China's capital exodus: How Beijing’s data freeze is fueling investor panic
China's capital exodus: How Beijing’s data freeze is fueling investor panic
With $12 billion already gone, global firms face uncertainty amidst tightened market transparency.
Last month, the Chinese authorities stopped publishing daily data on capital flows from foreign funds into Chinese stocks, limiting a significant source of investment information. Meanwhile, international funds continue to withdraw capital from the country.
According to a report in the Financial Times, this move followed international investors withdrawing more than $12 billion from the Chinese stock market since the beginning of June, according to data from the Hong Kong Stock Exchange. As a result, capital flows have fallen into negative territory. Estimates suggest that 2024 may become the first year in which capital withdrawals outweigh capital inflows since the mechanism giving foreign investors access to Chinese markets was established a decade ago.
The withdrawal of investors is not solely due to the economic slowdown and government restrictions, but also because of anticipated U.S. restrictions on investments in Chinese technology. "Geopolitical issues such as foreign investment laws cause China to be perceived as a toxic market despite its inherent opportunities," explained Han Lin of The Asia Group. According to Jason Lowe of BNP Paribas, while investors are bullish on emerging markets like India, they are avoiding China.
The information restrictions are part of the government's efforts to bolster market security in light of the economic slowdown. Similarly, back in May, regulators stopped publishing real-time trading data on transactions by foreign investors. However, analysts warn that these measures may backfire. "While data provided by global stock exchanges can vary, low transparency will not help attract foreign investment, especially in an emerging market," said Gary Ng, senior economist at Natixis. "Investors will seek to understand why the information is no longer available and will find it difficult to justify investing in China."
Evidence of the impact includes the largest private equity firms in the world, such as KKR and Carlyle, freezing deals in China this year due to geopolitical tensions and the government's increased control over business. Transaction pace has slowed significantly, with only five new investments—most of them small—by the ten largest investment firms globally. For comparison, in 2021, the same ten companies made 30 investments in China. This year, seven out of ten companies did not make new investments in the country, according to Dialogic data. The only firms still investing in China this year are Blackstone, Advent, and Bain. Blackstone invested in warehouses, while Advent invested in the conference group VNU and an animal feed manufacturer.
The restrictions on information are part of the government's efforts to strengthen security in the market, this in view of the slowdown in the economy. Similarly, back in May, the regulators stopped publishing live trading data on transactions by foreign investors. However, analysts warn that these steps may backfire. "While the data provided by global stock exchanges sometimes varies, the low transparency will not help attract foreign investment, especially not in an emerging market," said Gary Ng, senior economist at Natixis. "Investors will try to understand why the information is no longer available and will have difficulty justifying entry into China."
As evidence, the largest private equity companies in the world, including KKR and Carlyle, froze deals in China this year in view of the geopolitical tensions and the steps taken by the government to strengthen its control over business. The pace of transactions slowed down significantly, and only five new investments were made, most of them small, by the ten largest investment companies in the world. For comparison, in 2021 the same ten companies made 30 investments in China. This year, seven out of ten companies did not make a new investment in the country, according to Dialogic data. The only companies that still made investments in China this year were Blackstone, Advent. Blackstone invested in warehouses, while Advent invested in conference group VNU and an animal feed manufacturer.
This is not the first time China has restricted access to potentially negative information. Last year, regulators prohibited some investment houses from disclosing the estimated value of their mutual funds. The government also ceased publishing youth unemployment data in 2023 after the index reached a record high.
