Amid China’s continuously declining economy and tightening policy environment, the trend of foreign capital withdrawal from China is becoming increasingly evident. Experts point out that the dual pressure of decreasing capital returns and escalating political risks indicates multiple hidden dangers in China’s economy, possibly leading to a fate similar to the disintegration of the Soviet Union.
Following a meeting between the Taiwan Kuomintang (KMT) Chairperson, Zheng Liwen, and the Chinese Communist Party (CCP) leader Xi Jinping in April, the CCP introduced the “Ten Measures” towards Taiwan, attempting to attract Taiwanese businesses and young talents to develop in China, also known as the “Second Western Development.” Taiwan University’s economics department distinguished professor, Fan Jiazhong, recently analyzed the real situation of China’s economy from an economic and policy perspective during an interview with New Tang Dynasty’s “Decoding the News” program.
Fan believes that the decrease in Taiwan’s investment in China reflects the overall economic changes in China in recent years. During the period of Taiwanese businesses expanding into China from 2008 to 2023, Taiwan’s investment in China peaked in 2010, accounting for 83.8% of Taiwan’s total foreign investment. However, this figure steadily declined thereafter, with China only accounting for 3.8% of Taiwan’s total foreign investment by 2025, further dropping to 2.7% in the first quarter of this year. Fan stated, “In other words, Taiwan’s investment abroad, particularly in China, has become insignificant.”
He pointed out that the decrease in Taiwan’s investment in China did not start in recent years, as early as 2010 when China’s economy seemed to be flourishing, Taiwan’s investment in China began to decline. The relationship between Taiwan and the mainland was relatively friendly from 2010 to 2016, and the Taiwanese government encouraged investments in China during that time; however, Taiwan’s investment in China significantly decreased from 83.8% in 2010 to 44.4% in 2016. Fan explained that this was mainly due to the noticeable downward trend in China’s economy during those six years.
Furthermore, in addition to economic factors, the policy environment has also contributed to the decline of China’s economy. Fan mentioned the suppression of private enterprises like Alibaba and tutoring centers by the CCP, as well as the violent lockdowns during the 2021-2022 pandemic period, which greatly impacted businesses. Additionally, a series of laws introduced after 2023, such as the Anti-Foreign Sanctions Law, Anti-Spy Law, Foreign Trade Law, and Cybersecurity Law, have further impeded foreign investment.
Moreover, on April 14, the CCP state media reported that Chinese Premier Li Keqiang signed a State Council decree announcing the “Regulations on Industrial Supply Chain Security”. This document consists of 18 articles, clearly outlining the CCP’s control over the industrial supply chain.
According to Fan, these events demonstrate that the CCP government’s interference in business operations has become more profound, reducing the autonomy and independent operational capabilities of enterprises. The increasing political risks companies face have led to significant impacts on foreign investment.
Fan believes that compared to economic risks, entrepreneurs and investors find it more challenging to deal with highly uncertain political risks. He emphasized that even though Taiwan is promoting external cooperation in terms of policies or encouraging companies to invest in China, the friendly environment that once attracted Taiwanese investment to China no longer exists.
He stressed that, similar to people, capital also follows the principle of “voting with their feet” and will continue to flow towards regions with higher returns and safer political environments. Fan cited indicators from his recent book, “Business Battle,” to interpret the hidden dangers in China’s economy.
For instance, he used the Chinese automotive industry as an example, noting that most Chinese car manufacturers, including BYD, are facing significant losses. Although their sales revenue looks impressive, their profit margins indicate otherwise, showing that they are not competitively viable enterprises. Therefore, evaluating an enterprise, industry, or a country’s economic strength should consider their profits or profit margins.
The Forbes Global 2000 list (2022) revealed that in high-tech fields such as defense, space, semiconductor, and advanced chemicals, Chinese companies’ global profit share is generally below single-digit percentages, ranging from 1% to 3%. Fan stated, “In these areas, China’s profitability is very low, drastically differing from the United States and its allies.”
Additionally, based on the internal structure of Chinese enterprises, Fan pointed out a significant gap in China’s core technological competitiveness compared to major countries worldwide. High-tech industry profits in China account for only about 13%, significantly lower than Japan (28%) and the United States (38%), and even falling behind Taiwan (55%). He explained that in China’s early development, due to cheap labor combined with foreign capital input, it created the facade of being the “world’s factory.” Still, slow technological progress has led to an economic growth structure that is unfavorable for development, resulting in a continuous economic decline in recent years.
Moreover, when it comes to measuring economic strength, talent is another critical indicator. While the CCP often boasts about China’s abundant talent, claiming that even utilizing the top 5% of its 1.4 billion population could surpass the United States and Europe, Fan considers these statements more as political propaganda rather than universally applicable statistics or references.
Fan presented several valuable indicators for comparison: in the top 20% of global universities, the United States accounts for over 50%, the UK approximately 20%, while China only accounts for about 5% or less. Furthermore, in top-tier academic journals like “Science Nature,” American research contributions exceed half, with China’s share around 12%. In the ranking of economic journals worldwide, the top three spots belong to the US, the UK, and Germany, with China ranking fourth.
Therefore, from numerous indicators, while China appears to have a vast population, it lags significantly behind in fostering technological talent environments, true academic research, and contributions compared to other countries.
Discussing China’s economic and political development trends, Fan analyzed from four perspectives and emphasized the structural similarities of China’s economy under CCP rule to the pre-dissolution state of the Soviet Union in key aspects.
Firstly, the heavy burden of military expenditure forms a substantial financial strain. Despite economic growth slowing down, the CCP’s annual military spending has maintained a growth rate of over 7% for over a decade. Fan mentioned, “It gets trapped in a vortex of military competition with the US and cannot break free, continually injecting massive military resources. Moreover, this is only the visible 7%; many gray areas are not included in the statistics.” He considered this an insatiable pit, also the most crucial factor that initially drained the Soviet Union’s finances.
Secondly, China’s economic structure is shifting towards government control. Fan indicated that from the CCP’s past planned economy to China’s latest “Five-Year Plan,” it displays increasing government intervention in the economy, leading to strengthened state-owned sectors while private enterprises shrink. The trend of “the state advances, the private sector retreats” is becoming more prominent, resembling the state during the initial stages of the Soviet Union.
Thirdly, the bureaucratic structure is becoming increasingly rigid. Fan stated that political purges within the CCP system are severe, making officials tend to err on the side of caution. Thus, no one presents crises to the actual decision-makers, leaving them isolated in an information bubble incapable of receiving genuine feedback.
Lastly, the issue of severe data falsification. Fan bluntly pointed out that falsification is inherent in the Communist Party’s nature. When everyone is engaging in falsification, the truth becomes elusive. He stated, “The CCP itself is also a victim because often it does not have access to the complete truth, leading to continuous accumulation of erroneous decisions, akin to what happened before the dissolution of the Soviet Union.”
Fan also highlighted that China is currently facing an extremely severe debt crisis, with government debt surpassing 100% of GDP and overall social debt exceeding 300%, with deficits continuing to expand. He warned, “Until they cannot afford to pay civil servant salaries or invest in stability maintenance machinery, the system will collapse. If the current situation deteriorates, this breaking point is inevitable.”
Reference:
[Navigating the News] Second Western Development? From the US-China Decoupling to the Soviet-style Disintegration? Data Revealing the Future of the CCP