Xi Jinping has no need for foreign money for his plans to make China a self-reliant superpower
The currency has slumped to a 17-year low. The stock market has crashed to 2006 levels. Foreign money is fleeing the country and the financial system is wobbling amid fears of a full-scale collapse.
Sound familiar? Well, actually, it is not the UK this time but a far larger and more powerful country. China. Ever since President Xi secured a third term as leader, tightening his authoritarian grip on the country, the renminbi and the Shanghai and Hong Kong stock markets have witnessed dramatic collapses.
There is one big difference, however. The government will simply shrug it off. Neither Xi nor the rest of his cronies at the top of the Chinese Communist Party care what investors or currency traders in New York, Zurich or London think.
They have a clear strategy for turning China into a self-sufficient super-power reliant on no one but itself and dominating every region in the world that matters to it. The less foreign capital is involved, the better. Anyone who imagines the markets are going to bring down President Xi, or make any kind of dent in China’s economic progress, is guilty of wishful thinking. It isn’t going to happen and in reality, it may just make him stronger.
China’s stock market crash was the kind of reaction that even “Kami” Kwasi Kwarteng might have been rattled by. As President Xi was anointed for a third term in office on Sunday, and as the leadership of China’s controlling party was purged of dissenting voices, the capital markets sold off every form of asset they could find. Hong Kong’s Hang Seng index, the main gateway into the country for global money, witnessed its worst one day sell off since the financial crisis of 2008. With a 6pc daily fall, it is back to levels last seen two decades ago.
The Nasdaq Golden Dragon index, home to US listed tech companies, witnessed its worst day on record and has now fallen to 2006 levels. On the international markets, the renminbi sold off sharply against the dollar, hitting levels last witnessed in 2007. Even the more tightly controlled Shanghai index, home to most major Chinese companies, fell sharply. Foreign money is getting out of China at an accelerating pace.
It is not hard to understand why. Under Xi, China has clearly taken a more authoritarian turn. Dissent has been clamped down on. Loyalty is more important than innovation. Minorities will be ruthlessly suppressed. The increasingly bizarre obsession with zero-Covid, long after the rest of the world has stopped worrying about the virus, will continue for far longer than needed.
None of that is likely to be good for growth. Indeed, the growing aggressiveness and nationalism of the Chinese leadership, along with its support for Vladimir Putin’s brutal war in Ukraine, makes a conflict more likely. An invasion of Taiwan no longer looks like a remote prospect.
At the same time, President Biden has started an economic war with China that is far more serious than anything Donald Trump attempted. Trump’s tariffs on its exports to the United States were largely irrelevant, imposing a few irritating extra costs on the most important trading relationship in the world.
Biden has clamped down on any form of technology transfer, closing down American involvement in the microchip industry even if it damages his own side (Apple has already dropped plans to use Chinese-made chips in the iPhone). The intent is clear. The US is determined to stop China becoming a serious rival in technology.
Against that backdrop, it is not surprising that global money is fleeing the country. It is hardly a good place to try and do business right now, at least if you are not Chinese. “The Great Chinese Liquidation of private and public equity is now in full swing,” argued the legendary hedge fund manager Kyle Bass on Twitter. “Today’s 10pc to 20pc crash in Chinese equities is just the beginning.”
Well, perhaps. Here is the important point, however. Does the financial sell-off really make any difference? The answer is surely no. China is hardly reliant on foreign capital. The country runs the largest trade surplus the world has ever seen. So far this year, the surplus is up by almost 50pc, and it was already running at record levels.
Chinese GDP statistics might be about as reliable as Boris Johnson’s tally of how many MPs were backing him for the leadership of the Conservative Party, and yet the country is still expanding by more than 3pc a year amid a global recession. Even if you don’t want to believe what the trade data tells you, it is still growing.
The technology ban will hurt this year, and perhaps next, but if it forces China to develop its own manufacturing expertise, it may come to be seen as a spectacular own-goal. Joe Biden has made plenty of mistakes as President. This might be his biggest one.
More importantly, the Chinese leadership has set out a clear path to national self-sufficiency. It does not want to be dependent on foreign capital, foreign technology, foreign raw materials, or indeed foreign markets.
We may not like that. We would all much prefer it if China was still set on a path towards economic modernisation and gradual democratisation, integrating itself into the global economic system whilst at the same time granting more freedom to its people. Think South Korea through the 1970s and 19980s except twenty times the size.
Yet, in reality, just because we want something to happen doesn’t mean it necessarily will. If Xi’s strategy is to make China a self-sufficient super-power, then he will be happy to see the back of foreign money. China may switch course one day and re-set towards steady liberalisation. But it won’t be the financial markets that force a change of direction – and there is no point in kidding ourselves that it will.
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