The Institute of International Finance (IIF) issued a capital flows report on Wednesday that predicted foreign investors will withdraw $65 billion from China in 2024. The capital outflow has been especially pronounced in China’s bond market.
The IIF found foreign entities pulled $3.7 billion from Chinese bonds and equities in November, pouring a good deal of their money into emerging markets instead.
The report expected flows to emerging markets will “benefit from the fall in global inflation, as advanced economy central banks turn less hawkish,” while flows to China will be “held back by elevated geopolitical risk and a change of investor sentiment.”
Investors are paying attention to the stock market at a securities business hall in Fuyang, China, on December 5, 2023. (Costfoto/NurPhoto via Getty)
That change in “sentiment” includes growing interest in “de-risking” by moving investments and manufacturing capacity out of China. The Wuhan coronavirus pandemic and the Chinese Communist Party’s periodic crackdowns on business made international investors and corporations nervous about keeping too many eggs in the China basket.
The significant pace of de-risking described by the IIF report demolishes Beijing’s efforts to threaten, intimidate, and wheedle foreign companies into keeping their money in China. Arrogant Chinese officials often pretend de-risking is some discredited idea that no one seriously discusses anymore, but it is very real and appears to be happening at a pace far beyond what the Chinese Communist Party expected.
Outside analysts poring over data from China’s State Administration of Foreign Exchange determined that September saw a $49 billion outflow of capital, the largest since China panicked investors with a surprise currency devaluation in 2015.
In November, the Chinese government acknowledged its first-ever quarterly decline in foreign investment. Some analysts thought this could be a temporary decline driven by more advantageous interest rates elsewhere, while others saw the beginning of a long-term trend in which foreign companies stop re-investing their profits in China.
The IIF report did have some good news for China, including a prediction that the worst scenarios for a collapse of the property market would be avoided, leading to a recovery in late 2024, and projections that global demand for Chinese exports will recover from current lows.
The Economist on Thursday noted perennial accusations that China cooks its books, manipulating foreign investors and concealing economic data that might embarrass the Chinese Communist Party.
Some analysts think China is currently understating its export figures and profits on foreign investment to conceal an even larger capital outflow than the IIF report described.