The other Ukraine/Taiwan effect: The Chinese economy is suffering and it is showing slowly

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Atlantico: The Chinese economic situation appears to be becoming more complex. As said, e.g. Economist Robin Brooks, capital outflows are so big now than during the renminbi devaluation scare of 2015/6. How serious is the situation?

Jean Marc Siroen: In fact, since the beginning of the year, China has seen a net capital outflow (difference between inflows and outflows of financial capital) estimated to be close to $200 billion, which is quite significant. But it would be wrong to only focus on China. However, the country’s current difficulties, in particular the economic slowdown, the adherence to a zero-Covid strategy and the very critical situation in the banking sector, are weighing on China’s attractiveness. But these are not the only causes. The rise in American interest rates makes investing in the United States all the more attractive as it also coincides with the rise in the dollar. Since April, the Chinese currency has lost more than 6% against the US currency. In fact, these outflows of Chinese capital will help fund America’s government deficits, which incidentally should also raise some questions in the United States about this form of dependency.

What is this economic situation and especially capital outflows?

Let’s remain cautious in interpreting net capital outflows. This is a balance sheet that, unlike the trade balance, has nothing “structural” about it and doesn’t tell us much about the real economy. However, it could have more cyclical origins, linked to the spectacular slowdown in the Chinese economy, which also mirrors that of the global economy – after the 2021 boom from which Chinese exports benefited greatly – and to the stubbornness of the Chinese leadership in their covid strategy “, which is burdening production and trade due to exit restrictions.

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To what extent does China’s ambiguous position on the war in Ukraine and its stance on Taiwan affect how foreign investors view China?

The net capital outflows we are discussing are not the result of corporations but of financial institutions, public or private, often investing their funds with short-term financial objectives. Of course, they assess political risk, but that is not the main criterion, at least as long as the possibility of a quick return of capital is not questioned. The political risk is greater with direct investments, which make it possible to control companies based abroad. The case of subsidiaries of Western companies established in Russia has shown that this risk could materialize very quickly… At the moment, foreign direct investment inflows to China remain larger than outflows, but what will the next few months, the next few years be like? ? The reassessment of political risks, fueled by China’s tougher stance (especially towards Taiwan), combined with corporate (and government) desires to reverse the dispersion of global value chains, will inevitably weigh on China’s attractiveness.

Economist Michael Pettis recently said, “We are living in the final year of the Chinese growth model.” Are we actually witnessing a permanently new and problematic situation for China?

It certainly takes more than a year to unravel a growth model, and what has also characterized China for 40 years is not applying a growth model, but letting two of them coexist: on the one hand, a historical “Stalinist” model based on planning, state-owned companies , heavy industry and, on the other hand, a “globalist” model based on the market, private property, competition and foreign direct investment. Logically, one might now expect the extinction of the first and the assimilation of the second, but Xi Jinping’s policies seem to tend to favor the opposite path—perhaps because the Stalinist model is proving more compatible with the untouchable system politics—than we had thought rather that he would stimulate the globalist model by promoting an upward movement (Made in China 2025) always with a vocation to export (especially via the “new Silk Roads”). However, China’s current difficulties are more likely to stem from the Stalinist model, which led to overinvestment in infrastructure and real estate and weakened the financial system. Moreover, today the “New Silk Roads” appear as a financial abyss, also due to the megalomania of power tempted by the implementation of a Chinese model of imperialism. The Chinese government has also failed to persuade families to move beyond “one child,” which will ultimately limit growth. In fact, the two models that were supposed to coexist are now in very serious trouble. With good planetary alignment (like in 2021!), China could still see some enviable growth rates, but without deeper questions, they’re becoming increasingly rare.

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