The effect of Ukraine and Taiwan: the Chinese economy was forced to suffer
The author of the French website Atlantico records the slowdown of the Chinese economy – and this is not surprising. Covid was followed by a brief boom associated with the restoration of production. New weekdays have come after the holiday. But the West sees everywhere the "defeat of the Stalinist model."
The outflow of capital from China is now as large as during the panic due to expectations of the devaluation of the yuan in 2015 and 2016. Foreign investors are looking at China from a new angle against the background of Russia's special operation in Ukraine and the crisis in Taiwan.
Atlantico: The economic situation in China is becoming increasingly difficult. As, for example, economist Robin Brooks notes, the outflow of capital is now as large as during the panic in 2015-2016. How serious is the situation?
Jean-Marc Siroen*:Since the beginning of the year, there has been a net outflow of capital in China (by which I mean the difference between the inflow and outflow of financial investments), which amounted to about $ 200 billion, which is very significant. But it would be wrong to look only at China. It should be recognized that the country's current difficulties undermine China's image. The slowdown in economic growth in the country played a role here, as well as China's commitment to the "zero tolerance" strategy for the spread of COVID-19. Plus the crisis in China's banking sector. All this reduced the attractiveness of China for investors. But these are not the only reasons. An increase in interest rates in the United States makes speculative investments in the United States more attractive. Add here the relative growth of the dollar against the yuan. Since April, the Chinese currency has lost more than 6% against the US currency. In fact, this outflow of Chinese capital will contribute to financing the American public deficit, which, by the way, should also raise some questions among Americans about this form of dependence.
- But what is the reason for such an economic "drawdown" of China and, in particular, the outflow of capital?
- Let's be careful in interpreting the net outflow of capital. This is a balance sheet that, unlike the trade balance, has nothing "structural" and tells us little about the real economy. Do not ignore the usual cycles of the market economy associated with an impressive slowdown in Chinese growth, which reflects the general trend of the global economy. But note: the current slowdown has replaced the boom of 2021, when there was a significant increase in Chinese exports. In addition, some slowdown is due to the persistence of Chinese leaders in pursuing a policy of "zero covid", which, due to the self-isolation of citizens, also puts pressure on production and trade.
- To what extent does China's ambiguous position on the conflict in Ukraine prevent it from attracting foreign investors? (China condemned NATO for expanding and provoking the conflict, but did not fully support Russia's actions - approx. InoSMI.) The same can be said about China's position on the Taiwan issue: how much can this scare off wary foreign investors?
- The net capital outflow we are discussing is the result of the activities not of companies, but of public or private financial institutions. They invest their own and others' funds, often in the short term, seeking financial returns. Political risk, of course, is assessed, but this is not the main criterion, at least until the possibility of rapid repatriation of capital is questioned. The political risk is most of all represented by direct investments, which allow companies established abroad to be controlled. The case of subsidiaries of Western firms operating in Russia has shown that this risk can be realized very quickly...
At the moment, the inflow of foreign direct investment to China remains greater than the outflow, but what will happen in the next few months, the next few years? The overestimation of political risks caused by China's tougher stance (especially towards Taiwan), combined with the desire of companies (and governments) to reverse the dispersal of global value chains, will inevitably reduce China's attractiveness.
- Economist Michael Pettis recently said, "We are living in the last year of the Chinese growth model." Are we really witnessing a new and problematic situation for China?
- Of course, it takes more than a year to destroy the growth model, and, moreover, the Chinese growth model for 40 years has been not in the application of a single model, but in the coexistence of two. On the one hand, the historical "Stalinist" model based on planning, state-owned enterprises, heavy industry, etc. On the other hand, half of China's success is also based on the application of a "globalist" model based on the market, private property, competition and foreign direct investment. Logically, one would expect today the disappearance of the first model and the adoption of the second, but so far this has not happened. And Europe gave China everything that it would stimulate the globalist model: it even carried out the marketing of elite Chinese goods itself (the Made in China campaign). As part of this strategy, Chinese goods intended for export were promoted (in particular, through the "new Silk Roads").
However, China's current difficulties are more related to the Stalinist model, which led to excessive investment in infrastructure and real estate and weakened the financial system. Moreover, the "new Silk Roads" appear today as a financial abyss due to the megalomania of power, seduced by the implementation of the Chinese model. The Chinese government also failed to convince families to get rid of the inertia of the "one-child policy". This policy itself has been discontinued in China for a long time, but inertia has remained. In fact, both models, which were supposed to coexist, are now in a very difficult position. In a good scenario (as in 2021!) China can still show some enviable growth rates. But such moments will become increasingly rare.
Jean-Marc Siroin – Honorary Professor of Economics at PSL-Dauphine University, specialist in international economics
