The pullback parallels a slump for equities this year that rattled overseas asset managers and other investors forced to play by China’s rules for foreign capital.
Lockdowns, plunging property values and weak consumer demand are among the unnerving developments chipping away at global investor confidence in China’s equity and bond markets.
So-called northbound streams of foreign capital into Chinese markets for bonds, Shanghai A-shares and Shenzhen tech stocks have recently reversed course in what analysts call a shift in global investor sentiment.
Economist Jonathan Fortun points to a “possible realignment in emerging market [EM] capital flows away from China, even as the flows to the rest of EM remained relatively robust,” in a Nov. 8 report from the Institute of International Finance.
The pullback parallels a slump for equities this year that rattled overseas asset managers and other investors forced to play by China’s rules for foreign capital. China limits foreign participation in equities and debt trading to Hong Kong-based schemes that funnel funds northward to Shanghai and Shenzhen markets—and southward when money exits.
The Shanghai and Shenzhen composite indexes fell 20% and 29%, respectively, between Jan. 1 and Oct. 30, as economic growth sputtered under the government’s zero Covid-19 policy and other constraints.
Policy moves by the People’s Bank of China (PBoC) are expected. According to Mary Xia, China rates strategist at UBS Securities, the PBoC “will likely maintain an accommodative policy tone next year in order to support the real economy in terms of keeping financing costs low.”
The Ministry of Commerce on Nov. 17 trumpeted that capital from FDI, including traders, rose to 1.09 trillion yuan (about $152 billion) between January and October. That’s up 14.4% year on year.
For now, the money is southbound. Fortun noted that China equities shed $7.6 billion and debt products lost $1.2 billion in foreign capital in October, even as EM securities worldwide attracted $9.2 billion.
“China in the past decade has attracted persistent and strong capital inflows at the expense of the rest of EM,” Fortun says. Asset managers, he adds, see the shift as “part of a more structural realignment … with participants looking at China in a new light.”