Outflows from investors in China reflect an increasing divergence between the U.S. and China, considered the world’s two largest economies.
Exploring lower growth in the Chinese Economy
While the Federal Reserve has signaled a hawkish stance on the rate hikes, China, on the other hand, has eased monetary policy; the divide between the rates is eroding the yield between the two economies and prompting investors to look at other economies as per Helge Berger, the IMF China mission fund.
As per Bloomberg News, for the first time since 2010, it is seen that compared to U.S. Treasuries, the 10-year sovereign bonds offer zero yield advantages.
Berger says in an interview that the law of microeconomics is at work. There is an increasing change in the interest rate position in China, which is linked closely with a slower growth rate. In contrast, the opposite happened in other advanced economies such as the U.S.
In February, the Russian invasion of Ukraine resulted in an acceleration of outflows from Chinese Mutual funds, Stocks, and bonds. Over the past two months, global funds have sold debt worth $15 billion to the Chinese Government and mainland listed stocks worth $7 billion via the Hong Kong exchange link.
The continued rolling lockdowns to prevent the spread of covid-19 have led to a slowdown in China’s economy and prompted a series of downgrades on the country’s growth forecast. The International Monetary Fund predicts the Chinese economy to grow at 4.4%, down from the earlier 4.8% estimates and even lower than the Chinese Government’s official target of 5.5%.
In the last six months, the yuan fell to its weakest levels due to the diminished differentials in yield and poor outlook. Any signs of China’s export boom slowing down would also impact the global investors. As of now, the pace of investors’ outflow has been contained for the time being.
As central banks of the U.S. and China react to changing domestic scenarios, according to Berger, the outflows are very small compared to the massive inflows seen in the past two years.
