Wall Street seems to have endorsed Washington’s hostility toward China trade and Chinese economics. Investment flows from U.S. sources to China have begun to decline.
Investors have turned against China for their own reasons and not in obedience to Washington. They worry about the burden on Chinese finance imposed by the large and growing overhang of questionable debt. They’ve become wary of China’s general economic slowdown as well as the recent ineffectiveness of infrastructure spending. They don’t unreasonably wonder if this picture signals still more fundamental economic problems in the Middle Kingdom and the prospect of lackluster returns.
Beijing’s State Administration of Foreign Exchange reports a dramatic decline in the flow of U.S. money into Chinese stocks and bonds. Not too long ago, this state administration reported high levels of such portfolio investments from the United States. In 2018, even as then-President Donald Trump began to impose punitive tariffs on imports of Chinese goods, U.S. investors made some $17 billion in net purchases in Chinese stocks and bonds. The net flow rose to $36 billion in 2020 despite the COVID-19 pandemic.
The flow held up in 2021, which saw a net inflow that almost topped $20 billion. But in 2022, net portfolio investment all but stopped, and this year through October—the most recent period for which data are available—has seen net outflows to the tune of about $31 billion.
The same pattern emerges from statistics on private investment. Over the years, U.S. investors’ enthusiasm for China has fostered the growth of several private equity funds specializing in Chinese investments. According to Preqin, a private consultant that tracks flows of money into alternative investments, China-oriented private equity funds attracted as much as $140 billion as recently as 2019, with most of the funds coming from individuals and pension funds. By 2021, that figure had shrunk to $93 billion; through October, those inflows have shrunk to a mere $4 billion.
Washington’s attitude has no doubt contributed to this investor rethink. Since 2022, the Biden administration has conducted what can only be described as a trade war with China. Despite his campaign rhetoric, President Joe Biden has retained the Trump tariffs on Chinese goods that went into effect in 2018 and 2019. President Biden, in addition, has forbidden the sale of advanced semiconductors to China and limited the ability of Americans to invest in Chinese technology.
Most recently, Washington has made it clear that tax credits for electric vehicles won’t apply to products made by Chinese companies or that have a significant proportion of Chinese parts, including batteries. Such strenuous government efforts couldn’t help but affect investor thinking. However, U.S. businesses and investors have reasons beyond Washington for losing interest in China.
Top of their list is China’s huge and growing overhang of questionable debt. Many U.S.-based investors have exposure to the debts of Chinese real estate developers, almost all of whom are threatening default. The losses and potential losses involved naturally have made all investors wary of sending more funds to China. More than this is the burden that this bad debt places on all Chinese finance. There are fears that even firms with no direct exposure to developers’ debts will suffer financial weakening because they have relations with companies with such exposure.
Then, there’s the overhang of local government debt in China. Few, if any, Americans have direct exposure to this debt. Still, they worry that any Chinese investment could suffer if payments on this debt are suspended or delayed or if the burden imposed by the debt slows local government spending. On an even more general level, U.S. investors worry that the weight of bad debt, whatever the source, will limit the ability of Chinese finance to support new projects that might foster economic growth and, hence, the returns on China-based investments.
Apart from the prospect of debt failures is the general slowdown in the pace of economic growth. Even optimists hesitate in the face of this news. After all, the original attraction of investments into Chinese stocks and bonds was how the once reliably rapid growth rate promised attractive returns. Of particular concern is how recent efforts at economic stimulus through infrastructure spending haven’t had the strong positive effects they once did. Though few in the investment community have offered explanations for these failures, investors worry that they might signal a more fundamental and unattractive turn in the nature of Chinese economics. That concern alone, even without specifics, is enough to impel investors to look elsewhere.
In the face of all of these considerations—not to mention how Chinese leader Xi Jinping’s near obsession with national security has made it nearly impossible to collect data essential to investment decisions—it’s easy to see why Wall Street has lost its once-great enthusiasm about Chinese investments.
From Beijing’s perspective, the turn in U.S. investors is worrisome. China needs outside investment to help bolster its weak financial situation and bring technological and business expertise into the country. Because Wall Street’s concerns deny China that needed input, they carry the risk of a self-fulfilling prophesy of economic stagnation and even decline.
