China: The economic environment is improving; will the capital inflow continue.
2023-02-15
■ Since November last year, non-resident securities investment flows in China have been converted into capital inflows
■ At present, as long as the proportion of investment in China is restored to a neutral level, capital inflows are expected to continue
In the context of the expectation of the resumption of economic activities and the government's buoyant policies, capital inflows into China are increasing. According to the calculation of the International Finance Association (IIF), non-resident securities investment flowed into emerging economies in December last year (inflow of US $1.74 billion), marking the third consecutive month of capital inflow. In fact, China has ended the zero-coronavirus policy ($11.4 billion inflow) and has seen capital inflows for two consecutive months, while emerging countries outside China ($9.66 billion outflow) have seen their first capital outflows in five months. It can be seen that non-resident securities investment is transferred from emerging countries outside China to China. From the perspective of the details of securities investment inflows into China, the amount of inflows into stocks is greater than that of bonds, and the capital inflows are mainly through stocks.
Since February 2022, the Chinese government has strengthened its control over enterprises, the continuation of strict quarantine measures marked by city closure, the global economic slowdown, the development of developed countries and other factors have contributed to the capital outflow. Domestic and international economic factors, such as the significant tightening of monetary policy in the United States. In addition, it can be pointed out that the exclusion of Russia from the International Interbank Telecommunications Association (SWIFT) as a sanction against the invasion of Ukraine has raised the awareness of national risk to China with territorial disputes such as Taiwan. The debenture-centred capital outflow from China is considered not only to reflect the changes in the economic and financial environment, but also to reflect that the rising risk of going abroad has affected the attitude of foreign institutional investors to invest in China.
In 2023, due to the policy changes of the Chinese government, the growth is expected to accelerate from 3.0% of the previous year. It is expected that the National People's Congress (NPC) in March will set economic targets that exceed the results of the previous year. The US monetary policy has also shifted to the usual pace of tightening. Many domestic and foreign economic factors driving capital outflows last year have been improved or eased. On the other hand, it is difficult to say that the country risk has decreased since Russia began to invade Ukraine about a year ago. At present, the conflict between the United States and China has intensified due to the problem of reconnaissance balloons, and the possibility of economic problems such as embargo measures in related industries being affected has also risen sharply.
Even if the share of Chinese investment that felled last year is only to return to neutral levels, expect substantial inflows in the process. This trend may continue for the time being as the Chinese economy recovers. However, in order to increase the proportion of non-resident investment in China to above neutral in the medium and long term, the necessary conditions include not only the economic and financial situation but also the reduction of national risks, including the easing of the US-China conflict.