Against Didi and a company like him, it could cost China as much as $ 45 trillion by 2030

This has been an explanatory week for global investors – or for all those who care about authoritarian capitalism – how much the Chinese Communist Party (CCP) will be willing to pay to secure its dominance.

The answer, according to a rough calculation from the new partnership formed by the Rhodes Group and the Atlantic Council, is as much as $ 45 trillion of new capital inflows into China and beyond by 2030, if the party is willing to pursue serious reform. It is an immeasurable loss of economic dynamism.

Graph courtesy of Rhodium Group and Atlantic Council Geoeconomic Center, China Pathfinder Project

What is clear is that Chinese president Xi Jinping, during this month ‘s 100th anniversary of the CCP, sent an unmistakable message at home and abroad about who is in charge.

Chinese domestic companies, especially technological and data-rich ones, are more likely to avoid Western capital markets and adhere to party preferences. Foreign investors, who are overjoyed to accept the risk due to the long-proven growth of Chinese stocks, must now take into account the growing risk premium as Xi tightens its screws.

“Wall Street must now acknowledge that the risk of investing in these companies cannot be known, much less disclosed,” he writes Josh Rogin u Washington Post. “Therefore, American investors should not entrust their future to China Inc..”

The story that sparked this week’s confusion was a $ 4.4 billion initial public offering (IPO) worldwide the biggest driving and food delivery service, Didi. The ripple could be long-lasting and far-reaching for lucrative China-Wall Street relations. The dialogic shows that Chinese companies have grown $ 26 billion with new U.S. entries in 2020 and 2021.

Until this week, the biggest concern for investors was that the new American accounting rules would hinder that flow. It is now more likely that the Chinese regulators themselves will clog the pipe.

The facts are as follows Didi Global began trading on the New York Stock Exchange on June 30, auspiciously one day before the CCP’s centenary celebrations.

One of the early hints of a problem was that company played down bestseller list. Not only did company employees resist the usual routine of ringing at the opening. They went further instructing their employees not to draw attention to the event on social media.

Still, Didi’s shares increased 16% the second day of trading, setting the market value of the company at nearly $ 80 billion.

But by July 2, Chinese regulators had put Didi under cybersecurity review, forbade her to receive new users, and then, in the following days, went even further referral app stores to stop offering Didi’s app.

All of this is attributed to a mix of increasingly authoritarian policies, regulatory concerns about data privacy and U.S. markets, and the ever-expanding front in U.S.-China competition.

The cost to investors fell to just 67% of the original value of the shares by Friday. If that’s on the downside and if regulatory retaliation against Didi stops where it is, this week’s Didi executives could still be called a victory.

A more serious thing is the wider cold effect that comes in the context of a series of halted or reversed Chinese economic and marketing reforms.

The latest came on Thursday, when The Wall Street Journal reported that China’s cyberspace administration reporting to Xi police all lists of foreign markets.

On the same day, the Chinese medical data firm LinkDoc became the first Chinese company give up his IPO after the news of Didi. Expect more Chinese companies to postpone the planned lists and many others to remove them from consideration.

With all the billions of lost investment capital it could bring in the short term, the higher cost is one that can be measured in billions of dollars of jeopardized potential as Xi is constantly withdrawing from market liberalizations it once seemed to advocate.

The story could not be written more clearly than through the accompanying table from Rhodium and the Geoeconomic Center of the Atlantic Council. From 2000 to 2018, China’s economic growth shook the world by expanding its share of global gross domestic product (GDP) from 4% to 16%. China has had similar growth in exports and imports of goods.

Graph courtesy of Rhodium Group and Atlantic Council Geoeconomic Center, China Pathfinder Project

At the same time, however, Chinese portfolio investment rose from almost zero to only 2% of the total, while portfolio investment rose from around zero to only 1%. It is not just an unrealized potential from the past – it is now a deeply threatened potential for the future that could amount to an estimated $ 45 trillion by 2030.

In mandatory reading analysis Chinese economy in Foreign affairs, Senior Atlantic Council colleague Daniel Rosen, who is also a founding partner of the Rhodium Group, argues that Xi-led China has repeatedly tried to reform China’s economy, only to withdraw. The accompanying table gives a useful overview of what has become a habit.

Graph courtesy of Rhodium Group and Atlantic Council Geoeconomic Center, China Pathfinder Project

“The consequences of that failure are clear,” Rosen writes. Since Xi took control, total debt has risen to at least 276% of GDP from 225%. It now takes 10 yuan of new credit, compared to six, to create one yuan of growth. GDP growth fell to 6% in the year before the pandemic from 9.6%.

Rosen writes: “At some point, Chinese leaders must oppose this compromise: [S]sustainable economic efficiency and political omnipotence do not go hand in hand. “

Common wisdom says that the West was naive when it thought that Chinese economic growth and modernization, which the West so enthusiastically supported, would eventually bring about political liberalization. It is now common wisdom that China has shown that it can be brutally authoritarian and economically dynamic at the same time.

What is probably more true is that Xi will soon face contradictions between his simultaneous desire for economic dynamism and increased authoritarian control. History shows he can’t have both, but right now Xi seems willing to risk the dynamics in favor of control.