20180713-NATIXIS-Financial_equilibrium_between_China_and_the_rest_of_the_world__The_present_situation_is_untenable_5页_648kb

Flash Economics Summary

Core Content

The document titled "Flash Economics" discusses the inefficiencies in the current financial equilibrium between China and the rest of the world, particularly in the context of capital controls and investment patterns. It outlines the potential for a future shift in this balance, driven by changes in capital flows and investment behavior.

Main Points

1. Current Financial Imbalance

• Capital Controls Reintroduced in 2017: China reintroduced capital controls in early 2017, leading to a sharp reduction in capital outflows.
• High Savings, Limited Investment Abroad: Due to the controls, China's substantial savings are mostly invested domestically, resulting in inefficient and relatively unproductive investments.
• Construction Sector Dominance: The domestic investment is heavily skewed towards the construction sector, which is considered unprofitable compared to other sectors.
• External Surplus Reduction: The external surplus of China has become smaller as a result of the capital controls.

2. Inefficiency of Domestic Investment

• Unproductive Use of Savings: The large volume of domestic investment leads to relatively unproductive use of China's savings.
• Potential for More Efficient Global Investment: If China's savings were invested in low-income countries with insufficient savings, it would be more efficient for both China and the rest of the world.
• Global Capital Ownership: The document suggests that China will eventually become the main owner of global capital due to its high savings rate and accumulated financial wealth.

3. Future Equilibrium

• Expected Increase in Capital Outflows: A new financial equilibrium is expected in the future, characterized by more capital outflows from China.
• Lower Domestic Investment: This will be accompanied by a lower investment rate in China.
• Exchange Rate Stability: With increased capital outflows and lower domestic investment, China will not experience significant depreciation of the exchange rate or major losses of foreign exchange reserves.

4. Historical Context

• Capital Controls Removal (2014–2016): During the period when capital controls were removed, there was a large loss of foreign exchange reserves and weakening of the renminbi due to capital outflows without a corresponding decline in investment.

Key Information

• Capital Flow Dynamics: The reintroduction of capital controls has significantly impacted the flow of Chinese capital, leading to a more inward-focused investment strategy.
• Savings and Investment: China's high savings rate, combined with its capital controls, has resulted in inefficient domestic investment and limited global capital ownership.
• Global Impact: The inefficiency in China's investment strategy affects the global financial landscape, particularly in low-income countries that could benefit from access to Chinese capital.
• Future Outlook: A shift in investment strategy is anticipated, which will lead to a more efficient allocation of capital and an increase in China's global capital ownership.

Conclusion

The document concludes that as China's capital controls are eventually relaxed, allowing its substantial savings to be invested abroad, it will gradually become the main owner of global capital. This shift is expected to be more efficient for both China and the rest of the world, and the financial community should prepare for this trend.

Disclaimer

• The document is intended for professionals and qualified investors only.
• It is confidential and must not be disclosed to third parties without prior written consent.
• The information is not a personalized investment recommendation and does not take into account specific investment objectives or financial situations.
• Natixis and its affiliates are not liable for any reliance on the document's content.
• The document is based on public information and is not an offer or solicitation for any purchase, sale, or subscription.
• It does not constitute a financial analysis and is not developed in accordance with legal requirements promoting the independence of investment research.
• The views expressed are those of the authors and may differ from one another or from those of Natixis.