Don’t know when I’ll be back again
China has a growing foreign investment problem.
- And by growing we mean shrinking.
In August, the capital and financial accounts registered an RMB 350 billion outflow – the largest monthly drop since 2015 (SAFE).
That included:
- An RMB 210 billion securities outflow
- An RMB 120 billion direct investment deficit
There are a bunch of cyclical issues driving the exodus:
- Chinese stocks – as proxied by the flagship CSI 300 index – are down over 11% from their late January highs.
- 10-year government bonds are yielding a paltry 2.68%, versus 4.32% for US Treasuries.
- A survey released Tuesday by the American Chamber of Commerce in Shanghai showed American firms’ overall outlook on China is at record lows (Bloomberg 1).
But there are also structural issues limiting capital inflow:
- The US government has stepped up efforts to limit direct investment into China’s tech sector – and there are growing calls to expand restrictions.
- Spooked by regulatory and geopolitical risks, foreign investment managers like pension funds and ETFs, have been reducing China exposure, evidenced by record numbers of new ex-China emerging markets funds (Bloomberg 2).
Get smart: We expect a rotation back into Chinese assets as the economy improves and global interest rates decrease.
- But structural challenges will put a limit on any rebound, and Beijing will have to offer more than promises and meetings with foreign investors if it wants to counteract these trends.
Get smarter: If traditional Western sources of foreign capital are permanently reduced, we expect China to increasingly search for alternative sources of investment.