The economic analysis of China should now be modified

March 22nd, 2018

Not very surprisingly, the very recent 13th National People’s Congress was not dominated by economic issues but by the even further strengthened political power of Xi Jinping, General Secretary of the Communist Party, President of the People’s Republic of China and also Chairman of the Central Military Commission. Xi received now even more personal power by some important constitutional changes than he already had created before, giving him the opportunity to continue his presidency also beyond 2022. Xi’s core status was also underlined by the new guiding ideology in the Constitution, expressed by the now included formulation that “the leadership of the Communist Party is the defining future of socialism with Chinese characteristics” – more exactly the “thoughts” of Xi Jinping.

In my view, “Chinese characteristics” also should be applied when it comes to economic analysis which so far has been made very superficially in our part of the world. Prime Minister Li Keqiang’s latest forecast for 2018 – predicting 6 ½ percent for GDP growth – does not imply any deceleration of economic growth as interpreted in a number of Western newspapers. Furthermore, a little bit higher GDP growth than predicted remains certainly in the cards – particularly for giving Xi recognition for successful economic leadership. However, Li’s comments on major risks seem to be more interesting, i.e. mainly his concerns about financial risks, poverty and the environment which are indeed embedded in a number of major goal conflicts – goal conflicts that I have pointed at frequently in this blog and published papers of mine.

Xi Jinping’s strengthened core leadership urges now for a number of analytical changes and attempts to find answers to difficult questions. Below, there are some examples:

¤  How will Xi handle relations to the U.S. and Trump’s protectionism?

¤  To what extent does Xi want to  stick completely to the reform plans by the Third Plenum from 2013 – and will there be new priorities and solutions to the related conflicts of goals?

¤  Now – with so much power in the hands of one single person but also rising direct personal responsibility – how determined will Xi handle potential failures or setbacks?

¤  How good are the chances of, finally, improving or even maintaining transparency in the potential  case of increasing problems – and what about the necessary qualitative development of statistics?

¤  Where could the domestic warning signals come from if things go in the wrong direction?

These are only a few examples and questions related to Xi’s strong leadership. It should be clear that also economic analysis – especially when applying a longer perspective – much more should be based on politics than in the past. Noting a certain number for GDP growth – even when exceeding (official) expectations – is about to become a (further) weakening guideline for future GDP growth and other macroeconomic forecasts. Careful political and – may be – psychological analysis has to be added to macroeconomic forecasts and conclusions.

Conditions are changing within China – and also China’s international relations. For this reason, economic analysis tools for China should be developed further as pointed at above. Official GDP growth is certainly not enough at all for analyzing trends in the Chinese economy.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
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China concerned about its financial markets

March 19th, 2018

Political issues dominated the 13th National People’s Congress (NPC), topped by the constitutional reform giving China’s leader Xi Jinping the possibility to remain in office also beyond 2022 which would not have been possible without this constitutional amendment. The re-election of Xi as China’s president and Prime Minister Li Keqiang’s re-endorsement were, of course, also important political events – not to forget the establishment of the new corruption-fighting super agency named National Supervision Commission.

When applying a purely economic and financial view on the results of the NPC, the unofficial upgrading of financial concerns and the increase of power for China’s central bank – the People’s Bank of China (PBoC) – seem to be the most important news to consider. Sure, one could read about quite some sharpened warnings by Xi and Li already in recent months – warnings that also were stressed very recently by the multinational central bank of the central banks, the BIS in Switzerland (www.bis.org/publ/qtrpdf/r_qt1803e.htm). But this time was – or rather is – different.

Despite the fact that official China tries to play down the very strong concerns of the BIS – where China by the way is a member – the very clear strengthening of the PBoC during the NPC convergation demonstrates all the same that China’s political leadership now worries more about the state of the financial sector than before. Now, the PBoC will be responsible for the macroprudential supervision of both China’s banks and insurance companies; it has also received the mandate to implement supervisory laws and regulations. For better decision-making, supervision of banks and insurance companies will be merged into the so-called China Banking and Insurance Regulatory Commission (CBIRC) under the aegis of the PBoC. The objective is obviously to create more efficient early warning signals and to implement well-working tools against misleading developments in the financial sector.

Altogether, the growing official awareness of structural problems in the financial sector and the approved improvements and changes of financial supervisory institutions have to be considered as positive. However, improvements of transparency should be achieved as well – whenever necessary and/or appropriate.

During the days of the NPC, a lot has been said by political leaders about the need of ever improving confidence. Better information on non-performing loans (NPL), shadow banks, new financial products and their risks should be part of such a strategy. The PBoC has now a good chance to contribute to a confidence-increasing development if China’s political leadership really wants to support such a positive change – and if a modern and forward-looking PBoC leader will succeed retiring, well-respected Governor Zhou Xiaochuan.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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India moving forward and sometimes back – now again higher tariffs on certain imports

February 19th, 2018

India is not always easy to understand. At the World Economic Forum some weeks ago, Prime Minster Shri Narendra Modi presented himself as a dedicated supporter of free trade – more or less in the same way as China’s leader Xi Jinping did a year ago at the same place shortly before President Trump’s inauguration. For a couple of months, Xi was celebrated as a kind of new global defender of free trade and antipole to protectionist Donald Trump. During 2017, however, China was again accused more strongly of protectionism by the U.S. government, particularly because of its enormous subsidies to certain industries. Consequently, cross-border trade mood between the Trump administration and China deteriorated further in the course of 2017.

These American-Chinese tensions may partly explain Modi’s efforts some weeks ago in the Swiss mountains to back up free trade. Modi is, of course, aware of the increasing role that India plays in the world economy. India is already the seventh largest economy in the world – and even number three on a Purchasing Power Parity (PPP) basis. India’s GDP growth is right now in line with China’s. Demography, digitalization and the growing middle class give India good potential in theory –  “but the quality of education is still a serious concern”, as one can read in chapter 47 of the new budget.

On February 1, the Indian Minister of Finance Arun Jaitley introduced the central budget for the fiscal year 2018-2019 (i.e. from April 1 to March 31). India’s next general election has to be held by 2019. For this reason, the Indian budget for 2018-2019 is observed with quite critical eyes. Certain comments – also from abroad – have judged the overall picture of the Union budget document as populistic. In my view, this grading may be too strict. Many structural needs and concrete measures are announced in 61 pages. There is quite a lot of supply side policy in it. Check it out, use this link:

https://www.s-ge.com/sites/default/files/cserver/article/downloads/india_budget_speech_2018.pdf

So, what’s the reason for the criticism of being populistic? It is indeed – certainly surprising after the Prime Minister’s speech in Davos – that India introduces protectionist measures concerning a number of import goods which made the Trump administration very upset. Higher customs duties are proposed on, for example, imported juices, vegetable oils, furniture, parts of cell phones, and auto components. The reintroduction of long-term capital gains on stocks also surprises many observers.

Sure, India is a complicated country for economic policy since most central measures have to be accepted by the 29 different states of India (when they are affected by a central law). As an example, it took years to implement the necessary move to more indirect taxation by a so-called Goods and Services Tax (GST) – but now it is there nationally since July 1, 2017. Economic policy is easier in China than in in India – the latter country often regarded as the largest democracy in the world.

The recent tariff hikes announced in the budget on certain imports were obviously not a very wise decision, and one may wonder how many Indian jobs will be saved or created this way. The psychological damage may be considerably larger in a global economic climate where India indeed had gained credibility in recent years. Unfortunately, it will be widely concluded that moving back in economic policy remains an Indian option also in the future.

Thus, it is not the velocity of economic reform policy that really counts in the country analysis of India but the steadiness of moving forward. Also smaller moves back can do harm!

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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