"The outflow of capital from China is unprecedented in size and intensity, especially since we do not see a similar phenomenon in other emerging markets. The timing of this outflow, which intensified after Russia invaded Ukraine, suggests that foreign investors may be looking at China in a new light. However, it is too early to draw definitive conclusions," the Institute of International Finance chief economist Robin Brooks and his team said.
Official data show investors cut their holdings of Chinese government bonds the most in February, partly because the war sparked a wave of bondholders' coupon-taking. Sanctions' blocking of the Russian central bank's dollar and euro reserves has sparked speculation that Moscow may be selling its holdings of Chinese assets to raise money, Bloomberg writes. In March, China's stock market plunged as foreign investors fled, fearing that U.S. and EU sanctions on Russia could also extend to China. Last week, policymakers promised to support equity markets; last week, there was a marked improvement.
Authorities in Beijing have only recently managed to make progress in attracting global portfolio managers distrustful of China. Chinese equities accounted for only 9 per cent of global equity capital in 2020, while Chinese companies held just 2.7 per cent of international investors' money. Strict capital market controls, unpredictable policy decisions and a shareholder base dominated by day traders did not attract serious financial institutions. Jim Chanos of a speculative fund once said that "China's markets are like cockroach motels: easy to pay in, hard to get your money back".
The aggression in Ukraine could become a reason to take a pause. Investors have already been frightened for two years by the blows taken by listed companies. The aggression is lifting commodity prices, and if Beijing forces Chinese companies to help Putin avoid sanctions, it will quickly expose itself to American retaliation. China's stock markets are doing the worst in the world after Russia, with IIF data showing that the average daily outflow of money reached nearly $500 million.
The flight of pension funds and insurance companies that buy assets and hold them longer will be harrowing in its consequences. Their presence makes it easier to fix market capitalization and reassures local traders who distrust local analysts and rating agencies. Official media portray foreign investors' enthusiasm for China as support for the authorities. If this capital flight persists, it will exacerbate the asset sell-off at a politically sensitive time. For reformers, it would be a fiasco in their campaign to raise money for the public sector. And President Xi Jinping is due to be elected for a third term this year.
Tags: China, Russia, Stock Market, Global Markets
Categories: World, Business
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