China’s Economic ‘Perfect Storm’ Accelerates Decoupling With US: Christopher Balding

Unfinished apartment buildings in Xinzheng City in Zhengzhou, China's central Henan Province, on June 20, 2023. (PEDRO PARDO/AFP via Getty Images)

Money will keep leaving China as a diminished return on investment no longer justifies the risk of dealing with the Chinese Communist Party (CCP), according to Christopher Balding, an expert on the Chinese economy at the UK-based think tank Henry Jackson Society.

The U.S.–China decoupling will accelerate as a result, he said.

He forecasts that U.S. interest rates will be higher than China’s for a “sustained period of time”—at least into 2025. In the past several months, China’s central bank has repeatedly lowered its key interest rates to control deflation, while the U.S. Federal Reserve has boosted rates to reduce inflation.

In the business world, where government bond yield informs the corporate return on investment (ROI) rate, which is usually higher because of higher risk, investors constantly compare ROIs among various options.

Currently, the U.S. 2-year Treasury bond rate is about 5 percent, while the 2-year Chinese central government bond rate is about 2 percent. That spread of 3 percent indicates a difference in business ROIs at the same magnitude.

“That is going to really pressure money to leave China because it’s like, ‘Why do I want the hassle of dealing with China when I can get the same return investing elsewhere? What’s the point? I don’t need the hassle of dealing with the CCP,’” Mr. Balding told The Epoch Times.

Perfect Storm

The world’s second-largest economy has been struggling for months, failing to achieve the post-pandemic boom that many had anticipated. The latest July data release showed exports posting the sharpest year-on-year drop since before the pandemic, and imports at five straight months of decline. Factory-gate prices fell for the 10th consecutive month, while new home sales had the most significant monthly drop since July 2022.

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Many have described China as being in the middle of an economic “perfect storm” based on that macro data, coupled with heavily indebted local governments and property developers, an aging population, and a more than 20 percent youth unemployment rate that the CCP decided in August to stop reporting.

Mr. Balding says the perfect storm has another dynamic: the difficulties of dealing with the CCP feeding into the lowered return. He added that the “compounding” effect makes investing in China more risky and less desirable. The business community will look to invest in other places that don’t carry the same high risk as what the CCP imposes in the Chinese environment, he said.

According to the State Administration of Foreign Exchange, foreign direct investment (FDI) into China increased by $4.9 billion in the second quarter, down 87 percent from July 2022 and the most significant year-on-year drop since 1998.

According to China’s National Bureau of Statistics, the property sector, which used to make up about 30 percent of China’s gross domestic product (GDP), saw its year-on-year investment decline by nearly 18 percent in July.

According to Bert Hofman, head of the National University of Singapore’s East Asian Institute and former World Bank country director for China, the Chinese private sector’s return on assets declined to 3.9 percent in 2022 from 9.3 five years ago, and the state-owned enterprises’ returns dropped to 2.8 percent from 4.3 percent during the same period.

Workers inspect solar panels in the early morning at the fishing-solar complementary photovoltaic power generation base in Taizhou, in China's eastern Jiangsu Province on July 12, 2023. (Stringer/AFP via Getty Images)

Decoupling Not on Xi’s Terms

The type of future decoupling between the United States and China isn’t helping CCP leader Xi Jinping because “it’s decoupling on somebody else’s terms,” Mr. Balding said.

He said that decoupling on Mr. Xi’s terms is about getting U.S. investments with know-how and then kicking these companies out of China as soon as he has everything that he needs.

The current decoupling is on U.S. terms, Mr. Balding said, pointing to President Joe Biden’s recent executive order as an example.

On Aug. 9, President Biden signed an executive order to restrict U.S.-based investments going to China in artificial intelligence, quantum technology, and semiconductors. These industries are strategic areas that Mr. Xi has identified to source future Chinese economic growth and facilitate achieving his goals of the “China dream”—a dream of global dominance.

In response, a Chinese foreign ministry spokesperson strongly objected to the executive order, calling it “blatant economic coercion and tech bullying.”

Four days later, the CCP released new 24-point guidelines to “improve the foreign investment environment and increase efforts to attract foreign investment.” The document urged foreign research and development investment in key science projects such as biotech and green energy.

At a news conference on Aug. 14, Yao Jun, head of planning at the Ministry of Industry and Information Technology, said that the CCP would continue pushing for FDI in “advanced manufacturing” and the “energy conservation and environmental protection” industries in central-western and northeastern China.

Mr. Balding said such guidelines were “not even close” to achieving the stated objectives.

“In China’s economic environment, these types of measures just are not going to really attract foreign investment. There’s very little return to have; there’s enormous risk. There’s just very little interest by international investors ... moving into that environment.”