Source Article in Chinese: 外资撤离成势，官媒为何否认？
The withdrawal of foreign capital from China has been a trend that began in 2009. Although at times there were new funds entering the country, they were not enough to change that trend. What drew my attention is that the People's Daily published articles time and again, asserting on one occasion that “the mass exodus of foreign funds is a purely groundless statement”, and claiming on another that “the withdrawal of part of the foreign funds was merely a temporary adjustment, its impact on China's economy is limited”.
That the withdrawal of foreign investment is an issue important enough to drive an official newspaper of CPCCC to running several pieces to “set the record straight” made one feel very interested in the key arguments of Chinese official media.
Reading closely, I found that Chinese official media used three main arguments.
Argument 1: foreign funds have not withdrawn from China en masse
The commentator made the judgment based on a decrease in “forex funds” (funds outstanding for foreign exchange). According to the information disclosed by the PBOC, China's forex funds balance in June was 27.38 trillion yuan, a MoM decrease of 41.205 billion yuan from May, the first negative growth record this year, some analysts believed there was evidence of withdrawal of foreign investment.
The People's Daily cited an analysis by the relevant department of the State Administration of Foreign Exchange (SAFE), claiming that the recent slowdown in the net inflow of cross-border capital in China was a result of factors at home and abroad, seasons and policies coming together, and that it expected a balance would be achieved in the second half of year. It also stressed that the withdrawal of foreign investment was only temporary and has limited impact on China's economy.
The People's Daily also quoted data from the Ministry of Commerce, saying that in June this year, the number of newly established foreign investment enterprises fell YoY by 17.31%; while the actual amount of foreign funds used increased YoY by 20.12%.
The People's Daily published this article on August 22.
On September 6, a piece about foreign capital withdrawing collectively from China's banking industry appeared in the 21 Century Economic Report. It mentioned that on September 3, the Bank of America sold all of its two billion CCB H shares and cashed over 11 billion HK dollars. Shortly after that, foreign strategic investment withdrew from all four major banks of China.
According to information from Dealogic, from 2002 to 2010, the Bank of America had acquired at least $ 14.8 billion worth of Chinese bank shares, and made a hefty profit. Between 2009 and 2013, it sold Chinese bank shares valued at $ 37.3 billion.
I pointed out in my earlier analysis that 2007 could be seen as a watershed. Before that year, foreign industrial investment had a dominant role; after that year, the dominant role was shifted to financial investment. Information on the background of this shift could be found in the data provided in an article published on September 10 in Shanghai Securities News.
It said that over the past 10 years, the profit gap between China’s banking sector and industrial has grown increasingly wider. This indicated an obvious problem with the economic structure, that is, the serious discrepancy between virtual and real economy.
The semi-annual report of 2013 showed that the four major banks (Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China) claimed the top four spots with the highest earnings in the first half of this year. And of the top ten most profitable listed companies, three were banks, and three others were energy giants: PetroChina, Sinopec and China Shenhua.
In the past two years, China’s banking industry continues to see an increase in their profits and revenues. However, the abnormal development of shadow banking, the high risks of local debt, and the burst of property market bubbles in some regions have caused relevant operational risks to emerge in many banks.
And viewed from the ratio imbalance between the profits of the banking industry and industrial enterprises, the size of profit margins of the banking industry in the economy would likely be challenged. These hint that the golden age of China's banking industry is gone, foreign banks picked up the signs and now is the best time they remove themselves as strategic investment partners of Chinese banks.
Argument Two: China still has a considerable edge in using foreign investment
This argument is made in response to the withdrawal of foreign investment that caused chiefly by the rising land and labor costs in China. Since the land cost in China is really undeniably high, the People’s Daily placed the main focus on the cost of labor instead. It claimed that while labor cost in China is rising gradually, the country’s work force has markedly improved its quality and is capable of processing work with higher added values. And although the coastal regions are losing their appeal to foreign investment, the central and western parts of China are becoming draws for those investors.
The question is: these “advantages” need to be agreed by foreign investors. World Investment Report 2012 cited a BCG report, which compared the labor costs of China and the United States and concluded that although labor costs made up a relatively low proportion of costs of the industries interviewed, the rapid narrowing of wage gap between the two countries made it one of the important factors. Chinese wages denominated in dollars are expected to rise 15% to 20% annually, exceeding the country’s productivity growth.
After taking into account the productivity of the United States, the once significant difference of labor costs between the coastal regions of China and low costs states of the US is expected to reduce to less than 40% of the current level by 2015.
On top of that, logistics and other costs and the complexity of the global supply chain considered, China’s cost advantage will become very small.
The BCG report also pointed out that China’s labor cost has been proven not to be so advantageous. Huawei reported that the cost of hiring engineers with master’s degrees in inland provinces was only 10% lower than that in Shenzhen. Kolcraft wanted to move to Hubei, and found out eventually that the costs there was only 5-10% lower than that of coastal regions.
In any case, it is a consensus that the time China has an unlimited supply of workers who earn less than $ 1 a day is over.
The report also pointed out other unfavorable factors of China, such as intellectual property risks, as well as the low-cost natural gas of the US that attracted manufacturing back to America.
In recent months, three major international rating agencies have lowered the credit rating of China; JP Morgan Chase, Citigroup and other international capitals have indicated the outlook of the Chinese economy "bearish." It goes without saying that the nature of capital is profit-driven. It’d go to places where profits can be made and leave when it cannot make any more profits. But for Chinese officials, the international investment community has always had a plot to "short China".
Beginning in March this year, international investment banks, rating agencies and the international media have "complemented one another in quietly brewing the second round of 'shorting' China, China is at risk of having to foot the bills for the financial crisis of the United States."
On September 9, chief strategy commentator of CCTV Securities channel Xu Yili simply attributed the “secret withdrawal of hot money from Asia” to the United States "using the U.S. dollars as a weapon of global revenge and its action of to collect debt."
Jim Chanos, president of Kynikos Associates, was named as the culprit of this round of shorting China. Beginning in March this year, international investment banks, rating agencies and the international media have "complemented one another in quietly brewing the second round of 'shorting' China, China is at risk of having to foot the bills for the financial crisis of the United States."
On September 9, chief strategy commentator of CCTV Securities channel Xu Yili simply attributed the “secret withdrawal of hot money from Asia” to the United States "using the U.S. dollars as a weapon of global revenge and its action of to collect debt."
The reason for this was that in an investor conference in Hong Kong on April 5 this year, Chanos used a 19-slide PPT to illustrate to investors why he felt bearish about China and wanted to short it. The reasons were that the “GDP-only” approach is giving rise to the phenomenon of “killing the hen to get the egg” in the Chinese economy; the problem of overcapacity has been prevailing in the cement, steel, and automotive sector; the unprecedented amount of investment in fixed assets made it maintain a high proportion in the GDP, causing the return on investment per unit to diminish while liability assets depreciate.
It was said that Chanos' speech listed nearly all problems of China's economy, including excessive investment, bank credit expansion, shadow banking, local debt, real estate bubble, phony urbanization, wealth disparity, the spread of corruption and others.
What made China most unhappy was that Chanos extended his judgment to the realm of politics, saying that once the Chinese economy is in trouble, the current interest group would scatter like monkeys when the tree falls.
With this political judgment of Chanos, the Chinese government became convinced that it definitely is a conspiracy to short China. The authors of these articles seemed to have forgotten that capital pursues profits, and would be where profits can be made. These authors sounded as if they thought that foreign capital went not to China for fortune but instead to help with China's socialist construction; and their departure now was not because of the room for profits became smaller, but that they were playing a premeditated conspiracy against China.
In summary, my judgment is: foreign capitals from the United States and Europe are indeed speeding up their withdrawal; many of the foreign funds that entered China recently were actually a reflux of Chinese capital after they were bleached in Hong Kong and other places.
In order to show that the Chinese market still has an advantage in attracting foreign investment, the People's Daily went to the extend of publishing articles on the topic itself. Judged from the results, however, that mouthpiece achieved not so much in the purpose of "clearing up doubts", rather, it has fed itself a pill of reassurance.
(The most intriguing thing is that the "People's Daily has exposed in its articles an "Achilles heel" that has been concealed carefully in recent years. I would go into this in my next article.)
