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China Investment Exodus: The Tide of International Capital Turns as Risks Mount

The recent deceleration of China’s economic momentum has not just disappointed global investors but has resulted in a substantial retreat from the Chinese market over the last two years. This trend is highlighted by the fact that international fund managers have offloaded a whopping net total of $148 billion in Chinese bonds since the start of 2022.

The catchphrase of the hour, “de-risking” from China, is gaining traction in the investing community. This comes amid escalating geopolitical pressures and a decelerating post-pandemic economic recovery in the country. Additionally, investor sentiment has been swayed by the unpredictable policy shifts under the leadership of Chinese President Xi Jinping, as well as the escalating tensions between the US and China.

In the world of equity investments, Chinese stocks have been hit hard, particularly on the New York and Hong Kong exchanges. Various independent studies support this trend, indicating an increased pace at which foreign investors are divesting Chinese stocks. Moreover, a former IMF official has made the ominous prediction of a “lost decade” for the Chinese economy.

This alteration in investor outlook underscores the importance of de-risking in the current climate. However, it’s not just about diplomatic manoeuvring. The move away from China is, at its core, a financial decision, driven by concerns about the country’s economic future.

An array of significant economic challenges fuel these concerns. Among them, the feeble recovery from zero-COVID policies, an ageing workforce, lacklustre productivity, growing wealth inequality, and an overwhelming property crisis.

Of course, China’s dependence on foreign capital isn’t as intense as it was a generation ago. Still, the caution shown by investors could have long-term reverberations on its economy.

Fund managers are growing increasingly apprehensive about Beijing’s regulatory clampdown, which is affecting a range of companies, including Western firms. The simple truth is that the risk quotient associated with Chinese investments has skyrocketed in recent years, and the rewards are struggling to keep pace.

A result of this trend is a shift in investment capital towards other markets, such as India. Even large institutions are holding back on buying Chinese assets and are looking to diversify their portfolios elsewhere.

Simultaneously, the US is implementing strategies to curtail China’s capacity to develop sensitive technologies, while China itself is restricting companies from launching offshore Initial Public Offerings (IPOs).

Despite China’s attempts to lure back overseas investment, the flow of foreign capital appears set for a further decline. US restrictions on the horizon coupled with a drastic 76% fall in American-led private equity investments in China last year paint a stark picture.

Couple these with the Biden administration’s restrictions on selling advanced semiconductors and cutting-edge chip-making gear to China, and the signal to investors is loud and clear: Investing in China will inevitably involve greater risk. Consequently, the trend towards de-risking appears likely to become the new norm.