Open up less so as to gain more weight: the new Chinese paradox
This column was first published in L’Express on 18th November 2021
Foreign companies can continue to invest in China, but Beijing may well put the damper on their ambitions at any moment.
Is China still investable? When education in China was, to all intents and purposes, nationalized last summer, the iconic investor George Soros responded with a resounding “No!”. Not only was China introducing arbitrariness into the whole industry, it was trampling on minority shareholders and, furthermore, limiting the sector’s potential for future innovation.
But any optimist reading the “Common Prosperity” program announced by the government of the pilot region of Zhejiang — the wealthiest region in China — which was a stepping-stone for President Xi on his way to Beijing, would have responded: “Yes, and undoubtedly more profitably than during the previous decade.” Far from any government propaganda with its promises of taxing the rich, this regional plan aims to reduce the income gap, mainly by remunerating people’s savings, something that has not existed in China up to now.
China is in desperate need of a new “wealth effect”.
Now that the real estate bubble has burst, triggered by the debacle of the property developer Evergrande, China is in desperate need of a new “wealth effect”, indispensable for the much-vaunted rebalancing of growth by speeding up domestic consumption. The example of the USA in the 20th century shows that any such boost can only come from local financial markets that are bullish in the long run.
After its annus horribilis in 2021, marked by increased state control — a foretaste of Xi Jinping’s third mandate –, China’s stock exchange could well offer investors an attractive opening in 2022 because of its low valuations and the expected return of central bank liquidity. But Beijing will be banking on capital gains ending up in the pockets of Mainland households rather than in those of Anglo-Saxon pension funds.
The latter will again be asked to play the game of being hoist by their own petard: to fund Chinese long term government bonds, which currently bring in 3% per annum, to which may be added an annual foreign exchange gain of 3% to 4%, i.e. a total of 6% to 7% per annum in dollar terms. In other words, the Holy Grail of any fool from the West hemmed in by the ECB’s zero interest rates and the Fed’s politicization. The first decade of the century saw China salvaging American deficits; the 2020s will mark a period of revenge, with Chinese deficits being financed by the West. This will help the RMB to become international and, in the long term, convertible in its digital version, against the background of a Western monetary system destabilized by inflationary pressures that are far more serious than our central bankers claim.
This explains why China is seeking to retain its independence vis-à-vis a world financial system that is seen to be unstable, by ensuring itself of a positive balance of payments. It is asking its people no longer to leave the country, saving $300 billion in capital outflows, and thereby counterbalancing the $150 billion or so that enter as foreign direct investment (FDI) — investment that, during the next five-year plan, is expected to remain merely stable with regard to the last five years. This dynamic clearly shows that, in the future, China intends to remove the link between GDP growth and foreign investment, which will be limited simply to the transfer of technology and know-how. If foreign companies are allowed to continue to invest in China, they will have to take on board that the determining factor will not just be their injection of capital.
During the 2020s, Chinese deficits will be financed by the West
The stock exchanges of Hong Kong or of Shenzhen-Shanghai, Government bonds, FDI… From now on, each type of asset in China will follow its own logic, but with a shared objective: to exploit disturbances in the West –initially financial, and, from the 2008 sub-primes crisis up to the 2020 Covid crisis, monetary as well — in order to place the RMB on the global stage.
This, then, is another Chinese paradox that we Westerners may find difficult to comprehend: it is by having its people withdraw into themselves, by stifling foreign industrial investment, and by prioritizing the strengthening of its currency, that China sees fit to prepare its return to the world stage.