Billions of dollars in global investors’ funds have drained away from China in recent weeks. Experts have attributed the outflows—11.5 billion USD since the start of March and counting—to volatility in global markets and the impact of Russia’s invasion of Ukraine on global supply chains. Chinese media has downplayed the seriousness of the situation and speculated that foreign money will soon come pouring back in. Such reversals have taken place in the recent past. Typically, when there have been substantial outflows, they reversed themselves quickly (typically within 2 months). But many independent experts claim that the situation has changed, and this outflow will not reverse itself naturally because they are based on deeper structural problems.
The main factor has been state meddling in the private sector, especially the tech sector, which has become all too commonplace in recent years. Another worry is that Xi Jinping’s support for Russia could lead to sanctions on Chinese companies. With how strongly the world has reacted to the invasion of Ukraine, there are growing fears that the world would similarly rally around Taiwan were China to invade. There has always been a risk of doing business in China, but the risk premium that investors are willing to pay has been steadily rising. Once that risk premium gets too high, investors scale back. And the longer the war in Ukraine drags on, the higher this scale-back could go. Because of this, investors are looking to put their money elsewhere, making more capital and liquidity available to other countries. China’s loss may be the developing world’s gain.
The Great Switch to Clean Energy
There has been tremendous recent motivation for Europe to switch from fossil fuels to renewable energy: the Russian invasion of Ukraine. But counterintuitively, this strong short-term push may end up being worse for the shift than one might expect. That is because Europe intended to rely more heavily on Russian oil and gas in the short term in order to hit its long-term zero carbon target. Smoothly managing Europe’s energy switch was always going to be difficult, but after two years of pandemic closures and depressed GDPs, Russia’s attack has caused energy prices to soar. Thus, the trade-offs that had to be managed during the great switch are worse deals than they were supposed to be.
Moving investments away from oil, gas, and coal to sustainable sources like wind and solar, limiting and taxing carbon emissions, and building a new energy infrastructure to transmit electricity are crucial to weaning Europe off fossil fuels. But they are all likely to raise costs during the transition, an extremely difficult pill for the public and politicians to swallow. This is a situation where it is extremely difficult to be a politician. Increasing reliance on fossil fuels is not the right way to go, but it is a very enticing short-term possibility to relieve political pressure. With soaring inflation and energy prices, citizens are demanding reprieves from their governments. Thus, the politically expedient option is at odds with the best option for the planet. For example, in Germany, leaders are planning to have several coal-fired power plants that were recently taken off the grid placed in reserve, so that they could be quickly fired up if needed. The country is also accelerating its investment in LNG terminals so it can begin to receive gas from the United States instead of Russia, whose gas was supposed to power much of Germany during the Great Switch.
Europe, too, is on the verge of investing billions in hydrogen, potentially the multipurpose clean fuel of the future, which might be generated by wind turbines. The continent is certainly heading in the right direction, but the path has certainly become more painful for everybody involved.