Contrary to reassuring pronouncements from Chinese Communist Party officials, the Institute of International Finance (IIF) reported on Thursday that foreign capital flight from China continued for the sixth consecutive month in July, pulling another $3 billion out of the $20 trillion bond market.
The IIF, an international trade group, also saw foreign investors dumping Chinese equities for the first time in four months, producing a net stock market outflow of over a billion dollars. IIF analysts said it was the longest losing streak for foreign capital in China since it began monitoring Chinese markets in 2005.
Analysts cited China’s economic slowdown, with growth dropping to only 0.4 percent in the second quarter, plus lingering fear of more draconian coronavirus lockdowns, the shaky Chinese real estate market, and disruptions from the Russian invasion of Ukraine as factors in the foreign capital flight.
Chinese leaders constantly downplay the importance of foreign capital flight, confidently predicting that overseas money will return after a bit of economic turbulence subsides. This is partly driven by the Communist Party’s absolute refusal to admit its “dynamic zero-Covid” lockdowns might have been a mistake, causing permanent economic damage and scaring foreign business away from Chinese cities.
The Atlantic Council speculated on Wednesday that the capital divestment might be the first glimmers of deliberate “disengagement” from China – perhaps galvanized by the ruinous “zero-Covid” lockdowns, but also driven by fears about China invading Taiwan, human rights concerns (and practical worries about complying with tough human-rights laws such as the Uyghur Forced Labor Prevention Act) and a growing sense among international businessmen that the Chinese Communist Party is not a business partner to be trusted.
The Atlantic Council noted that Western financial institutions aggressively pursued “financial integration and opening China’s markets” until very recently, when “geopolitical tensions” caused more American policymakers to conclude “national security is about economic security.”
The Trump administration led the way by expanding the authority of the Committee on Foreign Investments in the United States (CFIUS), but even the more cautious Biden White House issued an executive order to “prevent US capital from flowing into the People’s Republic of China’s defense and related materiel sector.”
In a real legal sense, everything in totalitarian China is part of the “defense and related materiel sector,” so it is no surprise to see foreign investors growing more nervous about sinking their money into enterprises that could be co-opted by the Chinese military at any time, or run afoul of Western sanctions against the brutal regime.
China remains profitable for globalist investors, but a growing perception of risk – from coronavirus lockdowns, Communist Party interference, or sanctions – is dimming the luster of those profits.