Why are foreign investors worried about China?

S.Tate Media It has not tried to hide the fact that billions of dollars of global investors’ funds have been diverted from China in recent weeks. They attributed the outflow to শুরু 11.5 billion in global market volatility since the beginning of March, a crumbling Federal Reserve and the impact of Russia’s invasion of Ukraine on the global supply chain. An official publication downplayed the situation and predicted that foreign money would return soon.

Listen to this story.
Enjoy more audio and podcasts iOS Or Android

Your browser

Indeed, Chinese markets that have experienced short-term outflows in recent years have only been seen to reverse rapidly, usually within two months. Since the inclusion of many mainland-traded securities in various global indices, the onshore markets have become a definite bet, e.g. MSCIIts flagship emerging-market index, launched in 2018. Since then, billions of dollars have flowed into the Chinese market each year. Once in 2019 and twice in 2020, there have been occasional outflows at that time. Two-and-a-half months after the most serious battle in July 2020, net inflows have gone up to about $ 12 billion before resuming.

At the moment, however, foreign investors say deeper, structural problems are destroying Chinese markets. Outflows have become more violent. And they have been accompanied by a worldwide sale of Chinese securities. The Hang Seng Technology Index, which tracks many of China’s largest technology groups listed in Hong Kong, is down 45% from a year ago. The Nasdaq The Golden Dragon China index, which includes similar companies listed in the US, fell 58% over the same period. “A bounce is unlikely to come easily until investors see a change in structural strength,” said Kevin Lai, a broker at Daiwa Capital Markets.

Despite state media reports, outflows do not appear to be closely linked to Fed tightening. Even as China has seen equity outflows, not much capital has flowed in from other emerging markets (see chart).

Instead, investors point to China-specific factors. State intervention in the private sector and with technology companies has certainly become commonplace. Another concern is that Xi Jinping’s support for Russia could lead to sanctions on Chinese companies. The war has also raised concerns in Taiwan, which China claims as its own and has vowed to withdraw. Fear of Chinese aggression has for the first time led some investors to add geopolitical risks to their structure in order to evaluate their Chinese investment. The risk premium that investors consider acceptable to hold Chinese assets is rising, leading some to reduce their allocations. The longer the war in Ukraine, the higher the premium.

Moreover, China’s weak control over the Omicron variant of the Kovid-19 darkens the economic outlook. The response to the growing outbreak in Shanghai, home to many foreign executives, has been embarrassing for local officials. International flights have been diverted. A chaotic, rolling lockdown of the districts is being enforced. Gate casting of residential communities is being stopped to prevent residents from leaving. Within two years of the situation in China’s most developed cities and the epidemic, Mr Shir expressed a lack of strategy to get out of the crisis. The property market is also shaky. On March 22, Evergrande, a troubled developer, said Chinese banks had demanded $ 2 billion in its cash, another bad omen for foreign lenders hoping to recover their investments.

The market has pushed the action of sales officers. Financial Stability and Development Committee (FSDC), Chaired by Liu He, a top economic adviser, is leading efforts to restore investor confidence. From March 16th, Mr. Liu and the FSDC Promises to increase debt growth and push state-owned funds to buy more stocks.

China’s leadership will support the listing of companies in the United States and ease its crackdown on technology companies. Housing-market policies will become more tolerant. And the government is also preparing to tackle the Omicron outbreak with self-examination kits and Pfizer’s Paxlovid pill, which will help protect infected people from serious illness.

Mr Liu hopes that in the future, China’s economic plans will be better communicated to the market. But more importantly, Laura Wang of a bank called Morgan Stanley says how quickly the authorities can implement their promises. It will take more than talking outflow stanch. 3

For more expert analysis of the biggest stories in economics, business and markets, sign up for our weekly newsletter Money Talks.

This article was published in the print edition of the section entitled “Farewell Thoughts”.

Leave a Reply

Your email address will not be published.