(Bloomberg) — A massive withdrawal of funds from Chinese stocks and bonds is reducing the market’s power in global portfolios and accelerating its decoupling from the rest of the world.
According to Bloomberg calculations based on the latest central bank data, foreign holdings of the country’s stocks and debt have increased by about 1.37 trillion yuan ($188 billion) from a peak in December 2021 to the end of June this year 17% down Bank. That was before onshore stocks saw a record $12 billion outflow in August alone.
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The exodus coincides with China’s economic downturn due to years of Covid restrictions, a housing market crisis and ongoing tensions with the West – concerns that have helped make the “avoid China” theme one of investors’ top beliefs in the Bank of China’s latest survey America became . Foreign fund participation in the Hong Kong stock market has fallen by more than a third since the end of 2020.
“Foreigners are simply throwing in the towel,” said Zhikai Chen, head of Asia and global EM equities at BNP Paribas Asset Management. There are concerns about the housing market and a slowdown in consumer spending, he said. “Disappointment on these fronts has led many foreign investors to reconsider their commitment.”
China’s weakness used to be seen as a drag on the rest of the world, particularly the emerging market group, but this year that is clearly not the case. With a decline of about 7% in 2023, the MSCI China Index is heading for a third straight year of losses, which will mark its longest losing streak in over two decades. The broader MSCI Emerging Markets index rose 3% as investors look for returns elsewhere such as India and parts of Latin America.
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The divergence comes as China’s push to achieve self-sufficiency across supply chains and deteriorating relations with the US have made other markets less vulnerable to its ebbs and flows. In addition to economic decoupling, another reason is the artificial intelligence boom, which has boosted markets from the United States to Taiwan but provided less of a boost to mainland stocks. China’s EM weighting has fallen to around 27% from over 30% at the end of 2021.
At the same time, the strategy of excluding China from emerging market portfolios is quickly gaining traction, with launches of China-excluding equity funds reaching a record annual high as early as 2023.
“China poses numerous risks – LGFV, housing inventory overhang, demographics, dependency ratio, regulatory volatility, geopolitical isolation,” said Gaurav Pantankar, chief investment officer at MercedCERA, which manages about $1.1 billion in assets in the US . “Investment opportunities in emerging markets exist in various areas.”
READ: ETF investors are putting money into emerging market growth engines outside China
In the debt market, global investors withdrew about $26 billion from Chinese government bonds in 2023 while pouring a total of $62 billion into debt from the rest of emerging Asia, data compiled by Bloomberg show. About half of the $250 billion to $300 billion inflows that came with China’s inclusion in government bond indexes since 2019 have been wiped out, according to an analysis by JPMorgan Chase & Co.
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Selling pressure on the yuan has pushed the currency to its lowest level in 16 years against the dollar. The central bank’s loose monetary stance, in contrast to tightening in most major economies, is weakening the yuan and giving foreigners another reason to avoid local assets.
When it comes to corporate debt trends, China appears to have completely decoupled from the rest of Asia as the real estate crisis enters its fourth year. The market is more locally focused and is around 85-90% owned by domestic investors.
All of this comes against the backdrop of China’s deteriorating economy, which has led to a rethinking of the market’s attractiveness as an investment destination. Wall Street banks such as Citigroup Inc. and JPMorgan doubt whether Beijing’s 5% growth target for this year can be achieved.
But the gigantic size of the Chinese economy and its key role in the manufacturing supply chain mean that the market will remain an important part of many investors’ portfolios, albeit to a lesser extent.
One channel through which China can still influence international financial markets is globally traded raw materials. As the largest importer of energy, metals and food, its influence extends beyond securities portfolios and creates links to the global economy that are likely to prove more lasting. The country’s global leadership in clean energy, from solar panels to electric vehicles, is an example of expanded trade potential as the world seeks to meet its climate commitments.
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“An economy that slows down doesn’t slow down everywhere,” said Karine Hirn, partner at East Capital Asset Management. “We find good value in sectors with structural growth prospects such as: B. New energy vehicles, consumer vehicles and parts of the renewable energy supply chain.”
The CSI 300 index, a benchmark for onshore stocks, fell 0.7% on Friday as foreigners sold, although retail sales and industrial production data for August beat estimates. As weakness continues, global funds’ positioning in China has already hit its lowest level since October, when the country’s reopening following strict Covid restrictions sparked a significant rebound over the next three months. In contrast, the allocation to US stocks, which have outperformed their global peers this year, is increasing.
For money managers like Xin-Yao Ng, investing in China requires a subtle balance between wariness of structural challenges and looking for opportunities in individual stocks.
“I am structurally cautious about China’s long-term economic prospects and aware of the geopolitical risks,” said Ng, Asian equity investment manager at abrdn Asia Ltd. “But China is still a very wide and deep universe.” many different possibilities. “The overall valuation is very low right now,” he said, adding that it is an “interesting stock-picking market” for fundamental investors.
– With support from Hooyeon Kim, Marcus Wong, Pearl Liu, Wenjin Lv and Jason Rogers.
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