of oil remained high, but it did not increase as it did between 2000 and 2008.

Deryugina and Ponomarenko (2014) use a large Bayesian VAR model to assess the relative importance of various macroeconomic factors in explaining the evolution of Russia’s GDP. They find that the oil price together with demand from the EU are enough to forecast and explain most of the short-run movements in Russian GDP. Rautava (2013) notes a similar dependence on the price of oil. Even more interestingly, he notes that Russia’s trend growth halved to approximately 2% after the global financial crisis.

Role of oil

It is difficult to overstate the importance of energy prices for the Russian economy. Crude oil, oil products and natural gas brought 70% of Russia’s export revenue in 2014, and the energy sector provides the Russian Federation with more than 50% of its tax intake. Figure 2 illustrates the tight connection between the price of oil and Russia’s exchange rate.

Even after the introduction of sanctions in July, the Russian currency and financial markets remained relatively calm, but the rouble started its steep depreciation when the price of oil plummeted. Connection works in the other direction as well, of course. When the price of oil stabilized and recovered somewhat in February and March, 2015, the rouble reacted in the same direction as well.

Long-run growth slower than before

Unfortunately, Russia’s long-run growth prospects are not very rosy either, especially in comparison to the development in the recent years. We know very well about the evolution of the working-age population during the next 20 years, as almost all people coming into working-age have already been born. According to the UN prediction, Russia’s working-age population will decline from 90.7 million in 2015 to 78.7 million in 2035, which translates into -0.7% change annually on average.

Figure 2 Price of crude oil and the rouble

Even if one assumes that the capital stock will grow somewhat – say by 0.3% per annum, which is higher than recently – for the next twenty years, and total factor productivity also rises at a relatively rapid – but decelerating – pace, Russia’s GDP growth will be below 2% for the next twenty years (Table 1). This is clearly below what Russians have become used to in recent years. Also, Russia’s share of global GDP continues to decline. Moreover, Russia’s growth needs to be driven by total factor productivity. Voskoboynikov and Solanko (2014) estimate that it grew by 2.5% per annum between 1995 and 2008. Therefore, keeping Russia’s growth relatively fast at higher income levels might be difficult.

Table 1 Baseline scenario for Russian growth

 

 

References

Deryugina, Elena and Alexey Ponomarenko (2014). A large Bayesian vector autoregression model for Russia. BOFIT Discussion Paper 22/2014.

Rautava, Jouko (2013) Oil Prices, Excess Uncertainty and Trend Growth – A Forecasting Model for Russia’s Economy. Focus on European Economic Integration. Q4/13, Oesterreichische Nationalbank.

Voskoboynikov, Ilya and Laura Solanko (2014). When high growth is not enough: Rethinking Russia’s pre-crisis economic performance. BOFIT Policy Brief 6/2014.

 

 

 

 

 

 

 

 

Iikka Korhonen
Head of Bofit (Institute for Economies in Transition) at the Bank of Finland

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Chinese Patents Gain Momentum – But Still Insufficient Transparency

According to the WIPO (World Intellectual Property Organization) – an agency of the United Nations – China was ranked in 2014 as the number three PCT (Patent Cooperation Treaty ) application country in the world, summing up its filing to totally 25 539. It should be added that the WIPO totally gathers nearly 190 member states. According to the WIPO’s website, the “PCT assists applicants in seeking patent protection internationally for their inventions … By filing one international patent application under the PCT, applicants can simultaneously seek protection for an invention in 148 countries throughout the world… “

This good Chinese ranking last year gave a global “market” share of almost 12%, after the U.S. (29%) and Japan (20%), and before Germany (somewhat above 8%). The Swedish share turned out to be relatively high (close to 2 %, 3925 applications, no 10 globally) – but 0.7% came alone from Ericsson; the total Swedish market share, however, has been declining somewhat compared to 2013. In the Chinese case, 1.6 % of all global PCT applications could be related to Huawei – the largest patent applier in the world – and 1% to ZTE (both representing the telecom and mobile business).

One may also note that other BRICS countries – if we still use this somewhat obsolete term – so far achieved very modest PCT-applications numbers compared to China’s 25 539 (India 1394, Russia 890, Brazil 581, South Africa 297; see also BOFIT Weekly 13/2015). China is indeed very ambitious when it comes to new technology and new products which I pointed at before a couple of times when discussing the strategic communiqué from the Third Plenum from November 2013 with its 16 chapters and 60 subchapters, many of them shadowing the New Growth Theory created by Paul Romer and consortes (who, by the way, would be a dignified Nobel Prize winner this year).

At the same time, however, one should not neglect that China’s PCT application numbers are misleading to some extent, even if it is hard to be more precise on what “to some extent” means in reality. We know that a substantial share of the Chinese applications do not stick to what can be called inventions in a real innovative sense. People I have been talking to have “guestimates” that only around one fourth or so of all Chinese PCT applications were justified from a strict innovative angle – but the same experts pointed also at the obvious fast upturn of genuine new Chinese patents and some slight general improvement of the enforcement of the Chinese patent law (see on this issue Ying Zhan, “Problems of Enforcement of Patent Law in China and its Ongoing Fourth Amendment”, Journal of Intellectual Property Rights, July 2014). In this context, Ying Zhan stresses the view that the Intellectual Property Right (IPR) system is a “Western imported system that takes more time to root in China”.

Altogether, there is no doubt that China is an increasingly important player on the global patent market – also what concerns the number and market share of technologically advanced innovations. But I would appreciate more transparency in this respect – and more and better research in this specific issue. Well-working patents are an important part of a promising innovation climate – and a promising and further improved innovation climate must be regarded as one of the decisive cornerstones of China’s new, future-oriented growth policy.

We should follow these trends that probably will affect us more than most of us imagine today.

 

 

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

 

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