China Research

Finally, we can read almost daily that there is an increasing price pressure on Chinese property markets. I would not doubt this fact as such. I have seen with my own eyes the substantial number of Chinese residential buildings that were more or less completely dark in the evening. Either many apartments were not sold – or they were bought for mere speculative reasons without physical occupancy of these places. But I have no idea about the contribution of these two price-squeezing factors to the price pressure currently taking place in Chinese cities.

So, what about the future and risks coming from the real estate sector in China? I would say that we are facing another of these Chinese statistical and policy question marks. The fact that Chinese property prices are under pressure is even confirmed by official statistics. It is also obvious that Chinese residential developers many times are offering substantial price cuts. Another interesting signal lies in the decision by quite a number of cities to reduce existing restrictions on the purchase of apartments. And China shows continuous weakness in economic growth.

We should also be aware of the unclear issue concerning the number of real estate developers that may be in troubles and the banks’ real exposure when it comes to more critical lending to the real estate sector. In these respects, transparency is not really existing (which – by the way – mostly was not the case either before the eruption of the well-known real estate crises in our part of the world).

In my view, the current real estate concerns are more a short-term or medium-term issue than a long-term issue. The urbanization of China will continue and create a strongly rising demand for apartments in particularly the metropolitan areas. Thus, the risk analysis for the forthcoming 5-10 years or so will be more difficult.

My best guess is that Chinese authorities would intervene if any serious real estate crisis was to happen. If such interventions really would help is a very different question – to a high extent depending on the degree of the deregulation of the capital account.

Here we may have one of the major risks if Chinese decision-makers were to deregulate cross-border financial movements too quickly.

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

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Paper for the SNEE Conference in Mölle / Sweden, May 20-23, 2014

Abstract

During the Third Plenum of the Central Committee of the Communist Party in November 2013, China’s political leadership implemented a relatively far-reaching reform program, covering many economic, social and political areas. On paper, the Chinese reform plans appear to be very progressive yet at the same time there are many conflicts of goals inherent in these policy strategies. Finding appropriate preferences for these different conflicts of goals will be difficult.

This introductory description of the paper leads us directly to the need for interdisciplinary research. In this paper an attempt is made to give the most important reform areas a natural interdisciplinary nexus. The objective is to show that China’s economic future cannot be analyzed and predicted without broader analytical tools. It is not mainly an issue of numerical long-term GDP forecasts.

Forecasts about the Chinese economy should focus more on the understanding of the Chinese political, social and the economic system rather than quantitative research. In order to gather some empirical evidence, a survey has been prepared with members of our (LNU’s) China Survey Panel. Hopefully, statistical quality and transparency will be improved during this ongoing reform process in order to stimulate a gradual improvement in the statistical conditions for quantitative analysis.

Some of the main reform challenges are exemplified by the further deregulation of the Chinese financial sector. The academic issue of sequencing seems to be particularly complicated when applied in real life. Can China learn from the Swedish financial deregulation process – and its failures?

There is no doubt that the outcome of the Chinese reform process will also be of great importance for the European (global) corporate sector. There is every reason for Europe, the U.S., and many other countries, organizations, and corporations to optimize their future cooperation with China in line with its necessary and implemented reforms. In other words: Europe (and the U.S.) should be very interested in contributing to a successful Chinese reform process as much as possible and whenever appropriate. Major Chinese reform disappointments would be scary since the European and American economies would not be prepared for such a reversal. This is a mostly forgotten risk.

Read the full article – SNEE 2014.pdf

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

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One of the most durable relationships in international macroeconomics and trade is “Houthakker-Magee” (H-M) the observation that the elasticity of US imports with respect to US economic activity exceeds the elasticity of US exports with respect to foreign economic activity. The elasticity ratio of about 2:1 appeared in the post World War 2 data, when H-M first published their findings in 1968 using aggregate US trade data spanning 1951-1966.

The relatively higher income elasticity of imports has persisted into the 21^st century. Researchers have used different data disaggregations, different econometric methods, and different time periods to explore the source and stability of these findings. Mann and Pluck [1] found, in particular, that consumer demand for different kinds of products was an important source of the high elasticity of demand for imports. Overall, however essentially the asymmetry remains, and has had global ramifications.

First, to the extent that the US has persistently bought more imports than it sells exports, even when US and global growth are similar, the US trade deficit has tended to widen. Indeed the US trade deficit has been a feature of the global trading landscape for more than a generation, and over the 1990s, and 2000s in particular, it widened substantially to more than 6 percent of GDP. From the standpoint of global exporters, particularly China, the high US import elasticity yielded more robust export expansion than would have been the case if the H-M asymmetry did not exist. A complementary outcome of the H-M asymmetry has been international reserves build-up and the associated challenges of leaning against currency appreciation among our export partners, as well as the decision of how to invest those reserves.

It is therefore of some interest that, since the onset of the financial crisis and during the recovery in US GDP, H-M seems to have gone missing. The chart below shows the average annual growth rates for US real GDP and several categories of consumer goods imports. The green bars show the ratio of domestic growth to the growth of imports in the matched category for the historical period (1968-2010) and more recently 2011-2014q1. The decline in the ratio of import growth to domestic growth (the implied import elasticity) is apparent in each consumption category. One reason for the decline in implied import elasticity for consumer goods is the increasingly share of services in the consumptions basket, but that can’t be the whole story for the most recent period.

[1] “Understanding the US Trade Deficit: A Disaggregated Perspective,” (with Katharina Plück) in G-7 Current Account Sustainability and Adjustment, Richard Clarida ed.. MIT Press: Cambridge, 2007.Download the working paper version from www.CLMann.com.

What are the ramifications of this apparent change in the relationship between domestic growth and imports, particularly for consumer goods? Considering trade flows, the trade deficit may not widen very much as the US economy builds steam. Foreign exporters to the US that have been importantly dependent on the US market for growth in exports may find that sales to the US market will remain sluggish. Indeed, the table below shows that the implied elasticity of imports from China has been falling. In recent quarters (emphasized by using quarterly data at annual rate growth from previous period as in column 6) suggest that imports from China have collapsed.

If H-M has indeed gone missing, it has implications for other countries. Foreign exporters to the US that had expected to take over from China the production of relatively cheap and easy to produce consumer goods may not experience such a robust climate for their products as was the case over the 1990s and 2000s. In fact, projections for growth in global trade are muted, with the World Trade Organization projecting global trade growth for 2014 of 4.7%. Although the WTO projection for 2015 is at the 20-year average of 5.3%, global trade growth was substantially higher than that – around 6% — in the 1990s and 2000s before the bust. [1]

Considering the financial perspective, if foreign economies have less international reserves accumulation, because of smaller trade surpluses, this may imply less demand by foreign central banks for US Treasury securities (UST). During the past decades, the demand for UST by foreign investors, particularly China, allowed UST interest rates to be lower than they otherwise might have been. Now, with the Federal Reserve tapering their purchases of UST and potentially less demand from abroad, two sources of demand for UST will soften. UST interest rates could rise more quickly than expected.

Thus, it matters from both the real and well as financial perspectives and for the United States, China and the global economy, if Houthakker-Magee has gone missing.

[1]http://www.wto.org/english/news_e/pres14_e/pr721_e.htm

Catherine L. Mann
Rosenberg Professor of Global Finance, Brandeis University

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