More Money Is Leaving China
China’s already beleaguered economy is facing yet another problem. Foreign firms, some long-established in China, are rethinking plans to modernize and expand and have begun to send their profits home or elsewhere in Asia and even further afield. The trend has diverse causes — some immediate, some more fundamental – and has been developing for some time. Whatever its cause, however, it has made China’s economic recovery looks even more problematic.
The outflow has gained momentum for more than a year now. According to Beijing’s National Bureau of Statistics, foreign companies pulled a total of $160 billion of earnings out of country during the 18 months through September, the most recent month for which data are available. In just the summer quarter alone, withdrawals overwhelmed foreign investment inflows so that for the first time in a very long time, China suffered a net outflow of foreign-based funds, to the tune of $11.8 billion. There can be little doubt that these significant funds flows have contributed to the about 5% decline China’s yuan has suffered relative to the U.S. dollar so far this year.
To be sure, some of this movement reflects temporary factors. While the People’s Bank of China (PBOC) has cut interest rates in an effort to encourage consumer spending and capital investment, the Federal Reserve (Fed) in the United States and the European Central Bank (ECB) have raised interest rates as part of their anti-inflationary policies. The Bank of England and the Bank of Canada, as well as the Federal Reserve in Australia have also raised rates. Managers, to get the best return on retained earnings before deploying them on a more permanent basis, have naturally sent the funds to places where they can get the highest rates.
If this were all, recent outflows would be easy to dismiss as something that will reverse as financial conditions change, and they inevitably will. But more fundamental and lasting influences are also influencing funds flows. China’s weakening economy has factored into the equation. According to Beijing’s statistics bureau, exports, still critical to Chinese growth, have declined, while industrial activity has slowed and recently hinted at an outright decline. Failures among property developers, such as Evergrande and Country Garden, have stolen from the economy the positive effects of residential construction that for years had spurred economic growth. It is also discouraging to foreign business managers that recent steps taken by Beijing to get the economy back on an acceptable growth path have failed to get the desired result. Few are talking yet about an outright economic contraction, but the situation nonetheless impels business managers to deploy their earnings – even that part emanating from Chinese operations – elsewhere.
Possibly even more troubling for foreign firms in China are the increasingly strained trade and diplomatic relations between China and the west. Washington has blocked the sale of certain technologies to China and also forbidden Americans from investing in Chinese technological ventures. Beijing has responded by blocking the export of vital materials to the west and Japan. Such less than friendly policies, even if far short of open conflict, raise uncertainties and risks and make China a less attractive place for foreigners to do business.
Adding to businesses’ concerns is Beijing’s increased belligerence toward Taiwan and its stepped-up surveillance of foreign firms operating in China. In just the last few months, Chinese authorities have raided two American firms operating in Shanghai, Bain & Co. and Mintz. These authorities detained several Mintz employees and fined the firm. On top of all else that is happening in China and with China trade, these implicit threats offer much reason for Americans, Europeans, and Japanese to consider getting out while the getting is good. The situation certainly argues forcefully against any steps to enlarge their presence in the country.
These earnings trends add to the hurdles facing Xi Jinping’s efforts to re-establish China’s once impressive growth trend. Along with all else weighing on the Chinese economy, such a trick, if Beijing can pull it off at all will be a long time in coming.-
About: Milton Ezrati
I am an economics and investment strategy consultant and serve as chief economist for the NY-based communications firm, Vested. I am a contributing editor for The National Interest and an affiliate of the Center for the Study of Human Capital and Economic Growth at the University at Buffalo (SUNY). In my long career in finance, I have held positions as portfolio manager, director of research, and chief investment officer. My latest book, Bite-Sized Investing, tells beginners of the basic principles of investing and reminds veterans of them. I hold an MSS in mathematical economics from Birmingham University in England and a BA in economics from the State University of New York at Buffalo.
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Russian losses in Ukraine have wiped out its advantage in Baltics, report says
By JOHN VANDIVER - STARS AND STRIPES ? November 24, 202
STUTTGART, Germany — Russia’s battlefield losses in Ukraine have eliminated the military advantages it once held over NATO allies in the Baltic region, a new think tank report says.
“Russia has effectively lost its position of power and the capacity to threaten its neighbors with projections of military power,” Pavel Baev wrote in a November report for the French Institute of International Relations.
Baev, a longtime Russia expert who once worked at a research institute inside the Soviet Union’s defense ministry, argues many Western policy planners haven’t grasped the long-term implications of what the war in Ukraine means for security in the Baltics.
While some in the West see Russia’s weakened position as transitional and a Russian comeback inevitable, Moscow sees the loss of its conventional military edge in the Baltics as “both unacceptable and irreversible,” Baev said.
The Baltic nations of Estonia, Latvia and Lithuania were annexed by the Soviet Union during World War II. Since becoming independent in the 1990s, their forces always have been far smaller and less developed than Russia’s.
However, they have welcomed training with U.S. troops and other NATO allies, which are required to collectively defend the Baltic nations if they are attacked, in line with the alliance’s treaty.
Russia’s war in Ukraine has taken an extreme toll on its military and challenges its ability to maintain a large force on its western flank with NATO, the report said. The study argues that Moscow’s strategic goal of turning its military exclave of Kaliningrad into a launching pad to dominate the central part of the Baltic region “has effectively been canceled.”
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Moreover, Ukraine’s ability to target Russian military infrastructure around Crimea has exposed weaknesses in Russia’s coastal defense weapon systems. Those vulnerabilities also apply to the Russian military along the Baltic coast.
Beyond the tactical weaknesses, Russian capabilities were compromised as assets moved to the war front. Many of the Baltic units tasked with guarding Russia’s western border with NATO countries have been decimated during the nearly two years of fighting in Ukraine, according to the report, which cites a lengthy list of damaged units.
“Whatever the scope of the outcome of the war, Russia will not be able to rebuild a position of military superiority in the Baltic theater or even to set an approximate balance of forces with NATO, which is implementing a new plan to strengthen its posture in this reconfigured direction,” Baev said.
Moscow could be forced to rely more on long-range missiles and talk up its nuclear capability for deterrence purposes, to make up for its conventional military disadvantages.
“Plain strategic logic dictates that weakness of conventional forces necessitates greater reliance on nuclear capabilities, and the Baltic theater may see applications of this logic,” the report says.
Regardless of the outcome of the war, Russia also will need to position forces along its southern border with Ukraine for the long-haul, the report says.
For years, the Baltics have been a focal point for the American-led NATO alliance, which has strengthened its position in the region amid concerns that it was outgunned by Russia. Many of the alliance’s changes were prompted by Russia’s initial 2014 intervention in Ukraine, which shattered old post-Cold War assumptions about a more secure Europe.
In the years before 2014, many NATO militaries drastically reduced defense spending, shrunk the sizes of their militaries and regarded the prospect of large-scale conflict on the European continent as an anachronism.
The U.S. military also sharply scaled back on the Continent, removing the last of its battle tanks from Europe just months before Russia’s annexation of Ukraine’s Crimean Peninsula.
The diminished NATO force prompted angst among security analysts at the time. Those concerns were reinforced by a large war game, carried out by the Rand Corp. think tank with the assistance of numerous American military commands between 2014 and 2015.
It found a Russian offensive in the Baltics would overwhelm lesser-armed alliance forces and seize the Estonian and Latvian capitals in a matter of hours.
The Rand war game, which garnered much attention at the time, said “the outcome was, bluntly, a disaster for NATO.”
Since then, NATO has added multinational battlegroups in the Baltics and Poland and ramped up rotations of other combat forces in the region, including U.S. Army tank units.
That, along with the addition of Finland into NATO and eventually Sweden, tipped the balance in the Baltics to NATO’s favor, Baev said.
“With the accession of Finland and Sweden to NATO, the Baltic theater is reconfigured so profoundly to Russia’s disadvantage that no amount of effort could make ‘Fortress Kaliningrad’ defensible,” the report said.-
About: JOHN VANDIVER
John covers U.S. military activities across Europe and Africa. Based in Stuttgart, Germany, he previously worked for newspapers in New Jersey, North Carolina and Maryland. He is a graduate of the University of Delaware.
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