Investor Redemptions from China Funds Hit Pandemic High
Global investors have turned bearish on China as they carefully navigate the changing global dynamics induced by the Ukraine-Russia conflict.
Global investors’ confidence in China is at the lowest since the start of 2021.
The bearish mood can be clearly seen in the data about redemptions from Chinese stock and bond funds. In the third week of March, global investors pulled out more than $3 billion from Chinese equities, the highest since the first week of 2021, according to the latest report from Emerging Portfolio Fund Research, which is owned by Informa and tracks fund flows and allocations. China bond funds saw a weekly outflow of more than $1 billion for the first time, EPFR data showed.
The sizable capital outflow is in sharp contrast to the bullish consensus assessment of Chinese securities not long ago. From September to the first week of March, over $50 billion was pumped into EPFR-tracked China equity funds and $11 billion into Greater China fund groups, the report said.
One of the most important factors driving investors out of the Chinese market is “China’s refusal to condemn Russia’s invasion of Ukraine,” according to EPFR. China is one of the few major economies that declined to take a clear stance against Russia, which makes it a target for sanctions from the West. If imposed, such sanctions could add to the suffering of Chinese companies listed in the U.S., which already face the risk of delisting after failing to meet audit requirements in early March.
“There is a rising fear that the ongoing Western sanctions against the Kremlin may be extended to Beijing for its ‘implicit’ support for Russia’s invasion of Ukraine,” according to Marko Papic, chief strategist at the Clocktower Group. “As such, investing in a country that sides with an aggressor is not only morally unacceptable, but also faces tremendous investment risk.”
But Papic doubts the ongoing Russia-Ukraine conflict would drive China closer to its northern neighbor. “There is compelling evidence suggesting that Beijing has been deceived by Moscow and is now angry at its reckless decision making,” he said. China was unprepared for higher energy prices induced by the war and did not warn Chinese citizens to leave Ukraine before the invasion took place, which were signs that Chinese decision-makers “were caught unaware by the scale of the attack,” Papic told II.
Nevertheless, global investors have been exiting the Chinese markets as they struggle to walk a fine line in the current geopolitical situation. The MSCI China Price Index dropped 21.6 percent in February, hitting the lowest point since March 2020, according to data from II’s sister company BCA Research. EPFR also found that China funds were “the worst performer year-to-date among the major Asia ex-Japan fund groups.”
The massive selloff of Chinese stocks was due in part to the fact that “Chinese investable stocks typically perform poorly both in absolute terms as well as relative to global equities during periods of rising geopolitical risk,” according to Jing Sima, China strategist at BCA. China also faces uncertainties over its domestic economic fundamentals and fresh Covid outbreaks, both of which pose challenges to corporate earnings, she added.