Thursday, 24 August 2017

Will China’s Latest Bout of Nationalistic Economic Policy Work?

In today’s post the focus is on the recent news emanating from China that the Chinese Government has introduced a cessation on foreign investment by Chinese entities on anything over $5 million. However, recent news concerning the potential investment in one of the world’s leading car manufacturers suggests that the outflow of Chinese capital will not be stopped, but rather will now carry a governmental-licence, which has the potential to alter the dynamics of the global capital flow and, more importantly, the global political balance.

China has long since employed different variants of economic nationalism, ranging from Mao Zedong’s 30-year reign to Deng Xiaoping’s radical transformation of the Chinese State. Today’s version, led by Xi Jinping, is part of a growing world-wide trend but with one crucial difference from other components of the trend like the United States or the United Kingdom; China has the political ability to enforce its nationalistic policies upon its business entities in a much different way than its political competitors. Last week, in announcing to the Chinese economy its intentions, the Chinese State Council announced that it would be implementing the latest phase of a long-held initiative to curb the outflow of capital from Chinese shores. In November last year it was announced that any investment outside of the country worth over $5m would need to be cleared by Central Authorities first, but this has seemingly not deterred the rate of investment abroad. However, the ever-growing debt crisis that is enveloping China has forced the State into action, despite suggestion that a general raising of corporate taxes could provide room for the State to breathe. In the wording of the document released by the State Council, it is affirmed that the levels of debt being incurred because of the vase outflow of investment are now being fundamentally considered, with the effect being an immediate prohibition (with the caveat of the requirement of a licence) of investment in overseas hotels, cinemas, the entertainment industry, and real estate. This is being witnessed already with the withdrawal of Wanda Group’s rumoured $1 billion acquisition of Dick Clark Productions, and the recent ordering for Anbang Insurance Group to liquidate its foreign assets, which include the famous Waldorf Astoria Hotel – although Anbang maintains that it will have the final decision, the reality will tell a different story.

Apart from the need to maintain capital within China to ward off any sort of financial crisis, the State Council makes clear that one of the aims of the State is to encourage internal investment in initiatives like President Xi’s signature ‘Belt and Roads’ project which, although far too expansive to define neatly, is a massive $900 billion infrastructure initiative which aims to connect China to a host of other countries in Asia and beyond – it is being heralded as the biggest ‘development push’ in human history. Therefore, the need to keep investment internal is clearly important to the Chinese state but, interestingly, it has not stopped the rumoured attempted outflow of capital. One relatively small development recently was the 80% takeover of English Football Club Southampton FC by Gao Jisheng, worth a reported £210 million – the latest in a recent flurry of Chinese investment in football-related endeavours since President Xi’s visit to the U.K. in 2015. However, the largest piece of news in this regard is the rumoured Chinese interest in the Fiat-Chrysler company, the seventh-largest auto manufacturer.

Rumours have picked up pace recently after an official from the Great Wall Motor Company confirmed U.S.-based speculation that a ‘well-known Chinese automaker’ was interested in purchasing Fiat-Chrysler; the official stated that ‘with respect to this case, we currently have an intention to acquire’. The deal, which if completed would represent one of the largest auto-based deals a Chinese company has taken part in, would be very-much needed by Fiat Chrysler as it struggles to keep pace with its requirements to stay competitive in an extremely competitive marketplace, and comply with emissions regulations and the need to develop technologically. However, Fiat Chrysler was forced to admit that it has not been the subject of a takeover bid, which was closely followed by Great Wall Motors declaring that it had not entered into discussions with Fiat Chrysler, which immediately sent Great Wall’s stocks down in price. At the time of writing the deal is considered as very unlikely to proceed, but whether that is because of the conditions in China is up for debate – there certainly seems to be a persistence in Chinese appetite for foreign investments.

Ultimately, however, the position of the Chinese State over its business entities will dictate the outcome. The impending threat of a debt crisis, when placed in conjunction with the Belt and Roads project which will cement China’s position as a global leader, will take precedent if needs be – and it is likely that it will need to be. The ability to position the Government as the provider of licences for foreign investment means that the Chinese Government can attempt to ward off what is a real and imminent problem with regards to its levels of debt being incurred. The IMF has been clear in its warning for China, noting that levels of private-sector debt and the use of complex financial instruments are putting the Chinese economy at great risk, with the world having a real understanding of what those risks are after seeing the U.S. and the U.K. fall to the same risks – however, it is unlikely that China will be deterred by this. In reality, China’s growth is incessant and based upon a sentiment of this current phase being representative of China taking its place amongst the global elite, which it has every right to do. China’s political structure allows it to take actions that Western countries (theoretically) only take during a crisis, which may mean that the situation will not develop as Western-based onlookers like the IMF believe it will. Either way, the future for China’s economy will have a massive effect upon the global stage, but whether that effect is positive of negative remains to be seen.

Keywords – China, Debt, Politics, Fiat-Chrysler, Great Wall Motors, Economics, Xi Jinping, Belts and Roads Project, @finregmatters

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