The world’s most important bilateral relationship, between the United States and People’s Republic of China, is likely to face even greater pressure as Donald Trump returns to the White House. Increasingly, seemingly unrelated issues are being tied to the bilateral relationship. For instance, prior to his inauguration, Trump dominated headlines setting forth an aggressive agenda for territorial expansion. He buttressed his demands—for Canada, Greenland, and the Panama Canal—with charges of potentially malign Chinese behavior.
A potential trade war also looms. However, the PRC might find it difficult to respond to Washington. Trump enjoys the stronger position, with the U.S. economy on the rebound and even Democrats indicating a willingness to work with him on shared priorities. In contrast, the PRC’s position has deteriorated since the start of Trump’s first term eight years ago.
China’s economy has slowed and faces a multitude of challenges: a real estate crash, banks burdened with bad loans, youth unemployment and underemployment, highly indebted local governments, and a population both aging and declining. On top of that, foreign investment is dropping. Indeed, not just falling but reversing. Reported the Canberra-based Australian Institute of International Affairs:
“According to China’s balance of payment data, net FDI inflows (FDI inflows minus FDI outflows) plummeted from its peak of $344 billion in 2021 to merely $42.7 billion in 2023, the lowest level in more than two decades. In the first half of 2024, net FDI inflows turned negative and was -4.6 billion dollars, suggesting foreign firms might have repatriated more earnings back home than adding to new investments in China. In the meantime, US dollar funding from global investors in China’s venture capital and private equity industry is now drying up. This is demonstrated by the other official data series on FDI inflows from the Ministry of Commerce. The Ministry’s series on new actually utilized foreign investment, a measure of gross FDI inflows that does not consider earning repatriations, shows a 30 percent year-on-year decline through July 2024.”
The problem extends beyond reduced direct investment flows, which, added the AIIA, “were also accompanied by declines in foreign portfolio flows into China’s equity market. Reportedly, international investors have pulled more than $12 billion out of Chinese onshore equities since June, and if such large-scale withdrawals continue, [2024] may become the first year of net outflows since investors were first allowed to trade Chinese onshore assets through the Stock Connect in Hong Kong a decade ago.”
There obviously are multiple reasons for increased foreign wariness of investing in the PRC. A more difficult economic environment is an important factor. So is international pressure: Companies have grown more cautious as the U.S. and its allies increasingly restrict commerce with China. However, explained William Alan Reinsch of the Center for Strategic and International Studies: “There are also political factors. The Chinese Communist Party (CCP) under Xi Jinping has continued to tighten its control over the population and the economy, including Western investors.”
There long have been doubts about the economic statistics released by Beijing. For years policymakers and analysts alike have expressed concern over the accuracy of official numbers, but the problem has been getting worse. Beijing has tightened rules and expanded information controls even as its officials have sought to woo foreign companies and investors. The latter must do due diligence before risking their capital but this increasingly “has made any Chinese investment a potential minefield for foreign firms.” In 2023, the PRC “hit Western management consultants, auditors and other firms with a wave of raids, investigations and detentions. Meanwhile, an expanded anti-espionage law has added to foreign executives’ worry that conducting routine business activities in China, such as market research, could be construed as spying.” All this discourages even the most aggressive investors. Moreover, the lack of transparency has fueled foreign complaints about Chinese economic practices, such as subsidies to state enterprises, and encouraged trade retaliation.
Chinese officials are aware of the challenge and have promised reform. Last year, reported the South China Morning Post: “China’s new financial regulator has made fresh pledges to increase regulatory transparency, stability and predictability, the latest of several attempts to restore investor confidence following a stock meltdown and high-profile personnel changes.” President Xi met with American executives and, according to the Wall Street Journal, “sought to reassure American chief executives that China’s economy hasn’t peaked and that the country is working to improve its business environment.” Recently the Council for the Promotion of International Trade insisted that 90 percent of foreign firms are satisfied with their experience.
However, in December, reported The Economist, “Executives of those companies scoff at all this. Many say they now struggle to justify investing in the country and talk instead of cutting staff.” Surveys show optimism among foreign businesses about the future to be at record lows. Now reports are circulating that Beijing has punished an economist who spoke frankly about the state of the Chinese economy. Gao Shanwen, the chief economist at SDIC Securities, raised doubts about official growth rates and the government’s ability to accelerate growth. According to the Wall Street Journal, Xi ordered that Gao be investigated and disciplined: “Xi’s order led to a ban on Gao speaking publicly for an unspecified period, said the people familiar with the matter. For now, he has been allowed to keep his job, they said.”
Obviously, it is difficult to confirm such reports. However, few Western investors and policymakers are inclined to give Beijing the benefit of the doubt. Such a case will only reinforce doubts about investing in the PRC. Ironically, Gao’s comments did little more than confirm what most Western analysts already believed. China is growing, but not as fast as claimed. And Chinese policymakers are unlikely to take the actions necessary to return the economy to high growth. Had his remarks not been met with apparent suppression, they would have received little attention. However, his reported punishment confirms the worst commonly believed about Chinese transparency and received additional attention.
China’s dramatic economic growth, which reflected the country’s turn toward open markets, delivered both financial prosperity and political influence. As Beijing tightens economic controls it further weakens relations with America and Europe. We will all suffer if the result is largescale decoupling.
