SINGAPORE(Asia Nikkei) - Investors are withdrawing funds from Chinese stocks due to growing concern about the prospects for the world’s second-largest economy. If risk aversion spreads among global investors in the wake of a market downturn in China, it could lead to a softening of equity markets around the world.
A total of around $3.7 billion was pulled out of Chinese stocks in the first 14 days of August, according to data released daily by the Institute of International Finance. This was the second-largest exodus of capital from the country, behind the net withdrawal of $7.9 billion in October 2022, when China’s economy was stuck in the doldrums under its zero-COVID policy.
Chinese equities saw a net inflow of funds in June and July. Since the start of August, however, the flow has quickly reversed as investors grow skittish about China’s economy. The financial woes of Country Garden Holdings, one of the country’s largest private property developers, have raised questions about the real estate market as a whole.
Financial data for July confirmed that credit is tightening, and retail sales and other economic indicators have fallen short of market expectations across the board. Business confidence is also weakening, and price indexes suggest China may be falling into deflation. In the absence of favorable investment incentives, the stock market is facing stronger headwinds.
JP Morgan, in its Monday’s stock strategy report, said, “The region has seen a string of disappointing data, with the latest very weak trade prints from last week, the worst decline since February 2020, poor [private-sector loan] data, and [consumer and producer price indexes] are now outright negative. China’s property sector is staying challenged, in a structural downtrend.” It added, “We stay cautious on Chinese equities, and keep advising to use any stimulus news-driven bounces to sell into.”
Hong Kong’s Hang Seng Index has fallen 6% so far this year. Although the Shanghai Stock Exchange Composite Index is still nearly 3% higher, it has badly underperformed other major global share indexes, such as the American S&P 500, which has jumped 15%.
Data on exchange-traded funds (ETFs) listed in the U.S. also confirm the outflow of funds from China. Data from QUICK-FactSet as of Monday showed an outflow of $113 million from the SPDR S&P China ETF (GXC) in the past week and $152 million in the past month. There also was an exodus of $47 million from iShares MSCI China ETF (MCHI), the largest fund by assets under management, in the past month.
The pullback from GXC was led by technology giant Tencent at 10.75%, followed by e-commerce company Alibaba Group at 7.64%, shopping platform Meituan at 3.42%, China Construction Bank at 2.21% and another e-commerce player, PDD Holdings, at 1.86%.
Although the Chinese government is expected to ease regulations on internet companies, those hopes alone are unlikely to stem the outflow of capital.
Early this year, Chinese stock markets attracted investors betting the reopening of China’s economy would translate to strong returns. But those hopes have been dashed in the face of the country’s economic slowdown.
In light of developments in the property market and other factors, a growing number of experts say China is in a structural slump rather than a cyclical downturn. The flight of funds from Chinese stocks may only be just beginning.