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The Smart Money Wants Out Of China

Walter Russell Mead

Signs point to more trouble for the Chinese economy, as Beijing prepares new measures to restrict capital flight. The Financial Times offers a helpful explainer:

China is preparing to impose new restrictions on outbound mergers and acquisitions, amid a wave of foreign dealmaking that has fuelled capital outflow and exerted downward pressure on the renminbi. […]

As China’s economy slows, investors and business owners are diversifying into foreign assets. President Xi Jinping’s anti-corruption campaign creates an additional incentive for some wealthy Chinese to transfer assets out of reach of Communist party investigators.

According to commerce ministry data, Chinese companies’ overseas purchases have surged past last year’s record of $121bn for non-financial outbound investments, reaching $146bn in the first 10 months of 2016. The flow of money out of China is creating downward pressure on the renminbi, which has depreciated 5.8 per cent in 2016, on track for its worst year to date.

The people who understand the Chinese economy best continue to do everything they can to move money abroad. For the rest of us, this is less useful as a signal about the future of the Chinese stock market than as a pointer to growing stress in the Chinese system, and another sign that China’s era of meteoric growth is drawing to an end.

The government’s clampdown on capital flight aims to staunch the bleeding of the falling renminbi, but it will do little to solve China’s systemic economic problems. President Xi has repeatedly shown a preference for short-term fixes to uphold the status quo rather than comprehensive market reform: see, for example, his dismissal of China’s reformist finance minister this month. The alarm bells on China’s economy have been going off all year, and new capital curbs might only exacerbate the country’s problem of growing asset bubbles—the result, in part, of too much money chasing too few opportunities within the country.

China’s economic woes may also point to a problem for the Trump Administration. The renminbi is if anything overvalued as a currency today, given the hunger of so many people in China to get their money out of the country, and given the reality that politically directed banking has led to massive overinvestments in China that will at some point have to be written down to their true value. That’s likely to make Chinese exports cheaper and sharpen the pressures in the United States and elsewhere to crack down on perceived “unfair” Chinese export strategies.

In some ways the incoming Trump Administration may be facing the most complicated of all the possible China scenarios: a China whose military strength and assertiveness is growing even as its economic model begins to unravel. Interesting times are ahead for us all.

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