Foreign investment was one of the pillars of the “economic miracle” in China that lifted 850 million people out of poverty in four decades.
After Mao Zedong’s death in 1976, 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 years, capital inflows increased exponentially, with Chinese GDP expanding at an average rate of over 9% per year.
But now this long-term trend has begun to reverse.
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Foreign investment in China has been falling since the beginning of this year, especially since the Russian invasion of Ukraine.
Between January and March alone, foreign investors withdrew approximately US$150 billion from yuan-denominated financial assets, mostly bonds.
The May report of the Institute of International Finance (IIF) states, “Although China recorded (capital) inflows in January, the outflows in February and March were so great that they made the first quarter the worst in history. The flight continued until April. has (IIF). , English abbreviation).
The Washington-based entity expects an asset outflow from China of $300 billion this year, more than double the $129 billion in 2021.
We analyze what the four main reasons for this trend are, whether it is permanent, what consequences it will have, and how Chinese officials have reacted.
1. “Zero covid” strategy
“‘Covid zero’ policies are pushing China into a contraction similar to the first wave of the pandemic,” Spanish economist Juan Ramón Rallo told the BBC.
More than two years after the outbreak began, most countries have lifted restrictions due to covid. But in China the situation is different.
Beijing, which previously prioritized economic growth, has set it aside this time to prevent a possible health crisis, even though the majority of its population has been vaccinated.
Has the government imposed strict quarantines on Shanghai? This accounts for 5% of the national GDP. And in other cities, it has strengthened anti-covid measures, reducing business activity.
Thus, urban unemployment exceeded 6%, its economy contracted by 0.68% in April, and few believe China will achieve its growth target for this year.
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“Many companies still see China as an important market, but today that optimism is hard to maintain as the rest of the world opens up and China is closed,” said Nick Marro, analyst at the Economist Intelligence Unit (EIU) in Hong. Cong.
Marro believes that the “covid zero” strategy does not encourage investors to bet on China because “rules can change suddenly, without notice, which makes planning and decisions regarding future investments more difficult”.
“The big question is whether foreign investors see ‘Covid Zero’ as a temporary problem they can tolerate. The longer this policy continues, the greater the intolerance will be.”
2. Housing crisis
Home construction has been one of the growth engines of the Chinese economy in recent years.
But the industry has been in crisis since last year due to heavy indebtedness from local giants like Evergrande.
While the housing crisis in China is older, foreign investors’ fears of “zero covid” and the consequences on the country’s economic health, along with the effects of other factors, are more recent.
“In the last 10 years, China has grown based on cheap credit and a housing bubble,” Professor Rallo recalls.
He explains that after this bubble burst, the country plunged into a shift in the production model, which he described as “complex”.
“Suppressing a housing bubble of this size is a slow and painful process, and even more difficult if it doesn’t allow for rapid adjustment, as the Chinese Communist Party did.”
Aware of this problem, Chinese authorities have taken some measures to stimulate the housing market, including various reductions in housing finance interest rates, with a decree from the country’s central bank.
That makes China one of the few countries to go upstream: the European Central Bank (ECB) and the Federal Reserve have announced rate hikes to fight inflation, while Beijing is turning to stimulus to ease the housing crisis and boost its economy. ? I bet most people think it’s risky at full price increase globally.
3. Russia, geopolitical tensions and human rights
The invasion of Ukraine cost Russia economic isolation from the West, with sanctions on a scale no one could have imagined for such an important country.
The war has led many investors to wonder what will happen to their holdings in China if Xi Jinping launches a military operation in Taiwan, suppresses a popular uprising in Hong Kong by force, or decides to settle territorial disputes with neighbors by force of arms.
China’s position in the Ukrainian conflict? closest to Russia? it doesn’t help either.
“Markets are worried about China’s ties to Russia – it scares investors, and risk aversion has been evident since the beginning of the invasion,” Stephen Innes, managing partner at investment service SPI Asset Management, told Bloomberg.
“Everybody started selling Chinese bonds, so we’re happy we didn’t buy any.”
Professor Rallo, on the other hand, underlines the trend towards the regionalization of global trade in two main areas of influence: Europe-USA on the one hand and China-Russia on the other.
Therefore, for Western companies “it can be a disadvantage that part of their value chain is on the other block”, so some will choose to forego these markets.
Analyst Nick Marro also highlights “the deepening divide between China and the West on issues such as economic and strategic competition, as well as democratic values and human rights.”
A good example of this is Norway’s Norges Bank Investment Management, the world’s largest sovereign wealth fund that manages $1.3 trillion in assets. In March, the fund excluded shares of Chinese sportswear company Li Ning because of “unacceptable risk” that “contributes to serious human rights violations”.
4. Attack on the private sector
Both the Chinese “economic miracle” and the avalanche of capital flows that largely made it possible came with free market reforms and the growth of private enterprise.
But Nick Marro notes that “a large part of the reform agenda that could benefit private companies, both foreign and local, is stalled.”
The recent trend of protectionism and intervention is taking place in a few industries, but particularly in technology where “national security concerns outweigh everything else.”
The clearest example is the attack that began in 2021 against major Chinese tech companies, which critics attribute to the state’s desire to control the industry. This has affected the value of world-renowned companies, including Alibaba.
Billionaire Jack Ma’s company has been one of the hardest hits by Beijing’s regulatory campaign, which in April last year imposed the largest antitrust fine in the country’s history worth nearly $2.8 billion.
According to the analyst, the Chinese government is increasingly giving power to state institutions, which may go against its goal of stimulating economic growth.
In recent weeks, Reuters and Bloomberg have cited industry sources who say Beijing plans to tweak its policy on tech companies, although the government has not officially confirmed this.
Is there a limit to development?
Chinese stock indices have also not yielded good returns for investors in recent months.
The Shanghai CSI300 bottomed out in late April and has since rebounded slightly, although still far from its earlier year levels.
The local currency yuan traded at two-year lows against the dollar in May.
The downward curve of Chinese indices is not much steeper than their US and European counterparts, which have lost value since the start of the year after hitting highs in 2021.
China’s trade surplus exceeded $200 billion in the first quarter. While this is partly due to the decline in imports, the reserve is substantial and helps the country better resist foreign investment pullbacks.
In this context, the IIF report explains that capital outflows from China do not endanger the solvency of the country, which does not need foreign currency to meet its external obligations.
The agency also thinks that the wave of divestments in China has its limits.
“While we may see high-profile companies announcing their plans to exit the market, we shouldn’t see it as an exit. Most of these companies have been in China for decades and it will not be an easy or quick decision for them to leave that market,” he says.
In a recent editorial, The Economist magazine cites the upcoming National Congress of the Chinese Communist Party (CCP), scheduled for October, as a turning point that could refocus the Chinese economy and offer foreign investors a different perspective.
“The optimistic view is that this period of dark ideology, political mistakes and slow growth is part of party congress preparations. When this passes, pragmatists will have more control over politics, ‘covid zero’ will end and support will return to economics and technology”.
– This text was originally published at https://www.bbc.com/portuguese/internacional-61809852.
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source: Noticias
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