China's plan to prevent its companies from leaving Wall Street 1:07
(CNN Business) --
Investors are fleeing China on an unprecedented scale, as a cocktail of political and business risks, and rising interest rates elsewhere, make the world's second-largest economy one less place. attractive to save your money, while the Russian invasion of Ukraine makes the situation worse.
According to the latest data from the Institute of International Finance (IIF), last month there were portfolio outflows worth US$17.5 billion, an all-time record.
The US-based trade association called this capital flight by foreign investors "unprecedented," not least because there were no similar outflows in other emerging markets during this period.
The outflows included $11.2 billion in bonds, while the rest was stocks.
China's capital rushes to contain 'urgent and grim' COVID-19 outbreak as Shanghai lockdown continues
Chinese government data also showed a record withdrawal from the bond market by foreign investors in recent months.
Foreign investors dumped a net 35 billion yuan ($5.5 billion) of Chinese government bonds in February, the largest monthly drawdown on record, according to China Central Depository and Clearing.
The sale accelerated in March, reaching a new high of 52 billion yuan ($8.1 billion).
Covid-19 restrictions affect Chinese economy 1:05
"China's support for the Russian invasion of Ukraine was clearly the catalyst for capital to flow out of China," said George Magnus, an associate at the University of Oxford's China Center and a former chief economist at UBS.
Geopolitical risks for investors in China: Ukraine
China and Russia proclaimed in February that their friendship "had no limits."
That was before Russia invaded Ukraine.
Now, with the Russian economy hit by sanctions from around the world, Beijing has not rushed to help its northern neighbor, fearing that it too could be caught up in the sanctions.
But he has also refused to condemn Russia's attack on Ukraine, trying to portray himself as a neutral actor and blaming the situation on the United States.
advertising
"There is nervousness about China's ambiguous but Russia-leaning stance on the Ukraine conflict, raising fears that China could be targeted for sanctions if it helps Russia," said Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics. , who has studied China's economy and US-China relations.
The war in Ukraine has also raised concerns about the risk of China increasing its military force against Taiwan, sparking a massive flight of capital from the Asian island nation.
But geopolitical tension is not the only reason for the exodus.
Rising interest rates in the United States and China's strict Covid-19-related lockdowns have also helped spook investors.
The US Federal Reserve is raising interest rates for the first time since 2018 to tame inflation, while the People's Bank of China has entered an easing cycle to bolster its faltering economy.
That means China looks less attractive to investors compared to the United States.
Earlier this month, China's 10-year government bond yield fell below the US Treasury yield for the first time in 12 years.
And the yuan hit a six-month low against the US dollar.
Will the US move forward with sanctions on China?
3:56
"Rising interest rates, especially in the US, make the nominal return associated with Chinese fixed income assets less attractive in relative terms," says Chorzempa.
Furthermore, Beijing's unwavering commitment to its covid-19 zero policy has come at a huge economic cost and has increased uncertainty about future growth.
"The economy is weakened and made worse by government actions and by covid-19 zero policies," Magnus said.
China's economy slowed sharply in March - consumption plummeted for the first time in more than a year, while unemployment in 31 major cities soared to a record high - as the escalation of COVID-19 lockdowns 19 in Shanghai and other big cities hit growth and supply chains hard.
Some economists are even talking about the possibility of a recession this quarter, as Beijing seems determined to maintain its covid-19 zero policy despite the high price tag.
In the last week, several investment banks have cut their growth forecasts for the full year in China.
The International Monetary Fund on Tuesday cut its growth forecast for China to 4.4% from 4.8%, citing risks from Beijing's strict Covid-19 policy.
This figure is well below China's official forecasts, which are around 5.5%.
Investors doubts about the future
With these concerns mounting, some fund managers and analysts have begun to question whether they should invest in China.
The Chinese economy grows 8.1% but at a slow pace 0:53
"China is experiencing deep outflows of foreign capital as doubts about its core investment capacity grow," said Brock Silvers, managing director of Kaiyuan Capital, a Shanghai-based private equity investment firm.
The pandemic is not the only reason for China's slowdown.
Much of the country's current economic woes stem from the extensive regulatory crackdown on the private sector, unleashed by President Xi Jinping in 2020. It is feared the government will continue to clamp down on sectors ranging from education to technology this year. .
"Global investors don't want to play regulatory guessing games or worry that tomorrow's news might kill off another otherwise attractive company or business model," Silvers said.
The speed and ferocity with which authorities have cracked down on private enterprise have surprised even China's closest observers.
A series of rules, unveiled last July, essentially shut down the $120 billion private sector, shutting out tens of thousands of companies.
Another decision by regulators to ban Didi – the country's biggest ride-hailing app – days after its US IPO surprised international investors and cost them dearly.
This move resulted in a sharp drop in Chinese stocks around the world.
The Nasdaq Golden Dragon Index, a popular index that tracks more than 90 US-listed Chinese companies, lost 31% in the third quarter of 2021, the worst quarter on record.
It then lost another 14% in the last quarter of last year.
By comparison, the S&P 500 rose 0.2% and 11% respectively in the third and fourth quarters of last year.
The Nasdaq Composite was also up 8% in the last quarter of 2021.
This is how China responds to the housing slump 0:54
Some of the money flowing out of China may have gone into US dollar assets, while there is also "a noticeable shift from China to India," according to Qi Wang, chief investment officer at MegaTrust Investment in Hong Kong.
Declining appetite for business in China
The private sector crackdown has also hit venture capital funds that focus on China.
Funds raising dollars to invest in China only attracted $1.4 billion in the first quarter of 2022, down 70% from the previous quarter, according to Preqin, a London-based investment data firm.
A separate Bain & Company survey showed that China-focused private equity funds attracted $28 billion in new financing for the second half of last year, down 54% from the first half, as global investors are increasingly increasingly concerned about the political and economic uncertainty in the Chinese market.
"Looking ahead, about 55% of those surveyed expect the [fundraising] situation to get tougher in the next 12 months," said Kai Zhong, a manager in the China private equity team at Bain & Company. .
Investors in China, on the edge
However, while equity and bond funds may be reducing their exposure to China, there is evidence that global companies continue to invest in Chinese businesses.
China increases its exports.
It will be enough?
0:41
Foreign direct investment inflows into China reached a record $173 billion in 2021, up 20% from the previous year, according to data from the Chinese Ministry of Commerce.
Chorzempa noted that the FDI record came despite "regulatory uncertainty and a dim view among policymakers outside of China was already very prominent."
"So it is not clear whether the data of the last two months represents a paradigm shift or rather a temporary recalibration of a still very strong investment relationship, especially with Europe," he said.
According to an annual survey conducted by the European Union Chamber of Commerce in China last year, only 9% of some 600 European companies operating in China planned to move any current or planned investment out of China, the lowest percentage low registered.
However, there are signs that some of them have become uneasy about China's covid-19 zero policy.
Earlier this week, Chinese Commerce Minister Wang Wentao met with some foreign chambers to discuss the impact of the country's covid-19 zero policy.
China's energy crisis threatens the global chain 0:48
Jens Hildebrandt, CEO of the German Chamber of Commerce in North China, told CNN Business that the participants raised some pressing issues facing member companies regarding the covid-19 containment strategy, especially in Shanghai. .
The ongoing lockdown in Shanghai - a major business and manufacturing hub - has forced most businesses to close for weeks, threatening to disrupt key supply chains for automobiles and electronics.
It has also worsened delays at ports and forced the suspension of many passenger flights, sending air freight rates soaring and putting further pressure on global supply chains.
"The current policy, with lockdowns causing production stoppages, supply chain and logistics disruptions and restrictions on the movement of people, is not only a short-term concern, but will leave its mark in the long term," Hildebrandt said in an email response to CNN Business.
"As foreign companies are suffering economically, we are looking for clear signals on how the Chinese government will support to ease the burden through aid programs," he added.
China War in Ukraine
