Even allowing for China’s messy cyclical ebb and flow and global political tensions of the day, the exit of long-term foreign capital from the world’s second-biggest economy is startling.
China’s spluttering post-Covid recovery this year and the depth of its unfolding property bust has reasonably seen a dramatic underperformance of Chinese markets – compounded by geopolitical posturing that sows long-term doubts about domestic regulation and the country’s strategic orientation.
Tactical traders desperate to retain a presence in the giant Chinese economy and hungry for “cheap” valuations in a relatively expensive global marketplace continue to tout its attractions and predict turning points.
But the exit of longer-term investors paints a far more worrying picture and suggests deeper-seated concerns.
A survey by the Official Monetary and Financial Institutions Forum of 22 public pension and sovereign wealth funds managing $4.3 trillion in assets showed not one had a positive outlook for China’s economy or saw higher relative returns there. Three-quarters of them cited regulation and geopolitics as chief deterrents.
Preferring to concentrate on inflation-proofing portfolios over the next two years, mainly via infrastructure investments or “green” assets, almost a third of these gigantic funds plan to increase allocations to Europe and North America. They showed little or no appetite to boost emerging market holdings at large.
Even within existing emerging market exposure, India was now identified as the most favoured play. And Brazil was seen on par with China, where 80% said their only exposure was now solely due to its inclusion in benchmark indexes.
With an otherwise huge focus on green investments and the energy transition, that aversion toward emerging markets may seem at odds with climate concerns.
But the extent of the political and economic jitters merely mirrors other signs of a long-term China exit well beyond portfolio flows.
Earlier this month, China recorded its first-ever quarterly deficit in “bricks and mortar” foreign direct investment (FDI).
Direct investment liabilities –
a broad measure of FDI that includes foreign companies’ retained earnings in China – were in deficit to the tune of $11.8 billion in the July-September period.
That was the first quarterly shortfall since China’s foreign exchange regulator began compiling the data in 1998 and likely was linked to the impact of “de-risking” by Western countries from China, as well as China’s interest rate discount.
And the number reflects comments earlier this year from U.S. Commerce Secretary Gina Raimondo, who in a tense trip to Beijing claimed many U.S. businesses now saw China as “uninvestable”.
‘MORE THAN WORDS’
Nicholas Lardy, a non-resident senior fellow at the Peterson Institute for International Economics in Washington, points out the data imply foreign firms in China are not only declining to reinvest earnings but – for the first time – are large net sellers of existing investments to Chinese companies and are repatriating the funds.
Those outflows, estimates Lardy, exceeded $100 billion in the first three quarters of 2023.
Alongside the global tensions, regulatory crackdowns and cross-border investment curbs that affected new equity listings and mergers and acquisitions, Lardy points to Beijing’s closure of foreign consultancy and due diligence firms critical to foreigners’ evaluation of potential new investments.
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