According to Chinese-language media Da Ji Yuan, the Chinese regime has liberalized finance to attract foreign investment in recent years. According to official data from the Chinese government, the cumulative net increase in foreign holdings of domestic bonds and stocks surpassed U.S. $700 billion from 2018 to 2021, representing a 34 percent annual growth rate. However, compared to economies like Japan, South Korea, and Brazil, the proportion of foreign money in China’s stock and bond markets is only 3 % to 5%.
As a result, the Chinese government wants to keep increasing the share of foreign capital in China’s financial market. Sudden changes in the policies and the downturn of China’s economy have caused major setbacks for foreign investors in China’s financial market since 2021 and have had a significant impact on international investors’ judgments on China’s financial, economic, and political trends.
A finance expert from Chinese-language media Da Ji Yuan has pointed out three red flags that China’s financial market sends out to foreign investors.
First, policies from Chinese authorities have triggered stock market turmoil, with nine of the top 10 overseas Chinese equity funds losing money in 2021
Policies drive China’s stock market, and most of these policies come in an unexpected way. In July, China issued regulations for the education sector forbidding foreign investment. The policy also prohibits tutoring institutions from going public and other restrictions on the sector. This move led to the vanishing of 4 trillion yuan ($629.14 billion) from the Shanghai A-share market and foreign capital departing and private equity passively losing their positions.
According to Refinitiv data, 9 of the ten largest overseas Chinese stock flagship funds managed by giants like Allianz Investment, Morgan Asset Management, Schroders Investment, Fidelity International, UBS Asset Management, BNP Paribas, and those managed by veterans with more than 20 years of investment experience, lost money in 2021 as of December 29, 2021. Since 2021, three of the funds have lost more than 20%, five have lost more than 15%, and the top four Chinese stock funds, with a total value of more than 40 billion yuan, which is $6.29 billion, have all lost money. In 2022, the Chinese stock market will remain volatile.
Second, the default of Chinese corporate bonds
Chinese corporate bond defaults took a hit in 2021, marked by Evergrande’s default.
2021 witnessed Chinese dollar bond defaults, with a total default amount of US$27.4 billion, a significant increase of 163% year-on-year. Among them, real estate companies accounted for the vast majority of Chinese dollar-denominated debt defaults, with a total default amount of US$24.5 billion, or 90%.
Data shows that 2022-2025 is the peak period for real estate enterprises to pay off their U.S. dollar-denominated bonds.
According to incomplete data, as of the end of the first quarter of 2022, listed real estate companies have a total of 43 U.S. dollar-denominated bonds maturing, with a total issue amount of more than $15.7 billion. In other words, the peak of debt repayment time is coming, and the risk of default of Chinese enterprises has significantly increased, sending a negative signal to the confidence of international investors.
Third, foreign banks find it challenging to grow in China
In April 2021, Citigroup announced its withdrawal from the personal banking business, including wealth management, credit cards, and personal credit in China.
The proportion of foreign bank assets in China’s banking industry’s overall assets has decreased over time. According to the People’s Bank of China’s Quarterly Statistical Report, foreign banks’ assets accounted for 2.4 percent of total assets at the end of 2007, but just 1.6 percent at the end of 2019.
It was expected that foreign banks could play a role for Chinese banks in product innovation, management concepts, and business practices, but foreign banks have been almost silent over the years.
Foreign banks face constraints on their deposit sources. There has been a lower limit of 1 million yuan for foreign bank branches to take in termed deposits from Chinese residents for a long time. The Foreign Bank Regulation issued in October 2019 only lowered this limit to 500,000 yuan, making it difficult to access low-cost resident savings as Chinese banks do.
All in all, China’s economy and policies have caused foreign capital to suffer a lot in the Chinese financial market in 2021. The world’s financial community’s judgments on China’s economic and financial developments have also differed.
In such conditions, large-scale foreign investment in China is a high-risk thing to do. According to Reuters, foreign investment in yuan bonds in 2021 totaled 748.7 billion yuan ($118 billion), a 30% decrease from the previous year.