China debt sees portfolio outflows despite nascent recovery for EM in August – IIF

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FILE PHOTO: FILE PHOTO: Illustration photo of a China yuan note

By Jorgelina do Rosario

LONDON (Reuters) – China debt markets lost $7.7 billion in August in a seventh straight month of portfolio outflows, data from the Institute of International Finance (IIF) showed, amid market jitters over the downturn gripping the world’s second-largest economy.

Weighed down by repeated COVID-19 lockdowns and a property market crisis, China suffered year-to-date debt outflows for the first time since 2018, even as overall emerging market portfolios started to show signs of recovery.

Chinese stocks attracted marginal gains of $1 billion, marking the smallest year-to-date inflows in seven years, the IIF data released on Thursday showed.

“For the coming months, several factors will influence flows dynamics, among these the timing of inflation peaking and the outlook for the Chinese economy will be in focus,” IIF economist Jonathan Fortun said in a statement.

“Equity and debt portfolio flows in China have suffered considerably throughout 2022.”

The yuan has lost 3.2% to the dollar since mid-August and is on track for its worst annual performance in more than two decades against a buoyant dollar.

China’s zero-COVID policy continues to drag heavily on domestic demand, while exports are flagging as global growth cools.

The International Monetary Fund (IMF) said in July that the country needed to rethink its COVID strategy in order to limit the economic fallout, as pandemic curbs leave residents and businesses facing uncertainty over the risk of future lockdowns.

Chengdu, the capital of the southwestern Chinese province of Sichuan, extended a lockdown in most of its districts on Thursday, hoping to stem further transmission of COVID-19 cases in the city of 21.2 million people.

NOT OUT OF THE WOODS

In contrast, emerging markets ex-China enjoyed portfolio inflows with equities gaining $20.3 billion and debt attracting $13.5 billion.

In total, emerging markets posted their first month of inflows at $27.0 billion in August after five consecutive months of outflows, the longest such streak in records going back to 2005. This compares to an outflow of $10.7 billion in July and a $10.2 billion inflow in August 2021.

“While August figures are encouraging, we believe that the continued volatility in the market (especially in equities) still represents a risk for the outlook,” the report added.

Cash has left emerging markets partly because developed economies have reversed years of very low interest rates to try to put a cap on inflation. Russia’s invasion of Ukraine in February triggered a spike in food and energy prices that increased that challenge.

Equities inflows mainly explained the positive outcome, with $21.2 billion. The constant was “the weakness in China flows, which have suffered an important setback since earlier in the year,” the report added.

(Reporting by Jorgelina do Rosario, editing by Karin Strohecker and Kim Coghill)

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