Overseas investors shed a record $150bn in yuan-denominated assets in the first quarter of this year.
Taipei, Taiwan – For months, Singaporean investor Anndy Lian has been selling off Chinese stocks to reduce his portfolio’s exposure to the world’s second-largest economy.
Once a regular investor in Chinese tech companies, Lian now views China as an increasingly risky bet as the country’s autocratic turn under Xi Jinping and ongoing “zero COVID” lockdowns cast a cloud over the economy.
“I started gradually lowering my exposure since last year as that was when the downward trend became obvious, but I’ve increasingly sold off my holdings this year as things have gotten worse,” Lian told Al Jazeera,
“The instability is my biggest concern as an investor. The overall environment in China is uncertain right now, and it goes way beyond the financial sector.”
Lian is among a growing number of international investors who are pulling back from China after years of record inflows.
Overseas investors shed more than $150bn in China-based yuan-denominated assets in the first quarter of this year, the largest decline on record. Chinese bonds alone saw a $61bn sell-off between February and May. Roughly $300bn could exit the country this year, more than double last year’s outflow of $129bn, according to forecasts by the Washington-based Institute of International Finance.
The trend reflects an increasingly bearish economic outlook as investors weigh the risks of draconian COVID restrictions and sweeping crackdowns on private industry that have ensnared sectors ranging from tech to property and education.
China’s economy barely avoided contraction in the second quarter, expanding just 0.4 percent, a dramatic decline from 4.8 percent growth during the first quarter.
Lian said the effects of last year’s crackdown on the tech sector, which decimated the stock prices of major players such as Alibaba, Tencent and Didi, are still being felt.
In one of the most prominent episodes of China’s “techlash”, ride-hailing app Didi lost 80 percent of its market cap – more than $60bn in value – within a year of going public after Chinese regulators accused the firm of violating data security rules. Facing mounting scrutiny at home, Didi delisted itself from the New York Stock Exchange last month.
“Chinese tech companies may be great performers, but they need to be in the best possible environment to achieve the best returns,” Lian said.
“If you look at the tech crackdown last year, and how the value of a whole company like Didi can be virtually wiped out, it makes you nervous.”
Other investors, though, see room to adapt to Beijing’s tightening grip on the economy.
“Investors understand what the goals of the tech crackdown were, taking aim at inequality and related social issues, so I think that makes the sector still very investible,” Ker Gibbs, former president of AmCham Shanghai and a veteran China investor, told Al Jazeera.
“There’s always policy risk in China, and regulation moves much faster than in the US. That is something people must be accustomed to.”
Nonetheless, Gibbs said the lingering uncertainty around the Chinese economy has been a significant concern.
“For me, it’s all about the uncertainty of the lockdowns and zero-COVID and not knowing when it will all end,” he said. “Investors just can’t see where it’s headed. People don’t know what environment they’re in now.”
Beijing has given mixed signals to investors about what to expect.
While Chinese officials have promised to tweak pandemic restrictions for the sake of the economy, Xi has repeatedly ruled out shifting from “zero COVID” to living with the virus.
China has opened up new offerings of asset classes to foreign investors but also stepped up supervision of institutional investors in the country.
This month, authorities announced the launch of Swap Connect, a mechanism to allow overseas investors to participate in mainland China’s financial derivatives market.
Meanwhile, more than 80 Shanghai- and Shenzen-listed exchange-traded funds will be made available to investors in Hong Kong. Beijing has also announced it will substantially raise its currency swap with the territory to new levels to provide extra liquidity for the offshore yuan.
“There is a dramatic opening of China’s securities, insurance broking, and wealth management markets going on,” Duncan Clark, founder of Beijing-based investment advisory firm BDA, told Al Jazeera.
“The transition isn’t going to be easy, though, from N-shares [shares of Chinese companies listed in New York] to onshore Chinese listings or even Hong Kong listings. Investor confidence is shaken and Chinese issuers can’t meet face to face,” Clark added.
Lian said Swap Connect is unlikely to turn the tide of investors exiting the Chinese market.
“On the one hand, it may help attract new investors to China, but I doubt it will do much to retain those who are already moving away, and that is a bigger issue,” he said.
“It will take time to turn the tide. There will probably be a two or three-year trial phase until they get the settings right. Another question investors will ask is ‘How do we exit?’ Can they be assured they can withdraw their stock when they wish? We will have to see what the final details are when it comes out.”
Even as Beijing courts more foreign investors, it is also seeking to monitor them more closely. Last month, the China Securities Regulatory Commission formally issued guidelines mandating the establishment of communist party cells within global hedge funds that operate in China.
“I think it will be problematic, but mostly because of the optics back at headquarters in the US,” Gibbs said, noting that many hedge fund managers specifically asked him about the measures at a recent conference he attended in San Francisco.
“Those of us who operate in China long term understand the role the party plays and the importance of aligning with their goals for society. Actually, the conversations they have with you are often about issues of social compliance, like labour standards or equality, which is not necessarily a bad thing,” Gibbs added, describing the scrutiny as comparable to “Chinese-style ESG [Environmental, social and governance]”.
“But in the US, we see the CCP [Chinese Communist Party] and think of the whole party apparatus, and so the idea of a party official in the boardroom sounds much scarier from an American perspective.”
Some observers say that the perception gap between China and global markets has only widened since the pandemic.
“Many in China don’t realise how dramatically perceptions have changed overseas about their country,” Clark said. “The wall of zero-COVID and the Great Firewall works both ways: they keep capital out and information skewed on both sides. China will have to hustle much more to raise funds going forward. The penny hasn’t dropped yet.”
Beijing may need to work harder at retaining local capital as well.
“We need to remember this is not just about foreign capital and foreigners leaving China. It impacts everyone,” Gibbs said. “Many Chinese investors are heading out, too, to places like Singapore.”
Lian said he has noticed an increasing number of Chinese tech entrepreneurs setting up in Singapore, especially those working on blockchain-based applications.
“It depends a lot on their business structure, but I believe those who can move will continue to do so,” he said.
“So you have these startups that were founded in China, the largest market of all, by Chinese entrepreneurs, and now they are here in Singapore, and now they are bringing their capital with them. To me, that says it all.”
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