HONG KONG The flow of cash is leaving China’s financial market at the fastest pace ever as investors flee a plummeting economy and currency Analysts point to indications that more cash is being withdrawn from the country via back channels as a indication of a waning confidence.
The flow of money, particularly from the market for bonds show the lure of more attractive rates of interest elsewhere.
But the size of their presence and the evidence that they are expanding beyond the portfolios of foreigners highlights the fragility in the confidence of Chinese which could be a drag on the yuan’s value in the future and the magnetic impact of a higher U.S. dollar on global capital flows.
“Everyone is suffering from the storm of U.S. interest rate rises,” said the wealth management expert Liu Yuan. “U.S. dollar assets are in the eye of the storm. It’s a haven of breeze and sunshine (while) life is hard on the periphery.”
Officially, China’s account of finances, that encompass bonds and stocks, as well as directly invested flows reveal that a total of $101 billion was taken out in the period from June to June. This puts 2022 on track to be the biggest annual flow of such outflows since the year 2016.
Monthly data on the market for debt shows foreign investors were net buyers for 7 consecutive months through August, in the midst of an attractive yield premium in China disappeared when U.S. interest rates soared.
Exports are a sign that China’s current balance is positive, and not all asset classes are experiencing outflows, with equity seeing a few small inflows.
But a substantial $45.2 billion net flow out of payment balances in the heading “errors and omissions,” is leading some economists to suspect that the funds are being moved away from this country using illegal or semi-legal means.
“Errors and omissions basically reflects the exit of residents’ money in an unofficial way,” said Alicia Garcia Herrero, chief Asia economist at French bank Natixis.
“It’s not just foreign asset managers no longer investing in China, it’s the unrecorded outflows that are worsening,” she told reporters as confidence dips. “People want to bring their money out.”
The yuan’s appreciation has been by more than 11% against the dollar in the past year.
In contrast to its many international peers who are quickly tightening policies to control the raging rising inflation China has lowered lending costs to boost its slowing economy. Housing, in which the majority of Chinese own their biggest assets are in a severe downwards trend, and youth unemployment has reached records.
GIMME SHELTER
In the midst of the exodus of foreign investors there are indications of locals following as swiftly as is permitted under capital controls tightened following the previous season of a flurry of outflows.
Inbound investments under the international Bond Connect, which links mainland China with Hong Kong and global markets and global markets, was 301.5 billion Yuan ($42 billion) at the end of August. increasing by 34% from the previous month and 19 times over March.
“All types of assets are falling this year, expect for a few money type products pegged to the U.S. dollar,” said Liu Yaolong, marketing manager at GaoTeng Global Asset Management which has been pushing these money-related products for Chinese investors.
Quota-based programs that allow investors from the US to access products and markets in the foreign market are becoming increasingly becoming popular.
The number of subscriptions for the Qualified Domestic Institutional Investor (QDII) scheme have increased by 80percent during the eight months leading up until August, reaching 322.8 billion units of fund units.
A recent survey conducted by HSBC has also revealed that the majority of investors who hold funds in foreign-based products through an international wealth Management Connect Scheme, planned to increase their investments over the coming twelve months.
BACK CHANNELS
The signs of unrecorded flows are harder to spot as well as the “errors and omissions” data in the national accounts are not conclusive. Moving money can be complicated as COVID-19’s restrictions travel restrictions further complicate capital control.
However, it can be an excuse to transfer money, and some brokers have seen an increase in inquiries about researching.
The data from the consulting firm Education International Cooperation showed a 41.5 percent increase in inquiries regarding study within Hong Kong between January and July, when compared to the same timeframe a year before.
Family offices overseas can become hubs for global investment. A total of 300 family offices were opened in Singapore this year as per the Monetary Authority of Singapore.
Investors hailing from Hong Kong, Macao, and Guangdong provinces comprised 44% of the newly established Family offices in Singapore during the initial four months of this year, which is up from 39% for the entire year of 2021, as per Chinese the language publication Lianhe Zaobao in Singapore.
Insurance products purchased in Macau which is where the border with mainland China is still open, is another popular back-channel experiencing increased interest. The products bought by visitors from mainland China are generally made by U.S. dollars, providing an insurance against the weak yuan and an attractive yield for the long run.
Agents involved in the lockdowns say ongoing lockdowns and uncertainty about the property market in China are additional reasons, in addition to the weakening of the currency. If they persist in the future, China’s opening its borders could trigger new flows of money and sell currency.
“I won’t say renminbi depreciation is the only trigger,” said an agent of insurance company AIA who asked to remain anonymous since the issue is sensitive. They anticipate a surge in Hong Kong products when the frontier with Hong Kong and the mainland opens.
(This report has been revised to remove an unnecessary dateline)
($1 = 7.1741 Chinese yuan renminbi)
