Global investors exit China as economic confidence wanes
Global investors are withdrawing funds from China en masse. The capital outflow reflects rapidly decreasing confidence in the government. In July, the government assured that it would tackle the issues of weak consumption, high youth unemployment, and concerns in the real estate market, according to the Financial Times.
Foreign investors have almost entirely turned away from Chinese stocks. Analysts say that the sell-off gained momentum in August and is likely to accelerate following an unexpected cut in the benchmark interest rate this week.
The value of withdrawn funds has reached, according to the Financial Times, 54 billion yuan (approximately $10.7 billion CAD). The outflow occurred gradually and encompasses the period from July last year. Foreign investments in Chinese bonds have fallen even further—by about CAD 7.2 billion.
"The measures taken so far appear to have disappointed the market," said Mohammed Apabhai, head of Asian trading strategy at Citigroup, in a conversation with the British daily. "There is increasing frustration and concern from investors about the lack of any solid policy action," he added.
Challenges to Beijing’s narrative are becoming more serious. The authorities assured that the slowdown caused by the COVID-19 pandemic was a thing of the past. However, many Chinese industrial giants have yet to regain their footing. Recent reports of further payment delays by Country Garden, one of the few private developers avoiding insolvency, highlighted Beijing's reluctance to rescue struggling companies.
Deepening pessimism in the markets
Macroeconomic data also relentlessly exposes the weakness of the Chinese economy. Consumer spending readings continue to disappoint, and the official youth unemployment rate has stopped being published—a few weeks after reaching a record high.
Wei Li, a portfolio manager at BNP Paribas Asset Management argues that the current market of Chinese securities is largely driven by sentiment.
Li added that the widening yield gap between U.S. and Chinese bonds prompted further selling of yuan-denominated debt. This gap, which has widened sharply due to American interest rates rising while China cut rates, reached a 16-year high this week.
Pessimism becomes entrenched
Pessimism regarding China is becoming entrenched. In the latest survey of Asian fund managers conducted by Bank of America at the beginning of August, 84 percent of respondents stated that Chinese stocks are in the midst of structural devaluation—in other words, the permanent shrinking of the overall proportion of investments allocated to this country’s stocks.
Further sell-offs by foreign investors are likely to affect the yuan exchange rate as well. After the rise in July, supported by direct and indirect state support, the currency has reversed course. On Thursday, the yuan weakened below 7.3 against the dollar and was close to falling below 15-year lows reached in October last year during devastating COVID-19 lockdowns across China.
