This Quarter's Summary - Summer 2019
The once-unimaginable scenario of China decoupling from major parts of the world economy is starting to appear realistic. It is useful to recall how this started. For China, engagement with the capitalist world was initially about earning a capital surplus to permit investment at home and acquire technology from abroad. Beijing became almost too good at this game, amassing foreign currency (and thus foreign government bonds). In recent years, Beijing was forced to relax its hoarding fixation. Not only was there no marginal benefit, but China’s twin surpluses were becoming a liability, breeding overdependence on foreign bond markets and resentment from the United States and other countries for its never-ending trade deficits. Beijing loosened capital account controls in 2014 and, lately, its firm hand on the value of the currency, which also stabilized the balance of payments.
The era of certainty about net capital inflows into China is over. The trade surplus has thinned as a share of gross domestic product (GDP), even in absolute value terms. After capital controls were loosened in 2014, $1 trillion in foreign exchange (net) left the country in about a year and a half, with the next trillion in line behind it, leading to controls being reinstated. The door is being opened wider to global portfolio capital, but it is not clear that capital wants to come in. Multinational corporate direct investors, long a mainstay of China’s domestic investment scene, are publicly diversifying into Vietnam, India, and other economies.
Beijing now has to contemplate a world in which trade is not in surplus and capital flow pressures are skewed toward the outbound side. The readiness of middle-class Chinese citizens to switch out of property-heavy domestic assets to a more diversified global portfolio exceeds the appetite of global savers to bring their wealth into the politically fraught world of Beijing’s socialist market system.