In light of recent political developments in the United States do we think China-bashing by Western governments and Western media will:
A. Continue as before? B. Decrease in intensity? C. Increase in intensity?
If, like me, you believe C is the most likely outcome the paper highlighted today from Isha Agarawal of the University of British Columbia and Wentong Chen and Eswar S. Prasad, both from Cornell University, will be of especial interest.
It’s not only a first but it’s a data wrangling tour de force indicative of the shape of social science research progress to come. The researchers machine-read 1.5m articles from 38 newspapers [What’s a newspaper? Ed.] relating to China in 15 economies that produce English language commentary over the period 2007~2022.
Using the data they then created indices for ‘sentiment’ and ‘risk’ which were used to line up with data from 20,000 funds covered by Morningstar to see if commentary, good and bad, affected capital allocation to/from China. The results were unequivocal and revealed as follows:
- Media narratives significantly affect portfolio flows
- Flows were asymmetric. Bad news has more influence than good
- News about political and environmental issues appear to be as, if not more, important, than stories about economic conditions
- The indices constructed based on the news flow appear to have no predictive power and no reliable relationship to economic reality
- Heterogeneity was observed in the data. Investors with more China experience (Ahem!) are less sensitive to ‘noise’ and countries ‘closer’ to China often see things differently from those farther away.
Don’t let the paper’s apparent length of 87-pages put you off. The real meat is in the first few pages and appendices and notes begin on P.34 so it’s an easier read than it might first appear. You’ll find the full text here How Media-Driven Narratives Influence Cross-Border Capital Flows.
Implications for investment flows from the West to China, if we’re right about C above, are as clear as they are depressing.
Happy Sunday?
[I’ve only one criticism of the work. Overuse of the word ‘narrative’ or ‘narratives’ which comes up 179-times. In most cases the word ‘story’ will do. This n-word is often used by commentators with pretensions to academic rigor and far flabbier analytical chops than this team obviously possess. They do themselves no favors by the comparison, albeit highly favorable.]