Foreign investors abandon the yuan and flee China

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Chinais COVID-19 blockages and rate cuts lower yuan and the exacerbation of foreign capital outflows.

“Uncertainty is really the key word, because there is no view, no perspective on how long this might last, and what will be. after ShanghaiMassimo Bagnasco, vice president of the European Union Chamber of Commerce in China, told Bloomberg on May 17.

In March, Hong Kong investors sold a record $24.2 billion value of the debt denominated in yuan. The Chinese investment exodus is fueled by fears about China’s diminishing growth prospects, falling bond yields and rising rates on US investments.

At the same time that the United States and other Western countries are raising interest rates to fight inflation, China’s central bank is planning to cut rates to stimulate the economy. In April, the central bank reduced reserve requirements by 9 percent to 8 percent in order to increase the money supply.

Investors exchange their money from yuan to dollars, which pushes the dollar up while pushing down the yuan. Over the past four weeks, the yuan spot rate has lost more than 6 percent against the dollar. UBS analysts expect the yuan depreciate further, breaking the 7 level for the US dollar. Barclays also lowered its yuan forecast to 6.9, but said the yuan could hit 7 if blockages and supply chain disruptions continue.

Investors had already started transferring money out of China by 2021 due to ongoing COVID lockdowns, supply chain issues, and Chinese leader Xi Jinping’s crackdown on many industries, including technology and education. These problems have accompanied an ongoing debt crisis with leading companies, such as Evergrande, tottering on the verge of insolvency, as well as a general cooling of the real estate sector, which is generally an important driver of the global economy.

Since the beginning of this year, the Ukrainian War and potential sanctions against China scared many investors off their yuan-denominated assets. Repeated cuts in GDP growth forecasts by major banks and financial institutions have exacerbated capital outflows.

May 18, Goldman Sachs cut its Chinese GDP growth forecast to 4%. Even the most optimistic Economist intelligence The unit forecast of 4.4% to 4.7% is well below Beijing’s goal by 5.5 percent.

An empty road is seen in Shanghai’s central business district (CBD) during a lockdown, amid the COVID-19 pandemic, in Shanghai, China April 16, 2022. (Aly Song/Reuters)

In April, Chinese stocks (.SSEC) lost 6 percent in value, and their weightings in emerging market portfolios have fallen from their late-2020 peak of 38.3% to 29% in April. Foreign investors disinvested $6.2 billion Chinese government bonds in April, marking three straight months of selling, the longest selling since 2015. Becky Liu, head of China macro strategy at Standard Chartered Bank Plcspeculated that a sharp drop in the yuan is also fueling sales.

Despite the obvious problems in the Chinese economy, some investment bankers are always optimistic. In April, Jean-Charles Sambor, head of emerging debt at BNP Paribas Asset Management said that despite rate hikes in the United States and rate cuts in China, Chinese bonds still offered a higher yield when adjusted for inflation.

Aninda Mitra, Head of Macro and Investment Strategy for Asia at BNY Mellon Investment Management was less optimistic about China’s outlook, saying continued rate hikes in the United States could increase capital outflows.

Although the Chinese currency and economy seem to be weakening, the International Monetary Fund (IMF) announced on May 14 that it would increase the weight of the yuan in the basket of currencies called special drawing rights (SDRs). The weighting of the yuan fell from 10.92% to 12.28%. This is the first revision since the currency was added to the basket in 2016. The dollar weighting has also been increased by 41.73% to 43.38%, while the weighting of the euro, the Japanese yen and the pound sterling decreased.

The IMF’s decision was made based on the gains in value the yuan has made over the past six years. However, the yuan remains an unwanted currency for investors and central banks, representing only 2.79 percent of the world foreign exchange reserves.

In response to the increased weighting of the SDR, the chinese central bank pledged to further open its financial markets and to improve disclosure. It comes just days after Chinese authorities stopped reporting some transactions by foreigners. Since May 11, the China Foreign Exchange Trade System, the main bond trading platform for foreign investors, stopped reporting liquidations. This action may have been taken to prevent them from having to acknowledge that there has been a sell-off as investors lose confidence in the yuan.

In addition to falling currencies and foreign investors turning away from Chinese government bonds, chambers of commerce in the United States and the European Union are reporting that their members are suspending investment in China. Supply chain disruptions and the threat of shutdowns were the main reasons given. While Shanghai enjoys the most media coverage, at least 32 cities were still confined to May 13.

The closures have caused many disruptions with far-reaching consequences. Factories lost days of production. Labor shortages and disruptions in logistics and supply chains also took place. Additionally, the lockdowns have close portshalted road traffic in some places and prevented foreign employees from entering the country or traveling to their offices in China.

Michael Hart, president of the American Chamber of Commerce in China, said Bloomberg May 17that while he does not expect an immediate exodus of foreign companies, he expects Chinese investment to decline over the next few years.

The EU Chamber of Commerce reported on May 16 that many of its members had stopped investing in China and were considering leaving the country. The German Chamber of Commerce reported that a survey of 460 members revealed that 30 percent of their foreign employees are considering leaving due to the lockdown.

President of the EU Chamber of Commerce Joerg Wuttke said higher interest rates in the United States would cause capital to flow out of China. Therefore, Beijing should tighten capital outflows controls to avoid further depreciation of the yuan. In a draconian move to prevent cash from leaving the country, Beijing announced a ban on May 13 which prohibits citizens from non-essential travel outside the country.

The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.

Antonio Graffo

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Antonio Graceffo, Ph.D., has spent over 20 years in Asia. He graduated from Shanghai University of Sport and holds a China-MBA from Shanghai Jiaotong University. Graceffo works as an economics professor and China economic analyst, writing for various international media. Some of his books on China include “Beyond the Belt and Road: China’s Global Economic Expansion” and “A Short Course on the Chinese Economy”.