China’s Problem Is Still China’s and Has Not Spilled to the Rest of the World

The Chinese Central Bank. (maoyunping/Shutterstock)

Commentary

The potential China collapse is now on the international agenda. A minority of opinions worry that China’s collapse will spill over to the rest of the world. This is not a mainstream view because China’s collapse has effectively been ongoing; a series of asset slumps and debt defaults have already been realized.

Yet the global economy and financial markets are so far not seriously affected, not only the western ones but also most of the Asians. Thanks to Covid and a series of trade wars, the linkages between China and many other countries had weakened before the collapse.

However, the linkages are not completely removed as outward production relocation from China cannot be done in such a short time.

The sign is clear, however, that China’s exports year-over-year (YoY) growth has plummeted from plus 30 percent two years ago to minus 10 percent now, despite other export countries having a similar decline.

Since China has closed its capital account, the balance of payments data has forced the net export receipts to the other entries, namely, the financial account. In most normal settings, a financial account refers to the pure capital position that is not due to in/out of goods or services, but China’s financial account is likely overstating such a position.

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Nevertheless, because the balance of payments data sum to zero across the globe, the chance of producing fake figures is not high. The accompanying chart presents the data compiled by the International Monetary Fund (IMF).

KC Law, Ka Chung

These are the items from China’s financial account, presumably the difference between current and capital accounts. Breaking it down gives two major categories: direct and portfolio investments. These are, respectively, the longer—and shorter—term positions. The “being claimed” and “claims” are shown respectively on the liabilities and assets sides, so that the former minus the latter gives “net out” or “net in.” Further, computing the four-quarter YoY difference turns these stock data into flow, thus showing the net incoming amount over time.

In stock terms, equity investments, whether direct or portfolio type, usually take up larger positions. This means China tends to rely more on equity financing than debt financing.

From the chart, we can see equity direct investment has been volatile and was an upward driver last year. Yet there was a strong base effect due to persistent plunge in the previous six years. Portfolio investments, whether equity or debt, have been declining for a year already, while direct investments follow suit resulting in net outflow in the recent two quarters (2022Q4, 2023Q1).

This is an overall decline where the trend looks quite like that in early 2016. Nevertheless, China’s economic fundamentals are much weaker now than then. As these positions might have included the receipts from external goods and services trades, netting off these would give an even uglier picture.

Nobody would care about such a serious outflow unless it affects other countries. Over the last year, we did not observe any significant spillover effect, except for the impact on neighboring regions like Hong Kong or Macau.

KC Law, Ka Chung