Why Chinese Companies and Investors are Exiting China
Introduction:
A declining domestic economy and escalating trade tensions are driving both foreign and Chinese companies and investors to exit China. The Chinese economy, struggling since the end of COVID-19 lockdowns, has yet to recover. Chinese stocks have steadily declined, losing over $6 trillion in value over the past three years. Exports have contracted and grown at a slower pace, leading to the closure of many Chinese manufacturers and layoffs of workers.
Foreign Companies and Investors Exiting China:
The People’s Bank of China (PBOC) has been cutting interest rates to stimulate the domestic economy. However, investors can earn about 5 percent by purchasing U.S. Treasuries, avoiding the risks associated with China’s struggling economy. It is unlikely that the Chinese economy will reach its 5 percent growth target this year, with GDP growth in the second quarter falling short at 4.7 percent. The trade war with the United States and the potential one with the European Union (EU) further push companies to look elsewhere to avoid tariff impacts. Even Chinese automakers, once considering China a great market, are seeking better opportunities abroad.
Chinese Companies Investing Abroad:
Chinese firms have set a record with $71 billion in outbound investment in the second quarter. This increase in overseas investment means that jobs are going abroad instead of staying in China. Just as China once benefited from global outsourcing, other countries will now benefit from Chinese factories moving overseas, which will slow job growth in China. The outlook for China’s exports is expected to worsen, with Chinese electric vehicles facing high tariffs in the EU.
Trade War Impact:
The trade war between the United States and China, which started under the Trump administration, has continued and intensified under the Biden administration. President Joe Biden’s trade policies may be continued and intensified by Vice President Kamala Harris if she becomes the presidential candidate. The imposition of high tariffs by the United States could significantly impact China’s growth. UBS has determined that a 60 percent tariff would halve China’s growth, preventing it from surpassing the United States.
Structural Weaknesses in China’s Domestic Economy:
China’s domestic economy faces unresolved structural weaknesses that drive away investment and cause exports to decline. The real estate debt bubble and local government debt pose significant risks. Local government debt in China is estimated to be as much as $11 trillion, with $800 billion at risk of default. This debt stems from incomplete or unsold infrastructure projects, transportation, and housing developments. Local governments, desperate for cash, are demanding millions in back taxes from private companies. These issues, along with the PBOC rate cuts, indicate an economy in crisis and a regime running out of solutions.
Conclusion:
Despite claims and proclamations by the Chinese Communist Party (CCP) regarding the need for economic reform and a shift to a more sustainable model, no major changes have materialized. Foreign companies and investors, as well as Chinese companies, have grown tired of waiting and are finally withdrawing their investments from China. The combination of a declining domestic economy, trade tensions, and unresolved structural weaknesses paints a grim outlook for China’s economic future.
