A significant capital outflow from Chinese stocks and bonds is diminishing the market’s impact in global portfolios and accelerating its detachment from the rest of the world, as reported by the Times of India.
According to data from Bloomberg, derived from the central bank’s records, foreign ownership of China’s equities and debt has declined by approximately 1.37 trillion yuan ($188 billion), or 17 percent, from a peak to the end of June this year.
This departure coincides with China’s economic slowdown, which has been exacerbated by years of Covid-19 restrictions, a housing market crisis, and ongoing tensions with Western nations. These concerns have contributed to making “avoid China” one of the prevailing convictions among investors in Bank of America’s most recent survey. Foreign investment in the Hong Kong stock market has also dwindled since the end of 2020, leading to a decrease of more than a third.
“Foreigners are simply giving up,” remarked Zhikai Chen, the head of Asia and global EM equities at BNP Paribas Asset Management. He cited concerns about the property market and sluggish consumer spending, stating, “Disappointment on those fronts has prompted many foreign investors to reconsider their exposure.”
Previously, it was believed that China’s weakening would negatively impact the rest of the world, particularly the emerging markets group. The MSCI China Index is predicted to decline by around 7 percent in 2023, initiating a three-year losing streak, which would be its longest in over two decades. In search of returns in other countries like India and various regions in Latin America, the broader MSCI Emerging Markets Index has risen by 3 percent.
This divergence is a result of China’s efforts to achieve self-sufficiency in all supply chains and deteriorating relations with the US, which have made other markets less susceptible to its fluctuations. In addition to economic decoupling, another factor is the artificial intelligence boom, which has boosted markets from the US to Taiwan while providing mainland shares with less of a lift. China’s weighting in the EM index has declined from over 30 percent at the end of 2021 to around 27 percent at present.
The introduction of equity funds that exclude China has reached a new annual high in 2023, indicating that the strategy of excluding China from emerging-market portfolios is rapidly gaining acceptance.
Gaurav Pantankar, Chief Investment Officer of MercedCERA, which manages around $1.1 billion in US assets, cited several risks associated with China, including LGFV, housing stock overhang, demography, dependence ratio, regulatory instability, and geopolitical isolation, according to the Times of India.
International investors have pulled out approximately $26 billion from Chinese government bonds in the debt market in 2023 while investing a total of $62 billion in notes from other emerging Asian countries, according to data compiled by Bloomberg. A JPMorgan Chase & Co. study indicates that over half of the $250 billion to $300 billion inflow associated with China’s inclusion in government bond indexes since 2019 has been lost.
The yuan has reached a 16-year low against the dollar due to selling pressure. The central bank’s loose monetary policy, in contrast to tightening in most major economies, is causing the yuan to depreciate, providing foreign investors with another reason to avoid local assets.
As China’s real estate crisis enters its fourth year, it appears that the country has fully decoupled from the rest of Asia in terms of corporate debt performance. With domestic investors holding approximately 85-90 percent of the market, it is now more regionally concentrated.
All of this is occurring against the backdrop of China’s faltering economy, which has prompted many to reevaluate the market’s attractiveness as an investment destination. Citigroup Inc. and JPMorgan are among the Wall Street banks with reservations about Beijing’s 5 percent growth target.
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