China’s Great Firewall 2.0 Will Repel Smart Money

A paramilitary policeman throws the Chinese flag as he raises it in front of Chairman Mao Zedong’s portrait hanging in Beijing’s Tiananmen Square March 5, 2008. REUTERS/David Gray

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HONG KONG, Jan 14 (Reuters Breakingviews) – China’s Great Firewall is starting to work in two directions. Once focused on blocking offshore websites, authorities are increasingly hiding information from prying foreign eyes. It will obstruct the circulation of the most useful capital.

Chinese bureaucrats have never been particularly welcoming to foreigners, but the post-Mao Zedong reform and opening up movement has given them a clearer outlook. More reliable data has helped the country attract more than $3.2 trillion in foreign direct investment by 2020.

Internet access has also allowed journalists to listen to local complaints, contradicting pink state media. Short sellers could use discrepancies between domestic company reports and US securities filings to detect fraud. Foreign critics have translated official statements, police blogs and more to bolster their campaigns. Local parish politicians who once naively assumed that foreigners couldn’t or wouldn’t read Chinese learned otherwise.

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Today, governments and regional agencies are increasingly blocking offshore access to online information. Chinese ships have stopped broadcasting location data. Municipalities no longer send bus and train timetables to Google Maps. Domestic economists and stock analysts have to be optimistic in public, which dilutes the value of domestic content. Even LinkedIn China, an ordinary corporate network, was shut down. The combined effect makes it harder to visit or invest in China, or to connect with Chinese professionals.

Beijing seems confident that foreign capitalists will keep coming anyway. The cash flowing into Chinese stocks and bonds looks robust; Northern traders via Hong Kong Stock Connect hold about 2.6 trillion yuan ($410 billion) of mainland stocks, according to data from local investor website Eastmoney. Americans held more than $1.3 trillion in Chinese securities in 2020, according to one estimate.

Unlike FDIs, however, passive funds that increase their exposure have no productivity spillovers and can reverse with the click of a button. The country does not lack money, it lacks the engines of production that come from the expertise and discipline provided by long-term private investments from world-class companies.

Some of the direct investment figures are flattered by currency hedging between onshore and offshore subsidiaries. Direct investment and venture capital inflows into the United States, two major providers of technology transfer, have been declining for years. Stupid money will flow around the newly inverted Great Firewall; it’s the smart money that will be pushed back.

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Editing by Jeffrey Goldfarb and Katrina Hamlin

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