Late last month, the Institute of International Finance (IIF) said there had been an "unprecedented" outflow of funds from China following Russia's invasion of Ukraine, and that investors were pulling out of China while other emerging markets remained unchanged. of.
IIF high-frequency data show that capital flows have changed significantly since their peak in mid-December last year.
Outflows from Chinese equities, in particular, intensified further in late February.
Overseas hot money flows out of the stock and bond market
What needs to be clarified is that foreign capital flowing into China is usually divided into two types. One is industrial capital invested in Chinese real enterprises, mainly foreign direct investment (FDI), and most of them are long-term investments; the other is financial capital, which is invested in the securities market. Stocks, bonds, foreign exchange, etc., which are usually referred to as "hot money", these money have short-term characteristics due to their strong liquidity in the secondary market.
It is the latter that is counted by the IIF high-frequency data.
In the first two months of this year, China's actual use of foreign capital increased by 37.9% year-on-year.
(Xinhua News Agency)
More than two years after the outbreak of the new crown epidemic, China has provided supplies to the world as the world's factory. In 2021, the total import and export trade volume exceeded 6 trillion US dollars, setting a historical record.
As a country with the largest market demand, the most complete industrial chain, and the most stable supply chain, China has attracted a large amount of industrial capital.
In 2021, China's actual use of foreign capital will be 1,149.36 billion yuan (RMB, the same below), a year-on-year increase of 14.9%, and the scale of foreign investment will hit a record high.
In the first two months of this year, China's actual use of foreign capital increased by 37.9% year-on-year, and the growth rate reached a new high on the basis of last year's high base.
This is the basis for whether foreign investment favors China.
From the perspective of the capital market, since the second half of 2021, overseas financial capital has begun to flow out, especially since March this year, the outflow of overseas financial capital from the stock and bond markets has accelerated.
According to data from China Central Depository & Clearing Co., Ltd. (hereinafter referred to as "China Bond Registration"), foreign institutional investors reduced their holdings of China Bond Depository's custody bonds by 66.9 billion yuan in February, the first reduction since November 2018; It held 35.4 billion yuan in government bonds, the first reduction since March 2021.
From this point of view, the monitoring data of the IIF is accurate.
This happened in part because the Russian-Ukrainian war prompted redemptions by fixed-income investors around the world.
U.S. and European sanctions have froze the Russian central bank's holdings of euro and dollar foreign exchange reserves, leading to speculation that Moscow may sell its Chinese holdings to raise funds.
But a more dominant factor is that the People's Bank of China will not cut interest rates or reserve ratios anytime soon, and expects 10-year yields to rise to as high as 3 percent as credit supply increases.
Fundamentals for attracting foreign investment remain strong
However, the one-month reduction in national debt holdings does not mean anything.
In fact, the inflow of foreign capital into China's bond market has generally shown a rapid growth trend.
As of the end of December 2021, the scale of bonds held by foreign institutions in China's interbank market reached 4 trillion yuan, a record high.
China's economy is stable and improving, the foreign trade is booming, and the RMB exchange rate is resilient, RMB bonds are still quite attractive.
Hong Kong and A shares fluctuated sharply last month.
(Associated Press)
Looking at the stock market again, the reason why hot money has flowed out recently is that the market crash in March triggered a large-scale stampede event. From March 7th to March 14th alone, the capital outflow from the A-share market to the north exceeded 50 billion yuan.
If you add the outflow of international financial capital from the Hong Kong stock market, the figure is much larger.
The recent sharp drop in A shares and Hong Kong stocks is mainly due to policy uncertainty, which has caused international investors to significantly reduce or even liquidate Chinese assets, while hedge funds have taken the opportunity to establish a large number of short positions to short; the conflict between Russia and Ukraine has further triggered a reduction in international capital allocation. Chinese risk assets to hedge.
But it is worth noting that it is after this round of "baptism" that the valuation of Chinese assets has reached a low level.
Due to the strong profit-seeking nature of foreign capital, the willingness of foreign capital to increase their positions in China will generally be stronger when there is a large room for China's stock valuation to rise.
In short, the outflow of "hot money" is a fact, but hot money has always come and gone quickly, and it is not possible to magnify the imagination based on one month's data.
In addition, China's fundamentals for attracting foreign investment are still strong, and there is no need to magnify this anxiety.
For details, please read the 311th issue of "Hong Kong 01" Electronic Weekly (April 4, 2022) "
Unprecedented Foreign Investment Outflows from China?"
".
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