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Fiscal and Monetary Policies Not Enough to Maintain 6% GDP as China’s Private Business Sentiment Dips Below Confidence Threshold

January 21, 2020 GMT

BEIJING, Jan. 21, 2020 /PRNewswire/ -- In December 2019, Cheung Kong Graduate School of Business’ (CKGSB) Business Conditions Index (BCI) registered at 49.8, below the confidence threshold of 50. The monthly dataset – a forward-looking diffusion indicator using the same methodology as the PMI index – is widely followed as a key indicator of Chinese executives’ sentiment on China’s macroeconomic environment.

Sales and profit indices and the financing environment index all fell. Recruitment and employment have rebounded somewhat but are still low. This research reflects China’s slowing economy as its GDP registered at 6.1% in 2019, the lowest rate since 1990. Professor of Economics, Li Wei, who supervises the BCI index, said, “Moving forward, China can’t simply grow through imitation. Instead, independent research, investment in development and exploration must play a bigger role to sustain economic growth.”

While the trade war truce is a step in the right direction, most economists agree that it will do little to stop the spread of pessimism in China. With GDP growth declining, financing costs and unemployment on the rise, Professor Li argues that in order to create sustainable economic growth, China must focus on the causes of growth decline and target policies to deal with more structural problems. Economic growth dependent on fiscal leverage is not sustainable.

Professor Li states, “Inefficient state-owned enterprises rely mainly on bank credit to survive. This credit is no different to the state-owned enterprises than government fiscal allocations. In other words, they may be unable to repay the loan or return the credit, either way they are wasting precious national credit resources. Once bankrupt, the banks will no longer need to lend them money, allowing banks to lend to higher efficiency companies. The flow of funds from places with low output to places with high output will help increase total factor productivity (TFP), essential to sustainable economic development.”

About CKGSB’s Business Conditions Index

In June 2011, the Cheung Kong Graduate School of Business Case Center and the Center for Economic Research initiated a project to gauge the business sentiment of executives about the macro-economic environment in China – called an index of business conditions. Under the direction of Professor Li Wei, the two research centers designed and tested the BCI survey in July 2011. In September 2011, the first surveys were distributed and first results computed, and has been published monthly ever since.

The CKGSB Business Conditions Index is a set of forward-looking, diffusion indices. The index takes 50 as its threshold, so an index value above 50 means that the variable that the index measures is expected to increase, while an index value below 50 means that the variable is expected to fall. The CKGSB BCI thus uses the same methodology as the PMI index.

Link: https://english.ckgsb.edu.cn/worldwide/the-ckgsb-business-conditions-index/

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SOURCE Cheung Kong Graduate School of Business