Chartbook 455: The AI boom, China's walled-in-wealth and the financial barriers that separate the two. - World Economy July 2026.

In the world economy right now there are two powerful forces at work. The AI boom is driving a K-shaped expansion in the US, which is rippling across the whole world economy. The impact of delivering AI may be huge but it lies in the future. Meanwhile, China’s on-going supply-driven expansion, delivers abundance, but also deflationary pressure. To add to the peculiarity of the summer of 2026, there is a sense that though both these forces are at work in the same world, at the same time, the two are to a degree separated and disconnected.

If the American AI boom and the China-deflation were colliding on the Sino-US axis, with Trump and his gang in charge, we might be looking at something quite dramatic. The US AI boom is sucking in imports at a furious rate. These, however, come not from China, but above all from Taiwan and Mexico (sic).

Meanwhile, the bilateral, Sino-US relationship is oddly calm. What “constructive strategic stability” actually means remains to be seen, but the China-US trade truce is holding. The bilateral US-China deficit has narrowed, dramatically. At least cosmetically, America’s protectionism is working.

It no doubt helps that the US has effectively excluded many of the products that make up the leading edge of China’s export drive. The US is not worrying, as Europe is, about an influx of Chinese EV. For all his green credentials Biden did not hesitate to impose 100 percent tariffs on Chinese EV and Trump is dismantling the IRA’s energy transition subsidies. As a result, the debate around China shock 2.0 is largely about China-Europe, not China-US. That is painful for the Europeans, but less explosive for the world economy, so far at least.

Meanwhile, though China’s overall trade surplus continues at records levels, the associated accumulation of fx reserves, commonly denominated in dollars, is disguised. It takes forensic work by analysts like Brad Setser, to show where the earnings are piling up.

All the while, China is holding the US-led AI boom at arms length - its own kind of disconnection. In technological terms, in the AI race, China’s tech giants are the only ones that can compete with the US. But the stock market valuations of the Chinese platforms do not compare to those on Wall Street, or even those of South Korea’s chip-makers.

Source: Bloomberg

Much to their chagrin, China’s wealthiest investors are barred from participating in one of the greatest run-ups in asset prices in history. The concomitant of the exchange rate manipulation that keeps the yuan undervalued - the bug bear of the China Shock 2.0 crowd - are capital controls that wall-in tens of trillions in Chinese wealth. China’s moguls are prevented from fully joining the tech party. China’s stock market lags woefully behind the world.

This spring there were reports of somewhere between $800 bn and $ 1 trillion that left China in 2025. That is a statistical measure of net flows that was given added color by the reports coming at the same moment, of a crackdown by the Chinese authorities on offshore accounts. A series of brokerage firms – Longbridge Securities, Tiger Brokers (both based in Singapore), and Futu Holdings in Hong Kong – were fined a total of $330 million by Beijing for serving mainland Chinese clients without proper licenses.

Why is Beijing so hawkish on capital flows? Control-freakery aside they have every reason to be concerned about the potential for very large and volatile movements on capital account. Once you impose controls, behind the wall of the dam, tremendous pressure can build up. Even if we discount political concerns, or other possible motives for “capital flight”, viewed simply in terms of portfolio allocation, China’s wealthy are massively underweight dollar assets. According to analyst Richard Casey there are “$50 tn in CNY deposits constrained to low CNY yields, collapsing real estate, underperforming equities and gold.” Financial repression - in the extended sense - is a core component of China’s political economy.

So we have a strange combination. On the one hand, urgent calls for China to revalue its currency upwards to create a level playing field for industrial competition with Europe. On the other hand, speculation swirling around Hong Kong and Singapore, that if the Chinese balance of payments were fully liberalized the result would be huge outflows, resulting not in a revaluation of the yuan but a crash. One might envisage a scenario, for instance, akin to 2015-2016, when over a trillion dollars in reserves drained and Beijing was forced to impose its current, stricter forms of capital account regulation. Highly-respected JP Morgan analyst Michael Cembalest puts this in dramatic terms:

China has achieved its growth targets via one of the largest monetary expansions the world has ever seen: at $60 trillion, China’s domestic banking assets have reached ~50% of global GDP. If China fully opened its capital account, possible outflows could crush the RMB and trigger a collapse in Chinese equity/real estate markets.

The limitation of capital flows is not just technically reminiscent of Bretton Woods, it also has about it the flavor of mid-century political economy. Beijing will tolerate and promote national wealth creation, but it does not grant to its bourgeoisie unlimited free disposal of its wealth, especially if that might destabilize the national balance of payments.

The relationship between Beijing and China’s wealth elite is fluid and opaque. In general, Chinese citizens can transfer only $50,000 (€43,000) a year abroad. But there are ways of getting far greater amounts of wealth out of the country. Those are more “complicated”. For large sums this involves share issuance outside China and complicated structures of offshore ownership. Beijing is now moving against those. As Bloomberg reports:

The clampdown threatens a five-step playbook that wealthy Chinese have followed for years, to Hong Kong’s benefit. They would build a successful business in China, list it on a global exchange, pay out billions of dollars in dividends to themselves and other shareholders, set up a family office abroad and snap up foreign real estate. These moves kept their fortunes relatively immune from President Xi Jinping’s restrictions, including the annual limit on overseas transfers.

This model relied on so-called red-chip firms — entities registered outside China that hold assets and businesses within it. Founders could incorporate their companies abroad and raise money in a US or Hong Kong listing without direct oversight from China tax authorities. Companies that have gone this route include some of the nation’s biggest tech giants. The popularity of the strategy is reflected in the number of family offices in Hong Kong, which jumped 25% to 3,384 at the end of last year from 2023.

China is now targeting red-chip structures by restricting their IPO applications. As a result, Hong Kong listings by mainland Chinese companies using this pathway have all but disappeared this year, according to data from the Hong Kong Exchange.

That’s pushed Chinese founders to opt instead for H-share listings in Hong Kong, which are reserved for companies incorporated on the mainland. Even there, the firms face new restrictions. Previously, there was more flexibility about whether proceeds from these sales needed to be returned to the mainland. But a directive from China’s central bank and the State Administration of Foreign Exchange that came into effect on April 1 clarified that the money needs to go back to China unless the company gets special approval.

The pressure comes in different forms. Recently, according to Li Yuan of the New York Times, Beijing has not just been issuing fines. It has given “several Hong Kong and Singaporean-based brokerages with significant mainland clientele two years to wind down those accounts. It expanded rules on overseas investment to explicitly cover individuals for the first time, threatening to confiscate vaguely defined “illegal gains.” In Hong Kong, long a gateway to overseas investing for mainland residents, banks and brokerages have tightened requirements for opening an account. Some brokerages told their mainland clients that the clients could sell U.S. stocks but not buy them. The Chinese social media app known as RedNote announced that it had cracked down on posts teaching people how to open U.S. stock trading accounts.”

The balance of capital account control and exchange rate management is not straight forward. In its balancing act with regard to the yuan’s exchange rate, it no doubt suited Beijing to allow some degree of outflow. The money flowing out helped to offset the upward revaluation pressure from the trade side. But there is only so much license that Beijing will grant. One might infer that two things have destabilized this prevailing balance and triggered Beijing’s crackdown.

One is the unmistakable desire of China’s elite to get a lot of its money out of China and into global assets. Again there are no doubt political reasons for this. But one should not underestimate the magnetic attraction of what is going on in the US. If Elon is becoming a trillionaire (my spellcheck does not even like the word) no one wants to be left out! As the Economist reports: “America’s towering tech debuts on the stock market have already caught the jealous eye of Chinese investors. At the Lujiazui financial forum in Shanghai this month, some mainlanders grumbled about their exclusion from the recent SpaceX listing.” Beijing, “cannot shake the suspicion that capital outflows are “unpatriotic and damaging to the Communist Party’s prestige”, as Gabriel Wildau of Teneo, a consultancy, has put it. They do not like to see their citizens betting on foreign “tech narratives” that compete or conflict with their own vision of the future. If money is to stride out of China, it must pass through portals of their approval”.

The other new factor is that China’s government needs money and with that comes an incentive to tax the rich. Levying effective income taxes would be a start. As an excellent report by Bloomberg on the crackdown on capital mobility put it: “It started with a tax bill.”

The public crackdown followed a series of behind-the-scenes moves within China’s borders, where tax officials have become increasingly aggressive as they attempt to extract more revenues from the country’s wealthy. In Beijing, Shanghai and Guangzhou, individuals have been told that investigations into their taxes could look back at least to 2018, people familiar said, requesting not to be named because the matter is private. … The individuals being targeted are usually rich — often having more than $30 million in their accounts, the people said. They are typically people of Chinese origin who obtained foreign passports but later returned to live in China. Some of them used offshore trust structures to manage their wealth. Those contacted are facing levies of up to 20% on investment gains, along with potential penalties for overdue payments, the people said. The final amounts are sometimes negotiable, they added. There have been no official circulars on the matter but only private negotiations between the individuals and local tax officials, the people added. The tax officials have ramped up the pressure, in some extreme cases threatening to involve the police.

My aim in raising these points, is not to dispute that the yuan is undervalued for trade purposes or to argue against those calling for it to be revalued. The point is to underline the conditions that enable us, in the trade-centric “China shock 2.0”-framing, to treat the trade balance in isolation and to call for a revaluation of the exchange rate without regard to broader capital flows. What makes this possible is precisely the rigged balance of payments, which bottles up capital, represses capital flows, limits aspirations to partake in the global AI boom and enables the currency to remain within government control. What makes exchange rate policy possible is the lopsided and tense political economy of China’s party-state-managed-capitalism. And that framing suffuses even the proposals that come from the West.

Those calling for a revaluation of the yuan to redress China shock 2.0 do not, for obvious reasons, suggest that China should liberalize its balance of payments. The suggestion is that it should maintain the existing system of controls but promote a revaluation of the currency. The political economy of that proposal is worth spelling out: A revaluation would, first and foremost, improve the terms of trade for Chinese consumers. It would encourage imports. It would also reduce exports and thus employment in export sectors. It would further squeeze export-orientated businesses. And, under the current circumstances, to make it work will also require robust exchange controls. To push the currency up against the downward pressure of outbound capital flows, Beijing would need to tighten its grip on the Chinese bourgeoisie. Under current conditions, more financial repression is the unmistakeable implication of calling for revaluation.

In a world of unrestricted flows for both trade and capital investment things would be far more complicated. In the short-run, a scenario of crash devaluation could not be ruled out. And what about the medium- and long-run? In due course the yuan would likely recover. But, certainly, fully floating rates and capital mobility are no guarantees of trade balance or vigorous industrial employment in rich, import-happy economies, like the US or much of the EU. The eurozone led by Germany and Japan have, after all, sustained running surpluses with the US, counterbalanced by large purchases of US assets without any kind of coercive mechanism in play. In an earlier post I referred to this not as a “dollar trap” but a gilded cage, in which wealth holders in other advanced economies co-benefit from America’s lop-sided model of K-shaped, pro-business, pro-profit growth. According to one recent estimate, over the last decade since 2015, non-US investors have benefited from a staggering $13tn in profits from their US assets. Little wonder that the Chinese bourgeoisie would like in on that game. That would drive the yuan down, not up and would maintain the imbalance on the basis of a new political economy.

We don’t generally recommend revaluations of the euro to address the chronic issue of Germany’s trade surpluses because what would be the means of bringing it about? You can only seriously talk about currency policy if you have the PRC’s system of controls, or some functional equivalent e.g. capital import restrictions, or clever trade regulations, or some credible agreement between central banks. In the North Atlantic economy all of that was left behind in the 1990s and the return of such talk from Trump and his crew is generally regarded as a scandal.

The fact that in the context of the China Shock 2.0 debate, we can seriously talk about the possibility of targeting an exchange rate for the yuan, suitable to rebalance the flow of trade, most especially in industrial goods, with a view to “fairness” and domestic social equilibrium in both exporting and importing countries, is a backhanded compliment to the increasing weight and influence of China’s model of economic management. As argued in a previous post, it would be more convincing if it were combined with disciplining also of European capital, to actually deliver the investment and innovation necessary to drive modern economic growth.

If we talk about currency policy without talking about financial repression and capital discipline are we not indulging in euphemism?

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