Sign in Subscribe

Investor Confidence in China Shaken as Foreign Investment Declines

Investor Confidence in China Shaken as Foreign Investment Declines
Photo by Edward He / Unsplash

The Lede: Foreign investors pulled out of Chinese stocks in April, marking the first monthly outflow since the country reopened its borders in December after years of strict COVID-19 restrictions. This setback comes amidst escalating geopolitical tensions and growth concerns, as China struggles to restore investor confidence.

What we know:

  • Overseas investors used the exchange link program with Hong Kong to sell off a total of 4.6 billion yuan (equivalent to US$658 million) in April, marking the first monthly net sale since China lifted restrictions.
  • After April 18, the combined market capitalisation of stocks featured in the benchmark indices of the Shanghai and Shenzhen stock exchanges has dropped by approximately Rmb3.6tn ($519bn), the Financial Times reported. Meanwhile, the market value of China's top tech groups listed on the Nasdaq Golden Dragon index has decreased by over $31bn.
  • Profits for companies listed on the CSI 300 Index likely fell by 13% in the first quarter, which would mark the fourth consecutive quarterly decline.
  • The current month has witnessed a massive market capitalization wipeout of nearly US$400 billion in China, largely driven by concerns that the Biden administration may introduce new restrictions on American companies' investments in Chinese firms dealing with advanced technology such as AI and quantum computing, the South China Morning Post reported.

The background: China has implemented some of the most stringent measures to control the spread of the virus, leading to a significant decline in its GDP growth last year, reaching levels that have not been seen in five decades. Surpassing earlier estimates, China’s economy grew by 4.5% in the first quarter, but the rebound is mostly consumer-driven. Although retail sales saw an increase in growth, industrial production, property sector and investments remained slow during this period. Official figures reveal that China's gross domestic product (GDP) has grown by 4.5% in comparison to the same period last year. The boost in economic activity was largely due to increased household spending and factory activity, indicating a resurgence in consumer confidence and manufacturing output. Beijing has also recently eased its three-year-long crackdown on major technology companies and property developers.

Investors have been waiting for the release of these figures to gain insights into the strength of China's recovery following the government's pledge for a quick economic rebound since lifting virus containment measures. The trend of global fund managers purchasing Chinese stocks, which had continued for five months, including a record purchase of 141.23 billion yuan in January, has been reversed due to a sell-off in April.

Likely outcomes/Takeaway:

  • The pullout of foreign investment has been fueled by geopolitical risks and uncertainty on the sustainability of China’s economic recovery, as some analysts claim the rebound will slow down in the second quarter.
  • The trend will likely have significant implications for China's economy and its efforts to attract foreign investment, especially as it aims to continue growing and developing in the global economy. It indicates a potential loss of confidence in the Chinese market among foreign investors who had previously been actively investing in the country.
  • Investors' cautious approach towards China reflects the growing political discomfort in the West, especially in the U.S., regarding Beijing’s rising economic power and technological advancement. Multinational companies are restructuring their supply chains to reduce their dependence on China and seek for alternative manufacturing hubs, which has affected investors' perception of the risk-reward tradeoff for investing in China.

Quotables:

  • "As concerns heightened around geopolitics, Chinese equities were net sold for the first time in a month, driven by risk unwinds with long sales outpacing short covers,” Goldman Sachs.
  • “China’s economy is resilient and has good potential and vitality. Its long-term fundamentals remain unchanged” President Xi Jinping.

Good Reads:

Goldman Sachs loses taste for China’s cheese lollipops (The Financial Times)

Overseas investors ditch China stocks for first month since the end of zero-Covid policy as reopening trade fizzles out(The South China Morning Post)

China’s economy rebounds more than expected (Economist Intelligence)