Negative economic sentiment haunts China’s portfolio inflows, FDI to contract – South China Morning Post

Waning interest from global investors is likely to drive more funds away from China, after its equities suffered their largest monthly outflow in August, according to various data points and forecasts.

A combination of the coronavirus pandemic, slowing economic growth, regulatory uncertainty and strained international relations caused a slump in foreign direct investment (FDI) inflows to China, according to a report by The Economist Intelligence Unit (EIU) on Thursday.

Direct investment liabilities – a gauge of foreign direct investment in China – had slumped to just US$4.9 billion in the second quarter, the State Administration of Foreign Exchange said last month, representing a decline of 87 per cent year-on-year.

“Overall, China’s share of FDI inflows among emerging markets is forecast to fall to less than 30 per cent by 2027, compared with a historic range of 40 to 50 per cent,” said the EIU, adding that aggregate FDI flows to Southeast Asian economies, led by Indonesia and Vietnam, are forecast to exceed China’s from 2024.

Overseas investors also pulled around US$15.5 billion from China’s emerging market portfolios in August, the largest monthly outflow since September last year, the Institute of International Finance (IIF) said on Wednesday, driven by large outflows from Chinese stocks.

Chinese equities suffered an outflow of around US$15 billion in August, marking the largest monthly outflow on record for Chinese stocks, highlighting the “negative sentiment over the country’s economic challenges, amid scepticism over measures to stem the economic slowdown”, the US-based association for the global financial services industry said.

Chinese debt also saw outflows of US$5.1 billion in August, compared to a preliminary outflow of US$10.2 billion in July.

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A survey of fund managers by Bank of America at the start of September found that growth expectations for China have plummeted.

None of the respondents expected a stronger economy in September, compared to 78 per cent who had expected a positive outlook in February.

China’s real estate market was ranked as the most likely source of a systemic credit event, ahead of the commercial real estate sectors in the United States and Europe, according to the survey findings released on Tuesday.

Some 21 per cent of respondents said shorting Chinese equities, referring to borrowing shares and selling them over speculation that the price would fall, was among the most crowded trades in the financial markets.

The global survey by the US bank had 222 participants with a total of US$616 billion worth of assets under management, while 141 participants with US$276 billion worth of assets under management responded to the regional survey.