Foreign investors are pulling out of Chinese markets at a faster pace as the economic rebound stumbles

Xi Jinping
Chinese President Xi Jinping speaks during a press conference at the BRICS Summit in Xiamen, Fujian province, China September 5, 2017.REUTERS/Fred Dufour/Pool
  • Foreign investors are increasingly moving out of Chinese markets.

  • Reuters reported that about $1.71 billion worth of stock traded on the mainland was sold in May.

  • Even if growth rebounded, geopolitical tensions could keep foreign investors at bay.

Foreign investors are showing dwindling faith in China, as they ramp up a retreat from the country's financial markets.

According to Reuters, $1.71 billion worth of mainland shares were sold by foreigners in May, outpacing April's $659 million withdrawal.

The outflows are a notable turnaround from activity earlier in the year. Following China's ending of its COVID-19 restrictions in December, bullish hopes for an economic rebound led to investments worth $25.05 billion in the first five months of 2023.

That's compared to $6.36 billion in the entirety of 2022, Reuters reported. But the hopes that fueled this year's heavy investment have been dashed as growth continues to cool across a number of Chinese sectors.

This month, analysts have brought down 12-month earnings forecasts for large and mid-cap companies by over 0.7%, while mining and real-estate saw cuts of over 3%.

This is alongside contractions in manufacturing activity, which caused industrial profits to drop by nearly 20% in April, Alicia García-Herrero, Natixis' chief economist for the Asia-Pacific, wrote in The Financial Times.

Meanwhile, retail sales and private investments failed to meet forecasts throughout April, further denting economic optimism. At the same time, public debt is on the rise, limiting China's ability to incentivize market activity.

According to García-Herrero, such performance may challenge China's current growth target of 5%, which is underwhelming by previous standards. Even if things were to change, geopolitical tensions may complicate a return of foreign investment into China.

"The reality is that, beyond cyclical reasons, a whole new set of risks are emerging from America's push for technological containment and the threat of western sanctions on China, either because of its support for Russia or what might unfold in Taiwan," she wrote. "In addition, China's newly amended law against foreign espionage exemplifies its increasing wariness when it comes to foreign investors."

In May, the Shanghai Composite Index dropped by 3.6%, its largest monthly loss in seven months.

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