Washington should be more welcoming to China’s economic refugees, think tank argues

(Originally published Aug. 3 in “What in the World“) China is suffering from “economic long Covid,” the president of the Washington D.C.-based Peterson Institute for International Economics, Adam Posen, argues in a new, 4,000-word piece in Foreign Affairs, and the United States should take advantage of it.

China’s long-awaited recovery has been stunted by a populace now chastened by its experience under Beijing’s Covid restrictions, Posen argues. Instead of rushing out to spend and invest, they’re saving more and trying to slip those savings out of the country. Why? China’s Covid response, with its rolling and seemingly arbitrary lockdowns, may have saved millions of lives, but it underscored to China’s citizens the absolute and capricious power of their government—and their President, Xi Jinping—to interfere directly in their lives.

Posen argues that Xi’s behavior is part of an interventionist slide typical of third-term autocrats. China’s citizens tolerated rising autocracy when it only threatened Xi’s rivals, corrupt officials, or obscenely rich tech moguls. And as long as the economy was doing well, it seemed a worthwhile trade-off. But enduring power has given rise to creeping authoritarianism over the broader population, and now China’s consumers have grown wary about their future. The result: since 2015, household savings as a share of GDP have been rising, while consumption and investment have been falling, reflecting increasing fears of government intrusion into economic life. These trends have only accelerated in the wake of zero-Covid.

Posen projects that China’s malaise will persist for years, dragging on the global economy. Far from weakening Xi or the Communist Party’s grip, however, it may enforce their control, encouraging them to double down on policies that favor state planning over free markets.

Posen paints this as an opportunity for the U.S. to further weaken its rising rival. Instead of discouraging inward Chinese investment and people, it should welcome China’s economic refugees with open arms. Doing so, he argues, would weaken Xi and the Party and reward their opponents with opportunities and profits—not to mention benefit the U.S. with additional cash and talent.

Exports have long been a popular way to move money offshore. How? Under-invoicing is one tried and tested means. Companies would simply charge customers less than the goods they ship are worth, with the difference appearing in someone’s account offshore. A less legally fraught means is simply not to repatriate those export proceeds. But China’s share of global exports is falling particularly to the U.S. thanks to tariffs and a Washington-led effort to diversify supply chains. As it does, it will become increasingly difficult to expatriate cash from China.