As the world braces for the uncertainties of the coming year, the Institute of International Finance (IIF) warns of challenges ahead for foreign investors eyeing Chinese stocks and bonds. Elevated geopolitical risks and shifting investor sentiment are predicted to hinder the attractiveness of the Chinese market, with the IIF estimating a substantial outflow of $65 billion from foreign investors in 2024.
According to IIF data, Chinese bonds have experienced consistent outflows from foreign investors throughout the year. The IIF’s capital flows report projects a continued net outflow of non-resident capital from China in 2024, particularly in portfolio debt, reaching an estimated $45 billion. Despite the US Federal Reserve halting rate hikes, the wide US dollar-yuan yield spread is expected to persist due to the People’s Bank of China’s dovish stance.
China’s central bank has maintained low-interest rates to support subdued credit demand, contributing to the persistent outflows. The significant interest rate differential between China and the US, following the Federal Reserve’s rate hikes, has further accelerated capital outflows from yuan-denominated assets. The yuan’s depreciation against the US dollar, reaching as much as 6.2% this year, has added pressure, although recent weeks have seen stabilization around 7.13 to 7.17 against the US dollar.
Preliminary data from November indicates foreign investors withdrew $3.7 billion from Chinese equities and bonds, despite a recovery of funds flowing into emerging markets. Notably, Chinese stocks experienced a marginal inflow of $600 million. The IIF attributes the positive overall performance in emerging markets to significant inflows, excluding China. Flows to non-China emerging markets are expected to benefit from the fall in global inflation as advanced economy central banks turn less hawkish.
The IIF identifies Beijing’s deteriorating relations with the West as a key downside risk for Chinese assets in 2024. Concerns over de-risking, reshoring, and technology embargoes are expected to persist, weighing on capital flows. The IIF emphasizes that while emerging market currencies’ returns will stay linked to the US economy, flows to China will continue to be hampered by elevated geopolitical risk and a change in investor sentiment.
Despite the challenges, the IIF maintains a “slightly above consensus” forecast for China’s real economic growth at 5% in 2024. This optimism is driven by expectations of a stabilized housing market following a two-year recession and moderate global demand for Chinese exports.
As geopolitical tensions loom and investor sentiment undergoes a transformation, foreign investors face challenges in navigating the Chinese market in 2024. While the IIF holds a positive outlook for China’s economic growth, the factors of geopolitical risk and changing sentiment underscore the complexities and uncertainties that investors must navigate in the coming year.
(Source: Amanda Lee | SCMP)
