Foreign cash fleeing China adds insult to injury

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An investor looks at an electronic board showing stock information at a brokerage house in Shanghai, China July 6, 2018. REUTERS/Aly Song - RC1CDAB1A6B0

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HONG KONG, March 28 (Reuters Breakingviews) - Beijing’s close ties with Moscow may be rattling foreign investors. A study by the Institute of International Finance found that China has been experiencing “unprecedented” capital flight since Russia invaded Ukraine. The study found no similar outflows from other emerging markets, adding insult to injury.

China’s technocrats have only started to make progress attracting global portfolio managers long wary of the People’s Republic. While Chinese shares comprise 9% of global equity values, mainland-listed companies constituted only 2.7% of international investors’ fund allocations in 2020. Strict capital controls, unpredictable policymaking and a shareholder base dominated by day-traders put off serious financial institutions; hedge fund manager Jim Chanos once referred to Chinese markets as a “roach motel” - easy to get money in, hard to get it out.

It is now easier for money managers to repatriate funds at will, and embarrassing distortions – like arbitrary trading halts – have been fully or mostly closed. Passive index providers started to include onshore Chinese shares and bonds in their benchmarks, and international funds began steadily upping their China exposure, disregarding both the trade war and the pandemic.

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The Ukraine invasion may be giving them reason for pause. Investors were already traumatized by two years of rambling crackdowns on listed companies. read more War is pushing up commodity prices, and if Beijing forces its local companies to help Russian leader Vladimir Putin evade sanctions, U.S. retaliation seems imminent. Chinese bourses are the world’s worst-performing outside Russia, with IIF data showing daily average outflows touching nearly $500 million at one point.

An exodus of pension funds and insurers who buy and hold assets for long periods of time will be painful. Although small in absolute terms, their presence helps anchor market valuations and reassure local traders, who tend to distrust local analysts and ratings agencies. State media presents global investor enthusiasm for China as endorsing its authoritarian government.

If the capital flight is sustained, it could aggravate the current selloff at a politically sensitive moment; President Xi Jinping is set to be elected to a third term later in the year. For reformers, it marks a setback in Beijing’s campaign to woo institutional money.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

CONTEXT NEWS

- A study by the Institute of International Finance, the industry association of the global financial services industry, published on March 24 found that China has been experiencing “unprecedented” capital outflows since Russia invaded Ukraine.

- “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,” the report authors wrote.

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Editing by Robyn Mak and Katrina Hamlin

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