February 2010

In February, we made our tenth survey on short-term and long-term developments in China. Around 25 economists from academia and the corporate world participated. We are happy about having achieved some brief historical time series on our own. This gives us increasing possibilities to compare with previous years, particularly when it comes to long-term trends. There is no doubt about the growing role of China in the global economy. Our objective is to contribute somewhat to improved knowledge about the new economic powerhouse of China.

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Summary / Abstract

There is no doubt that China has achieved great economic progress since the start of the opening-up policy in 1978, particularly in the past 15 years. The fact that the country is currently ranked number 1 exporter in the world and soon to be number 1 importer, already number 1 car market by registrations, soon to be number 2 in total production (GDP), etc., clearly underlines the success of the Chinese policy. It is no exaggeration to say that China has emerged as the main benefiter of the current rapid phase of globalization.

However, obvious economic progress had – and still has – a major flip side. Many imbalances and problems are discussed in this paper. But many challenges are still neglected in the general discussion – even by Westerners. Furthermore, a great number of problems are hidden and not very transparent. Insufficient transparency – especially in the financial sector – must be interpreted as directly contradictory to the spirit of globalization. Despite these shortcomings, economic discussions are nowadays much more open-minded in China than they were ten or fifteen years ago – many times more open than Western business people and analysts discuss the Chinese economy. Some examples will be given in the paper.

Major improvements in the large number of structural problems would mean a very positive impact on China’s potential growth rate. Thus, China should have more to give in growth and import terms (under the assumption of political stability).

One of the most urgent and neglected areas that needs major improvement is transparency, both when it comes to economic policy, the financial sector and corporate China as a whole. Both China and rest the whole global would benefit from such a development.

This analysis is structured as follows:

1. Achievements
2. Short-term challenges
3. Long-term challenges
4. Own view of current discussions
5. Examples of frequent and open discussions in China  �
6. Outlook

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Summary

●  Looking at Chinese statistics and recent developments – without considering statistical quality at this point – leads to the (current) conclusion that China has managed the global financial economic crisis quite well. However, good economic growth was maintained by massive injections of fiscal stimuli and incredibly easy monetary conditions for new credits. Of course, these enormous injections into the economy now lead to concerns about the quality of new loans, of new investments and future inflation. Around 60 per cent of the big stimuli package has gone – or is about to go – to state-owned companies. This tells us quite a bit about future risks for the banks and the economy as a whole.

Current cautious measures to reduce the rapid rate  at which new loans are granted are not a wise precautionary step to dampen speculation and overheating – as it has been said in many comments – but rather an attempt to minimize damage after last year’s Formula 1 speed.

●  New own China Survey (Feb, prel, final results after New Year’s vacation):

Overheating indicator: 8.4  (peak since its start in fall 2004,  Mar 2009:3.9). 

Forecast GDP growth 2010: 9.4 percent     2011: 9.0 percent.

●  Still, my own main scenario – which I made before the panel survey – is that China will achieve quite a good GDP growth in 2010, in the range of 9-9 ½  percent, despite more tightening of credit conditions and uncertain global conditions. Two interest rate hikes by 0.54 percentage points are implemented in this rate forecast. This is not a very scary tightening (however, it could turn out to be somewhat more than this). In all: The risks for this year’s development should not be neglected, particularly when it comes to inflation. There is a non-negligible probability that inflation will exceed the unofficial “comfort ceiling” of 4 percent.

●  More skepticism should be applied to 2011 – unless the global economy recovers more rapidly than currently expected. Next year, fiscal emergency stimuli will run out, credit conditions will be tighter, and the Chinese currency may return to its previous state of appreciating cautiously. Many imbalances will be – or remain – in place next year, too. For this reason, a somewhat lower range for Chinese GDP growth seems to be appropriate in 2011, around 8 ½ – 9 ¼ percent.

A warning may well be in order: China (risk) forecasts should be prepared more carefully than in the past. Following the herd is not good enough anymore.

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