Exodus: Investors pull out $200 bn from Chinese markets
Virendra Pandit
New Delhi: Amid the collapsing economy in China, the meltdown of the real estate sector, which contributed nearly a third to the Dragon’s overall GDP, and the exodus of Chinese realtors from Australia and other countries are old hats. The latest indication that China is descending into chaos is this: global investors have pulled out at least USD 200 billion from the Chinese markets in the last 18 months.
According to the media reports on Saturday, the massive retreat of funds from Chinese stocks and bonds is diminishing the market’s clout in global portfolios and accelerating its decoupling from the rest of the world.
Foreign holdings of China’s equities and debt have fallen by about 1.37 trillion yuan (USD 188 billion), or 17 percent, from a December 2021 peak until the end of June 2023, the reports said, citing the latest data from the central bank.
That’s before onshore shares witnessed a record USD12 billion outflow in August alone.
The exodus coincides with China’s economic slump because of years of COVID-19 restrictions, a property market crisis, and persistent tensions with the West — concerns that have helped make the “Avoid China” theme one of the biggest convictions among investors in Bank of America’s latest survey.
Foreign fund participation in the Hong Kong stock market has dropped by over a third since the end of 2020.
“Foreigners are just throwing in the towel,” said Zhikai Chen, head of Asia and global EM equities at BNP Paribas Asset Management. There’s anxiety about the property market and a slowdown in consumer spending, he said, according to Bloomberg.
Even the earlier conception that China’s weakness could drag down the rest of the world, particularly the emerging-markets group, has proved wrong. India, China’s chief rival in Asia, has correspondingly gone up. The broader MSCI Emerging Markets Index is up 3 percent as investors chase returns in other places like India and parts of Latin America.
Apart from the West’s phased economic decoupling with China, another reason is the Artificial Intelligence (AI) boom, which has boosted markets from the US to Taiwan. China’s weighting in the EM gauge has dropped to around 27 percent from over 30 percent at the end of 2021.
Simultaneously, a strategy of stripping China out of emerging-market portfolios is fast gaining traction, with launches of equity funds that exclude China already reaching a record annual high in 2023.
In the debt market, global investors have pulled about USD 26 billion from Chinese government bonds in 2023, while plowing USD 62 billion into notes from the rest of emerging Asia. Roughly half of the USD 250 billion-USD 300 billion inflow that accompanied China’s inclusion into government bond indexes since 2019 has been erased, the media reported.
Selling pressure on the yuan has pushed the currency to a 16-year low versus the US dollar. The central bank’s loose policy stance, in contrast to tightening in most major economies, is weakening the yuan and giving foreigners another reason to shun local assets.
About corporate debt performance, China might have fully decoupled from the rest of Asia as a crisis in its real estate sector heads into its fourth year. The market has become more locally-held with nearly 85-90 percent owned by domestic investors who have no way to recover their invested money as over 65 million unsold newly-built houses in vast residential complexes across the land haunt its 1,400 million population.
All of this comes against the backdrop of China’s deteriorating economy, which has caused a rethink of the market’s allure as an investment destination. Wall Street banks including Citigroup Inc. and JPMorgan doubt whether Beijing’s 5 percent growth target for this year can be met.
