Brazil – still the country of hope

October 29th, 2018

Now we know that Jair Bolsonaro will be Brazil’s next president. Can he make a positive difference to previous presidents?

What we do know is that right-wing president-elect Bolsonaro has many radical views which are not particularly popular in a European perspective. At the same time there is no doubt that Brazil needs to meet its burdening challenges much more decisively.

Several decades of economic and political muddling through should finally  come to an end. Will “Brazil’s Trump” – as he frequently is called by opponents – be the man to put Brazil on a more favorable track?

Bolsonaro – who is not very skilled in economics – seems to know what the Brazilians really are tired of, i.e. criminality and corruption. However, research also tells us that these kinds of institutional failures and problems are extremely difficult to combat. It remains to be seen whether Bolsonaro will find the appropriate sustainability and means to fight successfully against crime and corruption.

However, this is exactly the main reason why a majority of the Brazilian people voted for him. But his voters also want to see major improvements of the strongly underperforming educational system.

Good education on all levels for a small minority and poor educational conditions for a vast majority has been characterizing the stance of education during many years.

This negative spiral has to broken if Brazil ever can develop into a really future-oriented and successful economy – but also the continuous weak fiscal performance which means a real obstacle to many other necessary structural improvements as well.

One can question whether these objectives can be met by a real hardliner like Bolsonaro without jeopardizing achieved democracy.

In the early days of my professional career in the early 1980s, I was always told that Brazil is the country of the future. Somewhat later when I started visiting Brazil regularly, I heard the same story – and still today but with a more skeptical sound.

Brazil is another example from the international area where heavy protests against insufficient political and economic results these days more strongly come from the right than from the left.

As usual, I am reluctant to spontaneous comments when political changes happen in Latin America. Too often disappointments followed later on.

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


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The Chinese economy gives some (partly) new worries

October 19th, 2018

In my last blog, I defined and discussed some different kinds of conundrums one can find in the Chinese economy. Unfortunately, I have to add a partly new one only a few days later.

GDP growth in Q3 as expected

Sure, I noticed this morning that Chinese GDP growth during the third quarter still was officially on track (6.5 percent yoy). But we know that Chinese exports these days are confronted with U.S. protectionism and that investments in construction have been cooling down more lately.

We also know that China still is working on its important objective to double GDP per capita between 2010 and 2020. In 2021, the Communist Party will celebrate its 100th anniversary – and certainly success stories have to be presented.

Meeting this long-term objective requires a GDP-growth rate at around 6 1/4 percent on average until 2020. This is one of the reasons why China’s insufficient GDP statistics simply have to show GDP growth above 6 percent. Another reason is to demonstrate growth stability which is clearly underlined by extremely small official growth fluctuations – actually limited to 0.2 percent maximum yoy in a dozen consecutive quarters.

I think no other country in the world has such a track record. Officials explain that phenomenon by pointing at China’s unique economic stability in all general terms. However, economic stability cannot be expressed well by even stable Chinese numbers for GDP-growth during so many quarters. Reality looks differently.

Some shift in economic policy

As a consequence of obvious growth concerns – which by the way also are expressed occasionally by officials, directly or indirectly – some (slight?) shifts in economic policy currently can be watched.

More focus is now put again on what economists call the demand side of the economy compared to some programmatic priority of the supply side since the Communist Party’s Third Plenum in 2013. Monetary policy is currently easened by lowering the banks’ cash requirements in the People’s Bank of China and, thus, give more room to new credits – despite the big debt problem. Fiscal policy is also put on a (somewhat) more expansionary track, meaning altogether more growth stimuli than before.

This – at least somewhat – revised economic policy stance could lead to delayed structural reforms which by definition would not be favorable at all.

However, the Chinese define demand and supply side policy somewhat differently from what we are used to in our part of the world. More supply side policy means in Chinese terms rather to provide the Chinese people and Business China with more and better goods and services that are needed for consumer satisfaction and modern corporate demand; the latter alternative could also mean cuts of industrial capacity to give a more balanced supply in line with market economy principles.

Supply side policy according to Western textbooks, however, is more concentrating on giving incentives to private households, companies and municipalities in order to, for example, save more, work more, increase personal flexibility on the labor market, learn more, give more education to the corporate staff, to increase R&D, to invest more, etc.

Watch the priorities of economic policy!

Only regularly updated knowledge about Chinese priorities in economic policy provides a reasonable chance to single out where Chinese economy may be heading in the medium and the longer run. The analysis of China is indeed difficult.

Today’s conclusion: Do not focus too much on Chinese GDP numbers!

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


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”The Chinese economy and its conundrums”

October 16th, 2018

Presentation by Hubert Fromlet, affiliated professor at Linnaeus University (Linnéuniversitetet), Kalmar/Växjö at the Baltic Sea Region and China Day 2018, October 16

According to a large number of conclusions on the Chinese economy – in most cases coming from Western press and financial economists – the current state and also the future of the Chinese economy seem to be quite obvious. However, this view should be modified. My own experience – after having studied the Chinese economy during several decades – looks somewhat different. I would rather differentiate conclusions and forecasts on the Chinese economy between

¤ more or less obvious ones (little or no conundrum),
¤ more or less uncertain ones – but still logical and understandable (limited conundrum),
¤ more or less intransparent ones (total conundrum).

Applying the above-mentioned differentiation to current conditions, almost any evaluation of the Chinese economy becomes more complicated. At the same time, it becomes more obvious that the Chinese economy cannot be analyzed only occasionally. Instead, regular studies of the Chinese economy must be considered as inevitable.

Below, there is an attempt to use the suggested conundrum classifications in a practical and updated sense. This kind of analysis pattern could serve as a kind of analytical guideline for corporations and financial experts.

More or less obvious interpretations/conclusions

¤ Ongoing slowdown of the Chinese economy:
Statistics still do not show a visible weakening of the Chinese economy. GDP growth uses to vary with only around 0.1 percent from quarter to quarter since around three years ago. Official objectives and expectations are met. This phenomenon is very unusual, also for emerging economies. We are waiting impatiently for official GDP statistics for Q3 on October 19 – and the “allowed” deviation from (official) expectations and forecasts.

Also the Purchasing Managers Index (PMI) appears too stable; numbers above and below the borderline of 50 are interpreted and defined too strictly. The current official NBS number of the PMI at 50.8 is therefore not safely above the positive borderline since the different corporate answers to the PMI diffusion index do not measure the strength of possible changes on individual corporate levels – but only the categories “stronger/unchanged/weaker”.

My own interpretation of the currently (somewhat) decelerating growth path of the Chinese economy is preferably based on official statements, speeches and interesting headlines in the Chinese press. Some recent examples can be given here.

“China to adopt more proactive fiscal policy” (Xinhua Oct 8) – a signal for the need of some growth injection

“China cuts banks’ cash reserve requirement” (China Daily Oct 8) – the fourth cut in 2018 points at GDP worries

“Manufacturing growth slower in September…partly due to weakened export performance” (China Daily, Oct 1)

“No need to worry about China’s economy…” (China Daily, Oct 1) – why saying so if there are no concerns?

It should not be neglected that these quoted – and other – articles also include encouraging comments on the resilience and modernization of the manufacturing industry and the assumed ongoing progress of the service sector. But in my view, Prime Minister Li Keqiang by using the words “current pressure on the economy” should be taken more seriously than the more positive comments by less highly ranked officials.

On the other hand, it is indeed obvious that China is working hard on education and innovation systems, co-operation with foreign countries and companies included. This is badly needed for moving forward. The New Growth Theory (NGT) of this year’s Nobel Prize winner Paul Romer is at least partly applied in China.

“Chinese premier says foreign talent important to China’s innovation” (China Daily, October 1)a relatively safe conclusion about Chinese awareness of what is needed to compete globally.

More or less uncertain interpretations/conclusions

¤ The current state of economic reforms – we have too little knowledge about it:
In November 2013, the Chinese political leadership’s Third Plenum set up 60, quite concrete strategic objectives – to be met by 2020. Most of the objectives mean marketization and improved institutions – in line with the broad definition of institutions by Nobel Prize winner Douglass North; they would bring China forward substantially if implemented ambitiously.

However, more concrete discussions or presentations on already achieved reform progress are still absent or extremely rare. Transparency is by far too limited also in this specific respect (even if it has been improving on trend at least for the economy). This is a serious shortcoming and could damage China’s image in the whole world – and criticism may be at some point even become wrong or unfair once improvements really have taken place. Comments on the strategic reform policy issues are usually formulated like this:

The central bank “will optimize financing and credit structure so that the private sector will be better served” (Xinhua Sep 30) – confirmation that the private sector should receive better financial conditions, but how/when?

“Tasks set out for advancing law-based governance in China”(Xinhua, Oct 4).

¤ Correct indebtedness probably the largest conundrum – psychological links not to forget:
Here we come to parts of the Chinese economy where guiding conclusions seem to be impossible. But more or less totally lagging transparency also means that related risks from total China’s total indebtedness – may be around 275-300 percent of GDP and roughly twice the ratio of ten years ago – cannot be considered in an appropriate way. The risks can either be underestimated or overestimated. It may even happen also in this context that really happening improvements will not be recognized or appreciated because of the historical credibility deficits. This special – somewhat different – kind of risk is also linked to behavioral economics and behavioral finance.

¤ Institutional conditions five to ten years from now:
Quite a number of economic researchers (North, de Soto, Acemoglu, Blanchard, etc.) consider well-working institutions as the key – or at least a main key – for economic development. Sometimes, however, institutional improvements are conflicting with political positions or strategies. Altogether, there is a clear political strategy in China to improve institutions. Thus, institutional progress will be made – but how fast and how wide-ranging will these institutional reforms be at the end of the day?

The broad range of possible new opportunities
This article is mainly based on the risks of future development. Conundrums do exist – however, also as regards the possibilities – which good economic, educational and institutional policies plus technological achievements indeed may offer. Some more progress is certainly in the cards. However, there should be doubts about the verifications of the opportunities in their entirety. Nobody knows – whatever so-called China experts pretend to know. This conclusion makes it necessary to steadily remain updated.

Impossible interpretations/conclusions

Here we have special cases of conundrums that cannot be judged at all what concerns size, time and reactions. China offers a number of these conundrums, both when it comes to political, social and economic conditions.

¤ Final success or failure of intended economic reforms
There is no way to foresee the outcome of all economic reforms. There are many good plans, many of them in line with Western economic research. But economic and political goal conflicts exist which may mean obvious impediments to the future growth potential.

¤ Coming deflation or continuous strong inflation of the credit bubble?
One of the main economic questions of the future: Will China trigger the next global financial crisis because of its enormous debt problem and possible/probable contagion to other countries?

¤ Non-performing loans of the Chinese banks:
“Government support for major banks will remain strong in China to keep public confidence and systemic stability healthy” (China Daily, October 2) – however, why is government support actually needed?

There are few areas in the Chinese economy where official numbers and private estimates differ as much as it is the case of non-performing loans (NPLs). Nobody knows exactly the real NPL-numbers of the bad bank credits and the off-balance financing operations by the banks; and even less people are aware of the corresponding statistics for the so-called shadow banks which – surprisingly for many analysts – use to have direct links to the big banks. If we then, for example, add implicit and hidden bad loans coming from state-owned enterprises, the conundrum of the total amount of non-performing loans becomes totally puzzling. We do know about the problems of NPLs per se – but we have not got a clou about the real dimension of this conundrum; however, the official number for 2017 for NPLs of commercial banks appears by far too low and unrealistic (1.74 % of total loans) .

¤ Local debt – who and what is right?
I wrote already in 2013 an article on this topic which is found at (search yourself):

Still, my uncertainty about the size of local government debt has not declined. Chinese officials point at their version that current debt levels of local governments do not indicate major problems in the future – very much contrary to what financial markets and more critical experts believe with their much more pessimistic stance – including also, for example, comments directly from China (“China battles hidden local government debt”)

¤ Protectionism in the longer run:
Potential future protectionist threats cannot be analyzed well these days – and do not at all allow for any meaningful long-term prediction. Analysts are confronted with a total conundrum. At least in the short run, China may suffer from damages of the global supply chain.

¤ The sustainability of the current account surpluses and the opening of the capital balance:
China has been – and still is – a country with surpluses in the current account. This phenomenon gives (partly) a position of strength on global financial markets since China by definition does not need net cross-border capital inflows as long as these surpluses exist; instead, China is able to work with net exports of capital – either by short-term (portfolio) investments or long-term investments (FDI) abroad or by granting credits over the border.

However, the surpluses in the current account have been shrinking in recent years. Regarding possible further enlargement of foreign protectionist pressure, further concentration on loans for private consumption at home and more imports, and also more widening protectionism could finally make the current account more vulnerable – and, consequently have an impact on the future speed of opening the capital balance for free financial cross-border transactions of stocks, bonds and foreign currencies. All these theoretically possible developments are not foreseeable at all; we find here a most puzzling conundrum.

¤ Social conditions five to ten years from now:
Here we have another, completely secret box which cannot be opened any time soon. What we do know about this is the experience and results from research that there is an often existing relationship of the economy to social developments or the other way around. There is no doubt that the Chinese need more and better social security.

Final conclusions:

The discussions above should show that China’s short-term economic outlook – despite certain (statistical) problems – seems to be more predictable than the structural long-term perspectives. This can be concluded despite the current shortcomings in Chinese statistics, transparency and communication (which make also short-term forecasts more complicated than necessary). Altogether: China’s economy is characterized by many conundrums – but not all of them with completely unforeseeable outcome.

It will, for example, be interesting to see whether China will keep up its opaqueness also when it comes to the development of digitalization and artificial intelligence. China is still a country that can surprise – hopefully in an increasing number of cases in a positive sense.

But I also remember the words coined by an outstanding China expert in Hong Kong in the 1990s who repeatedly during each and every meeting there reminded me of his own “law” – simply asking the following question: What do we really know about China?

Today, economic transparency is better – but still insufficient. This is exactly the reason why this article deals with different alternatives of conundrums in the political and economic powerhouse of China – from quite limited conundrums to very large ones.

However: Despite all these conundrums, China will remain a most exciting country, for both analysis and business.

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


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