Foreign investment was one of the pillars of China’s “economic miracle”, a country that in four decades lifted 850 million people out of poverty.
After Mao Zedong’s death in 1976, the more orthodox communism gave way to a pragmatic approach to economic development, and three years later the country opened its doors to foreign investment.
in the following decades capital inflows grew exponentiallyas Chinese GDP expanded at an average rate of more than 9% a year.
But now that long-standing trend has begun to reverse.
Foreign investment in China has plummeted since the beginning of this year, especially since the Russian invasion of Ukraine.
Between January and March alone, foreign investors withdrew some US$150 billion in financial assets in yuan, mainly bonds.
“Although China registered (capital) inflows in January, outflows in February and March were so large as to make the first quarter the worst on record. The flight of shares continued in April“, indicates the May report of the Institute of International Finance (IIF).
This Washington-based entity forecasts an outflow of assets from China of US$300 billion this year, more than double the US$129 billion in 2021.
We analyze what are the 4 main causes of this trend, if it is here to stay, what consequences it will have and what the Chinese authorities are doing to combat it.
1. The “zero covid” strategy
“The ‘covid zero’ policies are leading China to a contraction similar to that of the first wave of the pandemic,” Spanish economist, academic and writer Juan Ramón Rallo told the BBC.
More than two years after the start of the pandemic, most countries have lifted restrictions due to covid, but this is not the case in China.
Beijing, which previously had always prioritized economic growth above all else, put it aside this time to prevent a possible health emergency, despite the fact that the majority of its population is vaccinated.
The government imposed strict confinements in Shanghai – which accounts for 5% of the national GDP – and in other cities it tightened anticovid measures, reducing business activity.
Thus, unemployment in the cities exceeded 6%, its economy contracted by 0.68% in April and few believe that China will achieve the growth target for this year of 5.5%a figure that is already discreet in comparison with those of previous years.
“Many companies still see China as an important market, but today it is difficult to maintain that optimism while the rest of the world opens up and China remains closed,” Nick Marro, principal analyst in Hong Kong at the Economist Intelligence Unit (EIU), explains to BBC Mundo. ).
Marro believes that the “zero covid” strategy does not invite capitalists to bet on China “since the rules can change suddenlywithout prior notice, which makes planning and decisions about future investments even more difficult.
“The big question is whether foreign investors see ‘covid zero’ as a temporary problem that they can tolerate. The longer this policy continues, the greater this intolerance will be.”
2. The real estate crisis
Housing construction has been one of the growth engines of the Chinese economy in recent decades.
However, it has been in crisis since last year due to the heavy indebtedness of the local giants in the sector, with Evergrande in the lead.
Although the real estate crisis in China comes from before, they are more recent heyou fears of foreign investors about its consequences on the economic health of the country in combination with the effects of “covid zero” and other factors.
“In the last 10 years, China has grown on the basis of cheap credit and the housing bubble“, recalls Professor Rallo.
After the puncture of this bubble, he explains, the country is immersed in a change in the production model that he describes as “complicated”.
“The digestion of a real estate bubble of such magnitude is a slow and painful process, and more so if it is not allowed to adjust quickly, as the Chinese Communist Party seems to be doing.”
Aware of this problem, the Chinese authorities have taken some measures to revitalize the real estate market, including several interest rate cuts of mortgages by decree of the country’s central bank.
This places China as one of the few countries that goes against the tide: while the European Central Bank and the Federal Reserve announce rate hikes to combat inflation, Beijing resorts to stimulus to alleviate its real estate crisis and revitalize its economy, a bet that many consider risky in full escalation of prices at a global level.
3. Russia, geopolitical tensions and human rights
The invasion of Ukraine has cost Russia economic isolation from the West with sanctions the magnitude of which no one would have imagined for a country of such importance.
The war has led many investors to consider what would happen to your assets in china if Xi Jinping launches a military operation in Taiwan, puts down by force a popular uprising in Hong Kong or decides to resolve by arms the territorial disputes that he has open with 5 of his neighbors.
And China’s position in the Ukrainian conflict, closest to Russiadoesn’t help either.
“Markets are concerned about China’s ties to Russia – that is scaring investors and risk aversion has been on display since the beginning of the invasion,” Stephen Innes, managing partner at investment service SPI Asset Management, said in a statement. recent interview with Bloomberg.
“Everyone started selling Chinese bonds, so we are glad we didn’t buy any,” he told the economic portal.
Professor Rallo, for his part, highlights the trend towards the regionalization of global trade with two main areas of influence: Europe-United StatesOn one side and on the other China-Russia.
Thus, for Western companies “having part of their value chain in the other block can become a disadvantage”, so some of them would choose to give up those markets.
Analyst Nick Marro also highlights “the deepening schism between China and the West on issues such as economic and strategic competition, and also democratic values and human rights“.
A good example of the latter is that of Norway’s Norges Bank Investment Management, the world’s largest sovereign wealth fund managing assets of 1.3 trillion dollars, which in March excluded shares in Chinese sportswear company Li Ning for the “unacceptable risk” that it “contributes to serious human rights violations.”
4. The offensive against the private sector
Both the Chinese “economic miracle” and the rush of capital flows that largely made it possible they came from the hand of reforms oriented to the free market and the development of private companies.
However, Nick Marro points out, “much of the reform agenda that could benefit both foreign and local private companies has stalled.”
The recent trend towards protectionism and intervention can be seen in several sectors, but especially in technology, “where national security concerns trump everything else,” he says.
The clearest example is the offensive started in 2021 against big tech Chinese, which critics attribute to the will of the State to control the sector, and which stripped a large part of its value from world-renowned companies, including Alibaba.
Billionaire Jack Ma’s corporation was one of the hardest hit by Beijing’s regulatory campaign, which in April last year imposed largest antitrust fine in history from the countryworth about US$2.8 billion.
According to the analyst, the Chinese government is giving more and more power to state entitieswhich could play against its objective of reactivating economic growth.
In recent weeks, the Reuters agency and Bloomberg cited sources in the sector when they disclosed that, aware of the adverse effects of this policy, Beijing plans to correct its heavy-handed policy with technology companies, although the government has not officially confirmed this.
The face and the cross
Chinese stock indices have also not been giving investors good returns in recent months.
The Shanghai CSI300 bottomed out at the end of April and has since rebounded slightly, although it is still far from its levels at the beginning of the year.
The local currency, the yuan, was trading at its lowest levels in two years against the dollar in May.
On the other side of the coin, it can be said that the downward curve in the Chinese indices is not much steeper than that of their equivalents in the US and Europe, which have also depreciated since the beginning of the year after reaching highs in 2021.
And China’s trade surplus exceeded $200 billion in the first trimester. Although it is partly due to the drop in imports, it is an estimable cushion that helps it better weather foreign investment withdrawals.
In this context, the IIF describes in its report, the outflows of capital flows from China they are not endangering the solvency of the countrywhich does not lack foreign currency to meet its external obligations.
This institution also considers that the wave of disinvestment in the Asian giant has limits.
“Although we see high-profile companies announcing plans to leave the market, we should not misunderstand this as an exodus. Many of these companies have been in China for decades and it will not be a quick or easy decision for them to leave their market,” he says.
In a recent editorial, The Economist points to the upcoming National Congress of the Communist Party of China (CPC), scheduled for October, as the turning point that could give a new focus to the Chinese economy and present a different outlook for foreign investors.
“The optimistic outlook is that this dark period of ideology, political errors and slow growth it is part of the preparation for the party congress. When this passes, pragmatists will have greater control of politics, ‘covid zero’ will end and support for the economy and technology will return.
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