Is China still a good investment amid Covid and Russia’s war?

On Apr 25, 2022

China witnessed $17.5 billion worth of portfolio outflows last month, an all-time high, according to most recent data from the Institute of International Finance (IIF). The US-based trade association called this capital flight by overseas investors “unprecedented,” especially as there were no similar outflows from other emerging markets during this period. The outflows included $11.2 billion in bonds, while the rest were equities.

Data from the Chinese government also showed a record bond-market retreat by foreign investors in recent months. Overseas investors offloaded a net 35 billion yuan ($5.5 billion) of Chinese government bonds in February, the largest monthly reduction on record, according to China Central Depository and Clearing. The sell-off accelerated in March, hitting a new high of 52 billion yuan ($8.1 billion).

“China’s support for the Russian invasion of Ukraine was clearly the catalyst for capital to leave China,” said George Magnus, an associate at the China Centre at Oxford University and former chief economist for UBS.

China and Russia proclaimed in February that their friendship had “no limits.” That was before Russia invaded Ukraine. Now, with Russia’s economy being slammed with sanctions from all over the world, Beijing has not rushed to help out its northern neighbor, fearing that it too could get caught up in sanctions. But it has also refused to condemn Russia’s attack on Ukraine, seeking to portray itself as a neutral actor and blaming the situation on the United States.

“There is nervousness about China’s ambiguous, but Russia-leaning stance on the Ukraine conflict, which raises worries that China could be targeted by sanctions if it helps Russia,” said Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics, who has studied China’s economy and US-China relations.

The war in Ukraine has also heightened concerns about the risk that China could increase its military force against Taiwan, triggering a massive flight of capital from the Asian island.

But geopolitical tension is not the only reason behind the exodus. The rate hike in the United States and China’s strict Covid-related lockdowns have also played a role in scaring investors.

The US Federal Reserve is increasing interest rates for the first time since 2018 to tame inflation, while the People’s Bank of China has entered an easing cycle to bolster its faltering economy. That means China looks less attractive to investors when compared with the United States. Earlier this month, yields on China’s 10-year government bond fell below US Treasury yields for the first time in 12 years. And the yuan hit a six-month low against the US dollar.

“The rise in interest rates, especially in the US, makes the nominal return associated with Chinese fixed income assets less attractive on a relative basis,” Chorzempa said.

Furthermore, Beijing’s unwavering commitment to its zero Covid policy has taken a massive economic toll, and increased uncertainties about future growth.

“The economy is enfeebled and being made worse by government actions and by zero Covid policies,” said Magnus.

China’s economy slowed sharply in March — consumption slumped for…

Is China still a good investment amid Covid and Russia’s war?

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