Investors are rightly treating China like a short-term speculative play, rather than a long-term investment, top economist Mohamed El-Erian says

• Investors are right to treat China as a speculative trade, Mohamed El-Erian wrote in the FT.
• Long-term traders won't return until Beijing decisively transitions away from its current growth playbook.

Chinese markets are no longer a destination for long-term investors, economist Mohamed El-Erian wrote in the Financial Times, and until Beijing can deliver a clear economic transition, foreigners are justified in treating the country as a speculative stop, he said.

"Once hailed for its repeated economic miracles that lifted hundreds of millions out of poverty, today it faces a perception of being on more shaky ground, at risk of succumbing to the dreaded middle-income trap — where countries struggle to transition from an economy where growth, typically, is heavily reliant on low costs and sizeable global demand," he wrote.

Offshore investors have pulled around $7 trillion since 2021, possibly marking a permanent withdrawal. Traders were especially put off last year by the country's botched post-pandemic recovery, where headwinds ranged from low domestic spending, property market defaults, high debt burdens, and a continued tech industry crackdown.

Foreign traders are increasingly circumventing the country on the global field as well. Since 2020, the MSCI Emerging Markets ex-China ETF has jumped from $120 million to $10 billion.

These conditions are undermining China's growth dynamism, making non-economic objectives more costly, and potentially ending its bid to become the world's largest economy, El-Erian previously wrote. Until Beijing offers decisive reform measures, China risks eventually falling into the middle-income trap, El-Erian wrote.

"In that outcome, growth momentum dissipates, competitiveness erodes, financial robustness weakens, and long-term foreign investments become even more elusive," he said.

While recent weeks have seen a bounce back in Chinese markets, the CSI 300's 11% upswing since February should only offer temporary comfort.

To foster a more welcoming market space, Beijing will need to also improve its relations with the US, and pull back expensive efforts for global economic influence.

"China should find little solace in the recent performance of its stock market. These speculative 'tourist flows' are not a leading indicator for more stable, long-term 'resident flows,' El-Erian wrote.