As investors’ distrust of the Chinese market grows, large amounts of foreign capital are flowing out of the country. China’s market is posing potential risks for global investors.
Some factors, including the recent crackdown on firms, unpredictable policy, zero-covid strategy, might affect investors’ decision whether to invest in China.
Politics is the first factor as it sets a cautious tone for investing into China.
The scale and speed of sanctions imposed on Russia are forcing a rethink of Western attitudes toward China.
According to Simon Edelsten, Manager of Artemis Global, politics and governance factors should especially set a cautious tone for long-term commitment in China.
His team sold all of the investments in China to protect the shareholders’ rights.
They made such a decision after Beijing’s interventions in high-profile listings.
Simon added that the Ukraine invasion raises risks sharply. Therefore, their funds are likely to remain very lowly weighted in China for some years.
Brendan Ahern, Chief Investment Officer at Krane Funds Advisors, said that international investors have been “indiscriminately selling off Chinese stocks” over the past year.
According to Brendan, Beijing’s regulatory move is “an attack on the most respected and widely foreign-held companies.” His firm is swapping U.S.-listed Chinese stocks with those trading in Hong Kong to reduce risk.
Secondly, making money in China is becoming more challenging.
As reported by Bloomberg, the CSI 300 Index of stocks is down about 15% year-to-date. The risk-adjusted return is -2.1, the lowest point as measured by the Sharpe ratio.
Returns in China’s high-yield dollar credit market dipped in a decade in the fourth quarter of 2021.
China’s onshore credit stress was at level 3 in March, up from level 2 in February. Meanwhile, the offshore credit stress remained at level 6 in February and March.
The Wall Street Journal reported the largest withdrawal of more than $15 billion in foreign investment into Chinese government bonds in March. Investors also withdrew $7 billion from onshore Chinese stocks in the previous month.
Stephen Innes, managing partner at SPI Asset Management, told Bloomberg, “Markets are worried about China’s ties to Russia — it’s scaring investors and you can see that risk aversion playing out since the start of the invasion.”
Thirdly, the Chinese government’s pandemic control has a big negative impact on the domestic and international economy.
CNN cited Nomura Holdings that nearly 400 million people living in locked-down areas represent 40% of annual gross GDP.
Lu Ting, Nomura’s Chief China Economist, asked global investors not to underestimate the impact of the blockades on China’s economy.
In addition, Michael Hirson, Head of Eurasia Group’s China and Northeast Asia business, said, “The impact on China is major and the knock on effects on the global economy are quite significant.”
He claimed that there would be more volatility and economic and social disruption for at least the next six months.
Last, with the risk increment and reduction in returns, foreign will be more cautious about China’s market. Some international firms are exiting China.
As reported by the Association Press, Germany’s Frankfurt Airport Corp is selling 24.5% of its stake in Xi’an airport to a local buyer in March. The company will sell its stakes for 1.11 billion yuan ($174.4 million).
CEO Stefan Schute said that they had always considered the minority stake in Xi’an as the “starting point for expanding business in China”. However, he added, “this never materialized in Xi’an or at any other Chinese airport.”
In addition, outflows from Chinese stocks, bonds, and mutual funds accelerated after Russia’s invasion of Ukraine.
The dollar-denominated private equity funds operating in China raised just $1.4 billion, the lowest amount since the same period in 2018.
According to Bloomberg, investment professionals at a U.S. private equity fund in Hong Kong have not been as active in pursuing opportunities in China despite a much lower price.
Investor concerns include the difficulty of existing investments and the problems that could arise from a U.S. investment ban, or a hardening stance such as a consumer boycott of Chinese-made products.