Xi Jinping will address the World Economic Forum on Tuesday in Davos, the first time a Chinese leader has done so.
Chinese state media tells us he will speak strongly in favor of globalization. That message will be difficult to accept, however, as his country is closing off its market, restricting outbound capital flows, and delinking from the world.
Yet there is a more important storyline about the trip to the Swiss Alps. Xi will be begging for foreign investment. His country needs cash.
Xi, according to Chinese officials in Geneva, will advocate “inclusive globalization.” Jiang Jianguo, the chief of the State Council Information Office, said China’s president hopes for “a human community with shared destiny.” As People’s Daily said Saturday, he “will present a confident, open, responsible, and positive Chinese voice to the world.”
Xi may be “confident,” “responsible,” and “positive,” but “open” he most certainly is not. He has, after all, been closing off the Chinese economy with enhanced state subsidies, unnecessarily restrictive national security rules like last November’s cyber security law, and highly discriminatory prosecutions of multinationals. His tenure has been marked by the increased favoritism toward state enterprises.
Xi’s general approach is embodied in his signature phrase, “Chinese dream.” That dream, unfortunately, contemplates a state-dominated society, and a state-dominated society does not sit easy with the notions of an open economy. Call it China for Chinese competitors only.
Moreover, since the fall of 2015 he has informally restricted outbound transfers of cash. Last fall, Xi began applying those restrictions in earnest to foreign companies. For instance, multinationals can no longer “sweep” $50 million worth of currency out of the country using expedited procedures. The limit for this popular procedure is now only $5 million.
The concern in the foreign business community is that Beijing will further restrict cash transfers, and this, of course, discourages not only inbound money transfers but also additional foreign investment.
This is a particularly bad time for Xi to do that. Last year, foreign direct investment, which for decades has powered the Chinese economy, increased only 4.1% in yuan terms. When measured in dollars—what really counts—FDI fell. The renminbi in the onshore market last year plunged 6.95% against the greenback.
Continued depreciation of the “redback” is another significant disincentive to invest in China, of course.
And while China’s leader talks about globalization in Davos, his economy is in fact de-globalizing. In 2015, China’s two-way trade fell 8.0%. Last year, exports tumbled 7.7% and imports fell 5.5%.
The decline in imports could have been even more severe last year because the Chinese have been using fake import documentation to smuggle cash out of the country. Net capital outflow might have increased in 2016 from the year before.
For 2015, the highest estimate of outflow was Bloomberg’s $1 trillion. So far, the biggest number for last year comes from Christopher Balding of Peking University’s HSBC Business School. He has gone on record saying there may have been $1.1 trillion of outflow in 2016.
The only significant sign of China’s increasing integration with the world is outbound investment, but acquisitions of foreign assets, it appears, are primarily driven by a desire to minimize in-country risk. Many of the deals suggest money is permanently leaving China.
So outflows are increasing while inflows are decreasing. No wonder Xi Jinping is going to Davos. Like all Chinese leaders, he wants others to come to him, a sign of strength. So he surely thinks that his going to the foreign gathering is a humiliation, especially because he is on the hunt for cash.
The good news about Beijing’s new mindset is that the central government is being forced to grant market access, unilaterally. At the end of December, the powerful National Development and Reform Commission promised to liberalize rules for foreign participation in the financial, gas, and infrastructure sectors. The pledge followed a State Council announcement on increased access to certain types of manufacturing.
Yet it is not clear who would want to invest even if Beijing makes good on its market-opening pledges. For one thing, there is the slowing economy. The National Bureau of Statistics on the 20th of this month will report something like 6.7% growth for 2016, but in reality China was expanding in the low single digits. Slow growth poses the risk of a systemic financial crisis because China is now accumulating debt at least five times faster than GDP.
Moreover, China investments carry far higher political risk these days. For one thing, Xi Jinping’s Beijing is generally threatening to use its economic might to achieve expanding geopolitical ambitions. That jeopardizes China’s hard-won reputation for being a reliable member of global supply chains.
And then there is Donald J. Trump. The president-elect has announced the appointment of trade hawks—most notably Peter Navarro as the chief of the newly formed National Trade Council, Wilbur Ross to head the Commerce Department, and Robert Lighthizer as U.S. Trade Representative—signaling a far tougher line on China’s mercantilist practices. Beijing is bound to react poorly, and it has, according to a Bloomberg report this month, already threatened to scrutinize the business dealings of American multinationals, looking especially for tax and anti-trust violations.
Yet China is already doing that. On December 23, the Shanghai Municipal Development and Reform Commission announced it had imposed a fine of 201 million yuan ($28.9 million) on SAIC General Motors Corp., the joint venture of General Motors and Shanghai Automotive Industries Corp. The alleged sin? Setting minimum prices for dealer sales of Cadillacs, Chevrolets, and Buicks.
So someone at Davos should ask Xi, once he utters his last generalization on globalization, to explain why anyone should invest in his country.
Xi may look powerful, but he is going to Davos as a beggar—and he’s got a lot of ‘splainin to do.
By Gordon G. Chang