China’s economy: the end of a narrative

_ Luca Ruggeri, senior fellow, Centro Studi Machiavelli. Rome, 21. February 2024. *

China, since its entry into the World Trade Organization (WTO) in 2001, has become one of the economies that has attracted a great deal of interest among businesspeople. Presented at first as a producer of low-cost goods, an essential role in an increasingly globalized world, it has since become a major outlet market for many Western companies, to the point that it is currently the leading trading partner for Germany. Financially, China was described as a strong and continuously growing economy, in contrast to, for example, anemic Europe, where it was essential to invest in order to take advantage of this overwhelming trend; the development of a large and wealthy middle class also offered a not-to-be-missed opportunity for international asset managers to be able to manage the wealth belonging to that segment of the population. More recently, the expectation of a strong rebound after the crisis caused by the Covid virus has helped to further raise expectations about the Chinese economy.

In reality, many of these expectations have been unfulfilled, and the attitude of economic agents toward China has greatly changed, taking a much more cautious stance. The end of a sometimes uncritically enthusiastic narrative toward China is due to multiple factors.

One event that struck the business community very negatively was the blocking of the stock market listing of ANT, the financial arm of the Alibaba group; a case that had also been reported on in this blog. To many, the decision about ANT’s listing had indeed seemed to be the result of the Communist Party’s desire to reassert its dominance over the economy, mainly at the expense of the new web tycoons who had shown signs of impatience.

Other measures of a distinctly dirigiste nature further damaged the international image of the Chinese leadership; among these measures, a little-known event was the imposition of nonprofit nature on e-learning companies, a classic case in which a stroke of a pen destroys the value of investments in a sector previously reputed to be very promising.

The crisis in China’s real estate market has contributed to the burden on the national economy, in which real estate plays a significant role, and has concretized the perplexities about the byzantine ways of financing by foreign investors. In this context, particular relevance should be attributed to the crisis of Evergrande, a huge Chinese real estate group recently declared bankrupt; an affair in which the legal route for the recovery of credit, especially for international creditors, the percentage that can be recovered and the relative timing remains to be understood. Indeed, if the Chinese leadership seems willing, by providing the necessary financial support, to allow the completion of the real estate initiatives started, in order to avoid social backlash, about the offshore credits in the hands of foreign entities the thickest fog prevails.

As is well known, the purely economic/financial perplexities have then been compounded by an international framework characterized by an increasingly heated confrontation between China and the U.S., which increases geopolitical risks for direct investment in China and also for the supply chain, as the chip affair plastically demonstrates.

The crisis in the Chinese narrative has already materialized in a marked reduction in foreign investment and capital flight from China’s stock markets, as can be seen by the collapse in the performance of the relevant indices. Ironically, capital outflows from China have gone to strengthen China’s competitors; in particular, they have turned to Japan and India, given the need of institutional investors to remain invested in the Far East and emerging markets (curious as it may seem, China is in fact considered in financial benchmarks as an emerging country).

All this certainly does not imply that China will cease to be considered an important market for our goods and investments anytime soon, but the changing attitude of economic players will certainly be reflected in a lower willingness to finance and invest in China, and the perception of greater risk than in the past will imply a higher cost of financing for Chinese companies.

* Republished from the original publication at the Machiavelli Center.

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