A $188 billion exodus shows that China’s clout is fading in global markets

By | September 16, 2023

(Bloomberg) — The massive withdrawal of funds from Chinese stocks and bonds is diminishing the market’s weight in global portfolios and accelerating its decoupling from the rest of the world.

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Foreign holdings of the nation’s stocks and debt fell by about 1.37 trillion yuan ($188 billion), or 17%, from the peak in December 2021 to the end of June this year, according to calculations by Bloomberg based on the latest data from the Central Authority. bank. That was before onshore stocks saw a record outflow of $12 billion in August alone.

The exodus coincides with China’s economic crisis due to years of Covid restrictions, a housing market crisis and persistent tensions with the West – concerns that have helped make “avoid China” a major belief among investors in the country. latest survey from Bank of America. Foreign funds’ participation in Hong Kong’s stock market has fallen by more than a third since the end of 2020.

“Foreigners are simply throwing in the towel,” said Zhikai Chen, head of global Asian and emerging equities at BNP Paribas Asset Management. There is anxiety about the housing market and slowing consumer spending, he said. “Disappointment on these fronts has led many foreign investors to reconsider their exposure.”

While China’s weakness was once thought to drag down the rest of the world, particularly the emerging markets group, that has clearly not been the case this year. Down about 7% in 2023, the MSCI China index faces a third straight year of losses that will mark its longest losing streak in more than two decades. The broader MSCI Emerging Markets index rose 3% as investors chase returns in other places such as India and parts of Latin America.

The divergence comes as China’s attempt to achieve self-sufficiency through supply chains and tightening ties with the United States have made other markets less susceptible to its ebbs and flows. Besides economic decoupling, another reason was the artificial intelligence boom, which stimulated markets from the United States to Taiwan, giving mainland Chinese stocks less momentum. China’s weight in the emerging markets gauge fell to about 27% from more than 30% at the end of 2021.

At the same time, the strategy of excluding China from emerging market portfolios is rapidly gaining traction, with the launch of China-excluding equity funds already hitting a record annual high in 2023.

“The risks for China are different: LGFV, excess real estate, demographics, dependency ratio, regulatory volatility, geopolitical isolation,” said Gaurav Pantankar, chief investment officer at MercedCERA, which oversees about $1.1 billion of assets in the United States. “Investment opportunities in emerging markets exist in various areas.”

READ: ETF Investors Plow Money Into Non-Chinese Emerging Market Growth Engines

In the debt market, global investors took about $26 billion out of Chinese government bonds in 2023, investing a total of $62 billion in securities from the rest of emerging Asia, data compiled by Bloomberg show. About half of the $250-300 billion inflow that accompanied China’s inclusion in government bond indexes since 2019 has been wiped out, according to an analysis by JPMorgan Chase & Co.

Selling pressure on the yuan pushed the currency to 16-year lows against the dollar. The central bank’s accommodative stance, in contrast to the tightening of most major economies, is weakening the yuan and giving foreigners another reason to avoid local businesses.

In terms of corporate debt performance, China appears to have completely decoupled from the rest of Asia as the crisis in its real estate sector enters its fourth year. The market has become more locally managed, with around 85-90% owned by domestic investors.

All of this comes against a backdrop of a deterioration in the Chinese economy, which has caused a rethink of the market’s attractiveness as an investment destination. Wall Street banks, including Citigroup Inc. and JPMorgan, doubt Beijing’s 5% growth target for this year can be achieved.

However, the gargantuan size of China’s economy and its key role in the manufacturing supply chain mean the market remains a crucial part of many investors’ portfolios, albeit to a lesser extent.

One channel through which China can still impact international financial markets is through globally traded commodities. As the largest importer of energy, metals and food, its influence extends beyond stock portfolios, creating links to the global economy that are likely to prove more lasting. The nation’s world-leading position in clean energy, from solar panels to electric vehicles, is an example of expanding trade potential as the world seeks to meet its climate obligations.

“A slowing economy doesn’t happen everywhere,” said Karine Hirn, partner at East Capital Asset Management. “We find good value in sectors with structural growth prospects, such as new energy vehicles, consumer vehicles and parts of the renewable energy supply chain.”

The CSI 300 Index, a benchmark of onshore stocks, fell 0.7% on Friday as foreigners sold even after retail sales and industrial production data for August beat estimates. As weakness persists, global funds’ positioning in China has already reached its lowest level since October, when the country’s reopening from stringent anti-Covid measures triggered a strong rebound over the next three months. By contrast, allocation to US stocks – which have outperformed global stocks this year – is increasing.

For money managers like Xin-Yao Ng, investing in China requires a fine balance between wariness of structural challenges and seeking opportunities from individual stocks.

“I am structurally cautious about China’s long-term economic outlook and aware of the increased geopolitical risks,” said Ng, Asian equity investment manager at abrdn Asia Ltd. “But China is still a very broad and deep universe with many different opportunities. The overall valuation is very low now,” he said, adding that it is an “attractive stock picking market” for fundamental investors.

–With assistance from Hooyeon Kim, Marcus Wong, Pearl Liu, Wenjin Lv, and Jason Rogers.

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