In two separate conferences held this week on May 18 and 19, Chinese President Xi Jinping called for stabilizing foreign investment while Chinese Premier Li Keqiang stressed the importance of strengthening economic confidence upon current uncertainties.
The strict Zero Covid policy has dragged the country’s economy down for months, and services sector activity has sunk to the lowest level in two years. Foreign capital withdrawal is expanding, with the total Chinese bond holdings falling to 3.768 trillion yuan ($559 billion) in April, the lowest level since July last year. In April, global investors bought a net 6.3 billion yuan ($935 million) of Chinese equities, compared with a net sell-off of about $7 billion in March.
Duncan Tan, a strategist at DBS Bank, said, “Chinese government bonds (CGBs) are likely to see foreign holdings decline in the coming months as the CGBs’ yield advantage has disappeared alongside this year’s selloff in global bonds and expectations of aggressive rate cuts by PBOC are now low.”
Fueling increasing foreign capital outflow is the strong dollar and rapid yuan depreciation.
Foreign businesses are moving their investment out of China and urging Beijing to adjust the policy.
According to a late-April flash survey published last week by the EU Chamber of Commerce in China, around 85 out of 372 European businesses were thinking about shifting out of China, the highest level in a decade. Approximately 78% said China was now less attractive for investment because of its Covid policies.
American Chamber of Commerce in China also published another survey showing that 50% of American businesses have delayed or decreased investments in China. Nearly half said that foreign workers are either significantly less likely or refuse to relocate to China.
Joerg Wuttke, president of the EU Chamber of Commerce in China, said, “We are trying to tell the Chinese government that if you don’t change, we will vote with our feet.”
The situation poses enormous risks to the Chinese economy. Failing to stabilize the economy and gain back foreign investors’ confidence could cause even more severe damage than during the initial outbreak.