Reeling from unrelenting COVID lockdowns, travel restrictions and movement curbs, China’s national economy and over 20 other emerging national markets are seeing the worst capital exodus in seven years, according to several expert analyses.
One of the studies conducted by the Institute of International Finance (IFF) revealed that China’s manufacturing industry, in particular, has been severely impacted due to production chain disruptions and logistical challenges resulting from the prolonged lockdowns.
Trade experts have also warned that emerging markets are also being threatened as investors scramble to sell everything from Chinese bond shares to U.S. index futures in oil and natural gas related to the ongoing Russia-Ukraine war.
The world’s second largest economy saw an estimated $30.4 billion net outflow from its bond market in February and March alone.
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According to data from the IFF, foreign investors withdrew around $2.5 billion from Chinese bonds in June, while other emerging market bonds saw an influx of $9.1 billion. And though foreign investment into Chinese equity is still sizable, it pales in comparison to the net outflow of $19.6 billion from other emerging markets, the study said.
The net total of $4 billion withdrawn from emerging markets’ equities and bonds combined in June marked the fourth straight month of net losses, the U.S.-based IFF said.
“We see that the current outflow episode is similar in scale to the [yuan] devaluation scare in 2015 and 2016,” IFF economist Jonathan Fortun wrote on July 6 comparing China’s current foreign capital outflow to the 2015 Chinese stock market crash — when around $670 billion was withdrawn from its securities’ markets.
Industrial sector in trouble, unemployment hitting record high
China’s industrial output and consumer spending have also dipped to the worst levels since the pandemic began, with economists warning of a grim outlook as there is no quick path to recovery.
Although Shanghai authorities announced on May 29 that COVID restrictions would be lifted on June 1, allowing factories to resume production and businesses to reopen, the city of nearly 26 million residents has been subjected to varying degrees of restrictions as new clusters of infections are detected.
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The country’s industrial growth could further weaken to below 2 percent in the second quarter if current trends continue to hold, Bloomberg analysts warned, adding that China’s present industrial output fell by 2.9 percent in June from a year ago, while retail sales contracted 11.1 percent in the same period — weaker than an initial 6.6 percent prediction drop.
Meanwhile, the unemployment rate in China also climbed to 6.1 percent, with the youth jobless rate in particular hitting a new record in the country.
The recent surge in joblessness has been singled out as an element of concern for the Chinese Communist Party (CCP), and comes ahead of a twice-a-decade leadership reshuffle later this year, when Chinese leader Xi Jinping is expected to secure a precedent-breaking third term at the 20th Party congress.
Chinese yuan posts steepest drop on record
On May 13, China’s currency, the yuan — also known as the renminbi — hit its lowest levels since September 2020 in both onshore and offshore markets. The offshore yuan is currently holding at 6.70 per dollar.
In the past five months, the yuan lost about 7 percent of its value against the dollar. In May, the yuan posted its biggest monthly drop on record, with CNN reporting that in the month of May alone, China’s foreign exchange reserves had fallen to the lowest levels since late 2016.
However, according to Fortun, The People’s Bank of China (PBoC) is expected to maintain a “moderately easing stance” in the second half of the year, with banks hoping that by staying put, they will be able to weather the current financial storm until industrial output and consumer spending picks back up.
“We are in a global interest rate and high inflation shock,” he said, adding that, “For the coming months, several factors will influence flow dynamics, among these the timing of inflation peaking and the outlook for the Chinese economy will be in focus.”
According to Bloomberg, China’s gross domestic product (GDP) declined 1.21 percent in June from a year ago — the first contraction since February 2020. Economists at Bloomberg’s StanChart also downgraded China’s GDP growth from 5.1 percent to 4.1 percent for the remainder of the year.
“The China-US rates spread … remains well below its historical average. The narrowing rate differential is likely one factor behind offshore outflows from China bonds from February to May 2022,” analysts at global research firm Nomura Holdings said on July 7.