China is facing a massive trust-deficit frominternational investors as the country witnessed a portfolio outflow worthnearly $18 billion last month.
The communist country’s support for theRussian invasion of Ukraine and speculations, even if unfounded, of a possibleChinese strike against Taiwan, triggered the outgo.
The Institute of International Finance termedthe capital flight as “unprecedented”. CNN reported: “Data from the Chinesegovernment also showed a record bond-market retreat by foreign investors inrecent months. Overseas investors offloaded a net 35 billion yuan ($5.5billion) of Chinese government bonds in February, the largest monthlyreduction on record, according to China Central Depository and Clearing. Thesell-off accelerated in March, hitting a new high of 52 billion yuan ($8.1billion).”
Financial Times says in an exclusive report:“That took outflows over the past two months to Rmb193bn as concerns mountedover China’s economic growth outlook and the debt’s diminishing yield advantageover bonds denominated in US dollars. “These are by far the greatest outflowssince China began opening up its domestic bond market,” said Becky Liu, head ofChina macro strategy at Standard Chartered, adding that when combined with netselling of stocks, foreign investors had dumped a total of about Rmb234 billionin Chinese securities over the past two months. She said the bank expected“persistent outflows” in the second quarter.”
Portfolio managers at JPMorgan AssetManagement in Hong Kong explain the outflow “was in part spurred by globalinvestors locking in profits after a year in which Chinese bonds’ relativeoutperformance made holding them “pretty much required” for many investorshoping to deliver better-than-benchmark returns”. Investors and strategistssaid that “while renminbi debt’s yield advantage had been squeezed, payouts onChinese bonds still offered a substantial premium over their US counterpartswhen adjusting for inflation”.
China has refused to condemn the Russianinvasion on the ground that both are friends with “no limits”. At the sametime, it is not doing anything overtly to help Russia for fear of attracting thesanctions from the west that have nearly crippled Moscow. This ambiguity issomething that is scaring away the investors.
CNN quoted Martin Chorzempa, a senior fellowat the Peterson Institute for International Economics, who has studied China’seconomy and US-China relations: “There is nervousness about China’s ambiguous,but Russia-leaning stance on the Ukraine conflict, which raises worries thatChina could be targeted by sanctions if it helps Russia.”
The American media says the flight is beingcaused also by the “rate hike in the United States and China’s strictCovid-related lockdowns have also played a role in scaring investors”. Theissue is that the Federal Reserve of the US has increased interest rates totame inflation coinciding with the People’s Bank of China entering an “easingcycle to bolder its faltering economy”. As a result, “China looks lessattractive to investors when compared with the United States”. The net resultis that in early April, “yields on China’s 10-year government bonds fell belowUS Treasury yields for the first time in 12 years and “the yuan hit a six-monthlow against the US dollar”.
The third factor, of course, is China’sstrict Zero Covid policy that led to the complete shutdown of scores of citiesand towns including Shanghai, its ports and airports, halting manufacturing andtrade, thus increasing “uncertainties about future growth”.
That is not all. Some analysts feel that theChinese government’s crackdown on private businesses and unicorns late lastyear to instil fiscal discipline has had a cascading effect on the economy,downing industry morale and making foreign investors more nervous.
Last year, the Chinese government suddenlyintroduced harsh laws to shut down the private tutoring market that was worth$120 billion. Several coaching behemoths were put out of business. Chineseregulators also prohibited Didi, China’s popular ride-hailing app, only daysafter its IPO in the US. This shocked foreign investors who lost a lot of moneyand the government action led to a sell-off in Chinese stock around the world.
Media reports say “there are fears that thegovernment will continue to clamp down on sectors ranging from education totechnology this year” while analysts feel “global investors don’t want to playregulatory guessing games or worry that tomorrow’s news may deplete anotherotherwise attractive company or business model”.
International organisations and investmentbanks are already lowering their growth projections for China this year. TheInternational Monetary Fund has reduced the prediction from 4.8 to 4.4 percent. The official prediction of of China is 5.5 per cent.
The question is where is the outflow fromChina being diverted to? China Underground, a Chinese website quotes Qi Wang,chief investment officer for MegaTrust Investment in Hong Kong, as saying that“some of the money moving out of China may have gone into US dollar assets,while there has also been a considerable move from China to India”.
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