Crackdown on Leverage and Capital Flight is Not About China’s Long-term Financial Health: Andy Xie


Morgan Stanley’s former chief Asia-Pacific economist says that Beijing’s ongoing deleveraging campaign and efforts to block the movement of capital abroad by big companies is more about political control than long-term economic health.

Beijing has recently thwarted the efforts of domestic companies to extend their asst buying sprees overseas, with regulators reportedly ordering Chinese banks to review their exposure to foreign debt incurred by insurance company Anbang, conglomerate Fosun International and real estate giant Dalian Wanda.

These Chinese companies have caught headlines in recent years for their acquisitions of landmark foreign assets, including Anbang’s purchase of New York’s Waldorf Astoria hotel in 2014, and Dalian Wanda’s foray into US entertainment with the acquisition of cinema chain AMC Theatres and film studio Legendary Entertainment last year.

Speaking on CNBC’s Squawk BoxAndy Xie said the crackdown on foreign acquisitions by big companies were for the purpose of preserving political stability and making a show of control in the lead up to the bi-decennial 19th National Congress of the Chinese Communist Party.

According to Xie the big-note asset acquisitions comprise just a small proportion of $2 trillion that has made a surreptitious exit from the Middle Kingdom.

“China has a tradition of killing a chicken and show[ing] it to the monkeys,” said Xie. “how do you stop people from taking the money out? You take down the people you know who are taking money out and make an example of them.

“China is still in this mode of walling the money inside. Otherwise they will lose control over the game – that is paramount to the government.”

China’s desire to preserve political stability in the lead-up to the 19th CCP National Congress could also be a key driver of the central government’s ongoing deleveraging drive and debt crackdown.

“I’m not sure their intention is to say ‘This financial leverage is wrong and it’s illegal, it’s not good for the financial system in the long run, so we should shift the financial system from a command-and-control system to a more market-based, rule-of-law based system,” said Xie.

In Xie’s opinion it’s more about “[preventing] a crisis from coming down – that’s the imperative. It’s not really about the health of the financial system in the long run.

“The whole country now is in a standstill mode, nothing moves. We are not gong to see anything in the near future.”