American companies are urged to reconsider their investments in China as the country’s economy faces significant challenges, particularly in the struggling non-state sector, according to Mile Yu, a senior fellow and director of the China Center at the Hudson Institute. In an interview with EpochTV’s “American Thought Leaders: NOW,” Yu emphasized that China’s economic troubles have forced the country to be more realistic and agree to talks with high-level American cabinet members.
One key difference between the US and Chinese economic models, highlighted by Yu, is the Chinese Communist Party’s (CCP) willingness to crack down on the non-state sector in order to maintain state control, even if it means damaging the main driver of China’s economic growth. China has benefited from the international free trade system, with its economic growth heavily reliant on the non-state sectors in the past few decades. However, China’s financial institutions are now collapsing, leading local governments to implement policies such as zero-COVID lockdowns and heavy taxation schemes to push out non-state businesses.
During the COVID-19 pandemic, China placed entire towns and cities under strict lockdown measures, making it extremely difficult for many private businesses to survive. These measures were only lifted in March 2023, when China’s Premier Li Qiang, reportedly more sympathetic to the non-state sector, took office. However, the damage had already been done, resulting in the closure of millions of small and medium-sized enterprises and even affecting China’s star companies like Alibaba and Tencent who faced increased state control.
China’s development model, according to Yu, relies on issuing a massive amount of loans, particularly in the housing industry. However, this has resulted in a deflated housing bubble. Local governments in China generate significant income by selling land-use rights, making land sales the main source of revenue. With the collapse of the housing market, local governments have faced huge deficits, leading to banking industry losses and a credit crunch. This chain reaction has further led to more business closures and an overall collapse of the economy.
Yu warned that China is seeking international banking institutions to salvage its collapsing economy. However, he called on global financial institutions and banks to be cautious and aware of the risks involved. He emphasized that while decoupling of the US and Chinese economies has not been officially adopted, it is already happening in reality. Companies, especially major corporations, are reassessing their investments in China due to concerns about being repressed by state-sponsored or subsidized Chinese companies.
Goldman Sachs’ recent report downgrading the Agricultural Bank of China and the Industrial and Commercial Bank of China reflects the growing sentiment among major companies reconsidering their investments in China. According to Yu, many American companies are reevaluating their presence in China due to the hostile investment environment and the economic reality highlighted by reports and experts.
In conclusion, China’s troubled economy and hostile investment environment are leading American companies to reconsider their investments in the country. China’s reliance on state control and crackdowns on the non-state sector, along with a deflated housing bubble and financial troubles, have contributed to this shifting sentiment. The decoupling of the US and Chinese economies is happening in practice, and major corporations are reevaluating their investments, emphasizing the need for China to change its behavior for a favorable investment environment.