Financial disintegration: foreigners are exiting Chinese assets

China was the key Emerging Market to invest in the last 30 years. From 1978 to be precises. But everything changes. The process of financial disintegration is taking steam across the world. The interesting part is that the reasons for disintegration are different in each country. Let’s look at China.

Below is the chart showing China domestic bonds and equities held by overseas investors, measured in RMB. You can see that both charts show noticeable reversal of the trend and considerable move down which was never observed since 2014 in absolute terms.

Three drivers are responsible for this:

• Tightened regulation on tech companies – the core attractive segments. One of the biggest events to remember – suspension of a $37b Ant Financial IPO on November 3, 2020 two days before the planned IPO date Reuters
• Continues COVID-19 lockdowns
• Risks around Taiwan

After suspension of Ant IPO and further regulatory involvement to tech companies some investors framed that China became “uninventable”. This term started to appear in 2021. Now we can see this sentiment in numbers and declining investments.



Source: https://www.bloomberg.com/news/articles/2022-07-17/china-is-pariah-for-global-investors-as-xi-s-policies-backfire

This move has overarching consequences for the macro stability in the developed world. Disintegration - financial and economic – means the base for low inflation for the last 3 decades is over. Lower access to cheap labor in emerging markets. Lower access of emerging markets to cheap capital from developed markets. Loose – loose.

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Tags: China