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Russia’s invasion of Ukraine has created uncertainty for global financial markets, but China has become the unlikely victim as foreign investors are pulling out money hurriedly. While Chinese state media has been quick to attribute the outflows to a hawkish US Federal Reserve and volatility in global markets, market experts believe there is something more at play.
The state of Chinese financial markets
Chinese stocks have come under pressure since the beginning of 2022, with a tech selloff wiping off billions in investor wealth, while fears of US delisting and the announcement of fresh lockdowns have spooked investors.
A recent study by the Institute of International Finance (IIF) said it is seeing ‘unprecedented’ capital outflows from China. While it acknowledged that the Russia-Ukraine war may not be entirely to blame, it has caused investors to ‘look at China in a new light’. IIF adds that while China is seeing foreign fund outflows, emerging markets are attracting foreign money.
China saw net outflows of 59 bn yuan ($9.5 bn) through the northbound Stock Connect Programme with Hong Kong in the first 21 days of March, a Macquarie Capital report said. Meanwhile, China Central Depository & Clearing said foreign investment in Chinese onshore bonds fell by 67 bn yuan ($10.5 bn) in February.
“It’s likely that the outflows [out of bonds] would be even larger in March,” Macquarie Capital says in its report.
The Hang Seng Tech index, which tracks China’s biggest tech groups listed in Hong Kong, is down over 46% in the past year, as per data from Investing.com. The NASDAQ Golden Dragon China index, comprised of Chinese companies whose common stock is publicly traded in the United States, has fallen over 52% during the same period.
Why are investors pulling out of China?
Chinese stocks listed in the US are likely to be kicked off the New York Stock Exchange and the Nasdaq if they fail to file audit reports with US regulators. This has become a major point of contention between regulators from the US and China and could result in the potential delisting of over 200 Chinese companies.
The declines seen on the NASDAQ Golden Dragon China index shows the investor fear over the valuation of these companies headed for a delisting.
Another concern is the worsening Covid-19 crisis in China, which has caused shutdowns of major cities. Additionally, there has been a drastic drop in China’s holding of foreign exchange, based on data from the People’s Bank of China (PBOC) and the IMF.
The last straw for China’s market troubles was the Russian invasion of Ukraine, which IIF Chief economist Robin Brooks says was a surprise and has forced investors to look at China in a different light.
“We believe China’s ties to Russia have created a risk of geopolitical stigma, including potential sanctions,” Blackrock said in a report.
Investors are worried over China’s stance on the Russia-Ukraine conflict. US National Security Advisor Jake Sullivan previously said that “we will ensure that neither China, nor anyone else, can compensate Russia” for its losses. However, China has not clarified its position, which may pose a significant risk for global investors.
However, Deloitte analyst Ira Kalish seems quite optimistic and said, “Given that China’s economic relationship with Russia is relatively modest and that China’s economic relationship with Europe and North America is of almost existential importance, it is not surprising that China is unwilling to be more economically supportive of Russia.”
Jim McCafferty, the joint head of Asia-Pacific equity research at Nomura, told The Wall Street Journal that money managers focused on emerging markets had been told by end-investors to exit Russia as well as China, given the political similarities between the two countries.
Meanwhile, another factor that is causing concern is a potentially renewed Chinese offensive against Taiwan in light of the Ukraine crisis. Foreign investors have dumped Taiwanese shares worth about 480 billion Taiwanese dollars ($16.9 billion), reports CNN.
“While capital outflows are comparable to those at the height of the COVID-19 pandemic, the nature of the challenges facing the Chinese market today is quite different… it is difficult to say whether the current magnitude of capital outflow has fully reflected the collapse of confidence and has reached an inflection point,” said Hao Hong, Managing Director and Chief Strategist of BOCOM International.
