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The Chinese stock market has be plunging amid fear that the Chinese government will not allow Chinese companies to freely distribute their earnings. For example by forcing them to invest for “common prosperity” as they have done with Alibaba and Tencent. If China goes too far, Chinese companies should find it very difficult to raise capital from both foreign and domestic investors.

What I don’t understand is why people are even afraid if this? It seems like it can’t work. If Chinese companies can’t raise capital, won’t the entire economy be held back in a very significant way?

It feels like I’m missing something. Can the Chinese government significantly hurt their companies’ ability to raise money in a way that turns out well for them?

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  • $\begingroup$ I have a hunch the CCP has absolutely no qualms with taking money from investors and forcibly investing it in productive ways, or just printing money and investing it in productive ways (and letting hoarders of cash suffer from the resulting inflation) but maybe someone can confirm this. $\endgroup$ Nov 3, 2022 at 17:28

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Can China do well without investments?

No country can do well without any investment. Country's production function will be given by some $Y=F(L,K)$ where $L$ is labor and $K$ capital. For example, it could be given by let's say $Y=\sqrt{LK}$. $K$ naturally depreciates over time. Machines break down, buildings eventually get cracks etc., the rate of depreciation would be denoted by $\delta$.

The change in capital stock is given by:

$$dK/dt = I_t - \delta K_t$$

It is trivial to see that if $I$ is always zero then eventually $K$ will become zero at some point in the future.

Virtually all modern production requires some capital, with very few exceptions. So regardless of how the function $Y=F(L,K)$ looks like we can say with certainty that $F(L,0) \approx 0$.

However, note that the premise that $I$ will drop 0 as a result of the Chinese policies is not necessarily justified. There is no reason why meddling in company payout policy should drop $I$ to zero per se. Don't misunderstand me it can happen if for example CCP could credibly commit to not allowing companies to pay out any profits ever. However, I highly doubt CCP would do that. Although of course 'never say never' the ideological insistence on zero-covid strategy in China shows CCP is willing to do damage to the country in pursuit of ideology. Nonetheless, I do not think that chances that they would go so radical as to forever forbid any distribution of dividends.

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