Bloomberg Market Specialists Ruihao Chang, Xinyi Shen and Balkis Ammal contributed to this article. The original version appeared first on the Bloomberg Terminal.
Background
Concerns about China already included weakened growth prospects and Covid lockdowns. We can now add fears of continued capital flight to the list. According to the Institute of International Finance (IIF), investors have pulled money out of the country on an “unprecedented” scale in the weeks following the Russian invasion of Ukraine, even as other emerging markets held steady.
“Outflows from China on the scale and intensity we are seeing are unprecedented, especially since we are not seeing similar outflows from the rest of emerging markets,” IIF chief economist Robin Brooks and his colleagues wrote in an IIF report. “The timing of outflows – which built after Russia’s invasion of Ukraine – suggests foreign investors may be looking at China in a new light, though it is premature to draw any definitive conclusions in this regard.”
Many fund managers have been avoiding Chinese stocks due to the close diplomatic relationship between Russia and China and concerns over continued “Covid Zero” lockdowns. Factory activity in China fell in March to the worst level since the pandemic’s onset. Lockdowns will only worsen the economy’s prospects and jeopardize supply chains already strained by supply shortages and shipping delays. Morgan Stanley cut China’s 2022 growth forecast to 4.6% from 5.1%.
The issue
The surge in outflows from China exchange-traded funds in the month since Russia’s invasion of Ukraine has pared 2022’s net inflows, and funds investing in Chinese equities have taken a hit. Exchange-traded products slid 7.3% over the last month, while funds investing in Chinese equities dropped 5.7%, marking the worst losses in Asia.
A Bloomberg examination of the economic growth forecast for 2022 comes out to 5%, below the government’s 5.5% target. A look into options market pricing showed extreme bets against the yuan are rising while those against the dollar have fallen. Noting the “complexity and uncertainty of domestic and foreign environments have intensified,” officials in China have signaled that monetary policy tools to stabilize the economy may be on the horizon.
Tracking
Bloomberg functions showed funds investing in Chinese equities and exchange-traded products declined sharply as China suffered the worst losses in Asia.
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