Rethinking China’s Outward Cash Flow Crash: Politics in Command?

Dr. Jean-Marc F. Blanchard's picture

Not so long ago, the story of the day was about China’s inexorable path to buying up the world, with more than USD $200 billion of acquisitions in 2016 alone. Lately, however, those once focused about China’s global takeover have been dashing to explain the Chinese outward cash flow crash. The crash has involved an almost 43 percent drop in COFDI over the first six months of 2017 year-over-year (YOY).

Beijing’s slant has been that it had to clamp down on Chinese OFDI (COFDI) because too much of it entailed debt-fueled transactions, at excessive prices, going into speculative ventures that did nothing for the “real economy,” and often were outside the acquirer’s area of expertise. Many observers have embraced the government’s narrative. However, the conventional wisdom is open to challenge. First, it is not clear Chinese companies are paying above normal prices in most cases or that many deals are over-leveraged. Second, the Chinese economy’s net exposure to the debts incurred to finance COFDI seems far less than consequential than China’s massive non-performing loans or the debts of high-leveraged zombie enterprises. An alternative take is that the crackdown on COFDI is reflective of a move of the Chinese Communist Party (CCP) to assert control over private investors, to reassert the dominance of the state, and perhaps also an effort by China’s top leader to undercut rivals. This alternative explanation has three implications. First, Beijing’s involvement in COFDI, even if episodic, is deeper than most assume. Second, COFDI may not rebound just because currency reserves have stabilized if Beijing does not wish it to do so. Third, on a related note, COFDI may again jump once given the policy space to do so. After all, Chinese companies, state-owned or otherwise, still needs brands, technology, managerial expertise, access to markets, and resources.