| 2 October 2023, Monday |

China’s decoupling speeds up as it loses about $200 billion from its markets

According to a report by the Times of India, a substantial capital exodus from Chinese stocks and bonds is diminishing the market’s impact on global portfolios and expediting its separation from the rest of the world.
According to Bloomberg’s statistics, calculated from the central bank’s data, foreign ownership of the country’s equity and debt have decreased by around 1.37 trillion yuan ($188 billion), or 17 per cent, from a peak to the end of June this year.

The departure occurs at the same time as China’s economic downturn brought on by years of Covid-19 restrictions, a housing market crisis, and ongoing hostilities with the West – worries that have contributed to making the “avoid China” theme one of the largest convictions among investors in Bank of America’s most recent survey. Since the end of 2020, fewer foreign funds have been invested in the Hong Kong stock market, which accounts for a decrease of more than a third.
“Foreigners are just throwing in the towel,” the Times of India quoted Zhikai Chen, the head of Asia and global EM equities at BNP Paribas Asset Management. According to him, there are concerns about the property market and sluggish consumer spending. He said, “Disappointment on those fronts has led to a lot of foreign investors rethinking their exposure.”

Prior to this year, it was believed that China’s weakening would negatively affect the rest of the world, especially the emerging-markets group. The MSCI China Index is forecast to be down around 7 per cent in 2023, beginning a three-year losing streak that would be its longest in more than 20 years. As investors seek gains in other countries like India and other regions of Latin America, the larger MSCI Emerging Markets Index has increased by 3 per cent.

The disparity arises from China’s efforts to become self-sufficient in all supply chains and the deterioration of relations with the US, which have rendered other markets less vulnerable to its ups and downs. The artificial intelligence boom, which has helped markets from the US to Taiwan while providing mainland shares less of a boost, is another factor in addition to the economic decoupling. From over 30 per cent at the end of 2021, China’s weighting in the EM gauge has decreased to about 27 per cent presently.

The introduction of equity funds that exclude China already reached a new yearly high in 2023, indicating that a strategy to exclude China from emerging-market portfolios is quickly gaining acceptance.

The LGFV, housing stock overhang, demography, dependence ratio, regulatory instability, and geopolitical isolation are just a few of the dangers associated with China, Times of India cited Gaurav Pantankar, chief investment officer of MercedCERA, which manages around $1.1 billion in US assets.

According to data collated by Bloomberg, international investors have removed around $26 billion from Chinese government bonds in the debt market in 2023 while investing a total of $62 billion into notes from the rest of emerging Asia. According to a JPMorgan Chase & Co. research, over half of the $250 billion to $300 billion inflow that came along with China’s membership in government bond indexes since 2019 has been lost.

The yuan’s value against the dollar has reached a 16-year low due to selling pressure. The yuan is depreciating as a result of the central bank’s loose monetary policy, which is in contrast to the tightening in most major economies and giving foreigners another reason to avoid local assets.

As a crisis in its real estate industry enters its fourth year, China looks to have entirely decoupled from the rest of Asia in terms of corporate debt performance. With domestic investors owning roughly 85–90 per cent of the market, it is now more regionally concentrated.

All of this occurs against the backdrop of China’s faltering economy, which has led many to re-evaluate the market’s appeal as a location for investments. Citigroup Inc. and JPMorgan are two Wall Street banks that have doubts surrounding Beijing’s 5 per cent growth ambition.

  • Wions