Russia-Ukraine Conflict Triggers Capital Flight from China

Issue 116

Beijing’s close ties with Moscow may further be rattling foreign investors. A study by the Institute of International Finance found that China has been experiencing “unprecedented” capital flight since Russia invaded Ukraine. The study found no similar outflows from other emerging markets, adding insult to injury.

China’s technocrats have only started to make progress attracting global portfolio managers long wary of the People’s Republic. While Chinese shares comprise 9% of global equity values, mainland-listed companies constituted only 2.7% of international investors’ fund allocations in 2020. Strict capital controls, kneejerk policymaking and a shareholder base dominated by retail traders put off serious financial institutions; hedge fund manager Jim Chanos once referred to Chinese markets as a “roach motel” - easy to get money in, hard to get it out.

The Ukraine invasion may be giving them reason for pause. Investors were already traumatized by two years of rambling crackdowns on listed companies. War is pushing up commodity prices, and if Beijing forces its local companies to help Russian leader Vladimir Putin evade sanctions, U.S. retaliation seems imminent. Chinese bourses are the world’s worst-performing outside Russia, with IIF data showing daily average outflows touching nearly $500 million at one point.

An exodus of pension funds and insurers who buy and hold assets for long periods of time will be painful. Although small in absolute terms, their presence helps anchor market valuations and reassure local traders, who tend to distrust local analysts and ratings agencies. State media presents global investor enthusiasm for China as endorsing its authoritarian government.

Source: Reuters