Surprised by the unprecedented wave of divestment from China

The wave of capital flight

According to the most recent data from the Institute of International Finance (IIF), China saw $17.5 billion worth of capital outflows last month, an all-time high, CNN reported. Trade associations based in the US call batch divestments This trend of foreign investors is “unprecedented”, especially since there has been no similar wave of flight from other emerging markets during this period. The retracement cash flow includes $11.2 billion in bonds, while the rest is in stocks.

Data from the Chinese government also showed a record pullback by foreign investors in the bond market in recent months. Foreign investors sold 35 billion yuan ($5.5 billion) of Chinese government bonds in February, the biggest monthly drop on record, according to the Center for Deposit and Clearing. China. The sell-off accelerated in March, reaching a new high of 52 billion VND yuan (8.1 billion USD).

Reason

George Magnus – an associate at the China Center at Oxford University and a former UBS economist – thinks that Beijing’s stance on the war Russia-Ukraine is the catalyst for capital outflows from China.

China and Russia declared in February that their friendship “has no limits”. That was before Russia launched its military operation in Ukraine. Now, with the Russian economy being hit by sanctions from around the world, Beijing is in no hurry to help its northern neighbour, fearing it could be entangled in the sanctions. . But Beijing also remains neutral on the war.

Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics who specializes in China’s economy and US-China relations, said: “There is anxiety about China’s neutral but somewhat Russia-biased stance. States in the Ukrainian conflict. This raises concerns that China could be targeted by sanctions if it helps Russia.”

But geopolitical tensions are not the only reason behind the pullback. Interest rate hikes in the US and China’s strict COVID-19 shutdowns also contributed to investor apprehension.

U.S. Federal Reserve Fed raises interest rates for the first time since 2018 to rein in inflation, while the People’s Bank of China has entered an easing cycle to support the slowing economy. That means China seems less attractive to investors when compared to the US. Earlier this month, China’s 10-year government bond yields fell below the US Treasury yields for the first time in 12 years. And the yuan hits a 6-month low against USD.

According to Mr. Chorzempa, raising interest rates, especially in the US, makes the nominal yield tied to China’s fixed-income assets less attractive. Moreover, the blockades in China cause great economic damage and increase uncertainty about future growth.

China’s economy slowed in March – consumption contracted for the first time in more than a year, while unemployment in 31 major cities rose to a record high. Some economists are even talking about the possibility of a recession this quarter.

Over the past week, several investment banks have cut their forecasts for China’s full-year growth. The International Monetary Fund has cut its growth forecast for China to 4.4% from 4.8%. This is much lower than China’s official forecast of around 5.5%.

Uncertainty about the future

With worries growing, some fund managers and analysts have begun to question whether they should invest in China.

Brock Silvers – CEO of Kaiyuan Capital, a private equity investment firm based in Shanghai – said that China is seeing a massive outflow of foreign capital as doubts rise. on the country’s capital investment capacity.

The pandemic is not the only reason behind China’s slowdown. Since 2020, Beijing has imposed sweeping regulations on the private sector, from education to technology.

A set of rules published last July essentially shut down the $120 billion private tutoring industry, shutting down tens of thousands of companies. Another decision by regulators to ban Didi – the country’s largest ride-hailing app – days after its US IPO has stunned international investors and cost them dearly. These decisions led to a sharp sell-off in Chinese stocks around the world.

The Nasdaq Golden Dragon Index, a popular index that tracks more than 90 Chinese companies listed in the US, lost 31% in the third quarter of 2021, its worst quarter on record. The index then fell another 14% in the final quarter of last year. By comparison, the S&P 500 gained 0.2% and 11%, respectively, in the third and fourth quarters of last year. The Nasdaq Composite also gained 8% in the final quarter of 2021.

Bright signal

According to CNN, in the context of bond and stock funds may retreat, there is evidence that global companies are continuing to invest in stocks. Chinese enterprises.

Foreign direct investment inflows into China hit a record high of $173 billion in 2021, up 20 percent year-on-year, according to data from China’s Ministry of Commerce.

According to an annual survey conducted in China by the European Union Chamber of Commerce in China last year, only 9% of the nearly 600 European companies operating in China plan to move any existing investments into China. in or expected to come out of China, the lowest rates on record.

Beijing has attracted record levels of FDI despite regulatory uncertainty, Chorzempa noted. “So it is not clear whether the data from the last two months represent a lasting change or just a temporary readjustment to the still very strong investment relationship, especially with Europe.” Mr. Chorzempa said.