Never mind deflation and the property crisis - a brain drain could be the next big threat to China's economy

• It's been a rough 2023 for China, with Beijing failing to stop deflation or contain an ever-worsening property crisis.
• A brain drain could present the next big threat for the world's second-largest economy.

It's been a rough year for China's economy so far.

After ending nearly three years of harsh zero-COVID lockdowns at the end of 2022, Beijing has struggled to revive growth, stop deflation, and shore up a crisis-hit property sector.

One economic threat that hasn't captured so many headlines is a so-called "brain drain" – with highly-qualified and wealthy entrepreneurs steadily leaving the country over the past half-decade.

Around 9,000 high-net-worth individuals – people with fortunes of over $1 million – moved away from China a year for much of the 2010s, according to data compiled by the Wall Street Journal.

But since 2018, more Chinese millionaires have emigrated – with another 13,500 expected to leave the country this year, per estimates by the consultancy firms Henley & Partners and New World Wealth.

It's not difficult to see why the wealthy are fleeing China.

In the past few years, president Xi Jinping has cracked down aggressively on business, targeting high-profile individuals like Alibaba founder Jack Ma and rolling out harsh regulations that have wiped over $1 trillion off the market value of local Big Tech firms.

The country's harsh lockdown restrictions and economic malaise could also be fueling the rise in emigration among millionaires, Mercer's chief investment strategist says.

"The flow of talent has reversed – and now we have native-born Chinese people leaving to get their money by founding start-ups elsewhere," Rich Nuzum told Insider in a recent interview.

"They're heading to North America or western Europe for more political stability and what they perceive as better opportunities for themselves and their children," he added.

Brain drains are almost always bad news for a country, robbing its economy of a key engine for growth.

Just two years ago, forecasters were touting China as a future hub of innovation due to the rising number of billion-dollar startups located there – but Beijing will lose that advantage if it can't stop wealthy entrepreneurs from choosing to move to the West.

Brain drains are "horrible for the economy – you need leaders to drive your economy forward," Nuzum said.

"If one entrepreneur leaves, whatever – but if tens or hundreds of thousands move across the border, that's a big problem."