China’s capital market has experienced capital outflows for six consecutive months. Bloomberg said that investors’ confidence in China’s financial market appears to be running out, the market rebound is not durable, the multiple support actions promised by Beijing have not brought actual results, and the risks in the Chinese market can no longer be quantified.

For fund managers, that means facing the prospect of more losses in stocks, outflows from bonds, credit defaults and a weaker currency. The lackluster market reaction to China’s fiscal stimulus and rate cuts reflects a trend that has intensified in recent months as Xi’s government has become increasingly incapable of boosting investor confidence.

Some experts believe that Xi Jinping is fighting a losing battle while seeking to achieve strong growth while clinging to the “Zero Covid” policy .

China’s stimulus and rate cuts have so far failed

The MSCI China index has slumped nearly 12% so far this quarter, compared with an 8% rise in the global stock index. That puts the MSCI China index on track for its worst quarterly performance since 2000.

To address investor concerns, since March 16, Chinese officials have made at least 25 pledges to support the economy, markets or businesses, but only accomplished a stock market rally of more than 2%. 

In order to stimulate the economy and deal with the real estate crisis, the central bank of China cut the benchmark lending rate for households and businesses again on Monday, Aug. 22, and the authorities plan to provide more liquidity support for developers.

The stock market’s reaction to China’s policy measures has been mostly negative. 

On Monday, stocks were volatile and the offshore yuan remained weaker to near two-year lows. On Wednesday, the Shanghai Composite Index closed down 1.86%, while Hong Kong’s Hang Seng Index closed down more than 1.2%.

Economists are also generally negative about the policies the CCP has rolled out so far. According to CNBC reports, PineBridge Investments portfolio manager Mary Nicola said, “… policymakers are going to have to act a bit more responsively, more decisively … to mitigate some of that growth pressure.”

Atilla Widnell, director and general manager of Navigate Commodities, said in a report on Monday, “The government’s pumping out more fiscal stimulus and it’s not getting to the right places … People are still not on the streets consuming steel-intensive goods.”

ACY Securities chief economist Clifford Bennett said, “Covid-19 has masked a far more fundamental and permanent shift in the nature of the China economy. From boom growth period, agrarian, to consumer society … As impressive as all that be, the rapid and far easier growth pace of the past is at an end.”

Capital markets see capital outflows for 6 consecutive months

Bloomberg said Sentiment toward China’s frayed financial markets looks to be on its last legs with rebounds that don’t last, inflows that don’t stick and vows of more action from Beijing that keep falling flat.

According to the Institute of International Finance (IIF), China lost as much as $17.5 billion in foreign capital in March, among which $11.2 billion was in bonds. The IIF believes this capital flight from overseas investors is “unprecedented.” 

The IIF data also showed that in July, there was an outflow of $3.5 billion in foreign capital from the Chinese stock market, while the benchmark CSI 300 index fell 7%.

Bloomberg said that this pessimism among investors reflects broader concerns about the strength of China’s economy. Risk has become so unquantifiable that companies like Boston-based Zevin Asset Management, ZAM, are leaving.

ZAM recently sold all of its holdings in mainland China and Hong Kong. The company’s president, Sonia Kowal, said they would only consider re-entering the China market in the future when it is on a more sustainable path.

Expert: Zero-Covid policy and holding to Xi’s bailout policy will fail

Despite multiple rounds of China’s bailout policies, global investors still have ample reasons to remain cautious. 

Despite the CCP’s policy of cutting interest rates, the problem is that companies or households are reluctant to borrow from banks, primarily because of concerns over uncertainty about China’s epidemic restrictions and whether future outbreaks will lead to repeated lockdowns.

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