China Sees ‘Unprecedented’ Cash Outflows After Russian Attack on Ukraine: IIF
High-frequency data detected unprecedented cash flows out of China following Russia’s invasion of Ukraine, flagging a decreased confidence of investors amid geopolitical conflict and uncertainty.
A “very unusual” shift emerged to global capital flows in emerging markets in late February, as China saw investors pull out of from its market while the rest holds up, analysts at the Institute of International Finance (IIF) said after compiling daily numbers.
“Outflows from China on the scale and intensity we are seeing are unprecedented, especially since we are not seeing similar outflows from the rest of emerging markets,” wrote IIF’s Chief Economist Robin Brooks and his colleagues, in a March 24 report.
“The timing of outflows—which built after Russia’s invasion of Ukraine—suggests foreign investors may be looking at China in a new light, though it is premature to draw any definitive conclusions in this regard,” the report reads.
Economists said Russia could see its financial gains in over a decade evaporate under the U.S. and European Union sanctions, plus a rapid self-sanctioning from foreign companies.
Crushed by a multitude of sanctions over its invasion of Ukraine, the country’s economy will shrink in 2022 by some 15 percent, according to a previous IIF analysis, and the economic contraction could be twice as sharp as the Russian recession during the global financial crisis.
Although the IIF does not expect a broad emerging market contagion, The spillover effects of the war worry market watchers of China.
Official data showed foreign investors sold a net $5.5 billion of Chinese government bonds last month, the largest monthly outflow on record, according to Bloomberg. Market watchers speculated that Moscow may sell its holding of Chinese assets to raise funds, given foreign reserves held in euros and dollars of the Russian central bank have been frozen.
Some feared China’s possible pro-Russian stance could touch off a round of Western sanctions following Moscow.
On March 11, the Securities and Exchange Commission specified five U.S.-traded Chinese companies, requested to timely submit detailed audit documents to regulators or they will be forced out from American exchanges. The news has triggered the selling off of the Chinese companies’ stocks in the United States and Hong Kong.
Rather than leveraging its influence with Moscow to mediate a ceasefire in Ukraine, Beijing refused to denounce Russia’s aggression or join sanctions, while pledging normal trade ties with Moscow and actively embracing pro-Russia narratives at home, despite a self-claimed neutral role.
“China must not provide economic or military support for the Russian invasion,” NATO Secretary-General Jens Stoltenberg said at a press conference on March 24, after accusing Beijing a day earlier of spreading “blatant lies and misinformation.”
The same day, the White House warned Beijing not to take advantage of business opportunities created by sanctions, offering Russia economic lifelines, as China’s ambassador to Russia urged Chinese businesspeople in Moscow to waste no time and “fill the void” in the Russian economy.
President Joe Biden warned Chinese leader Xi Jinping last week of “consequences” if Beijing gave material aid to Russia for the war.
“At this stage, it is too early to say if the war is driving outflows or if other factors are to blame,” Brooks said. A fresh wave of COVID-19 resurgence nationwide and regulatory crackdowns by Beijing also caused investor panic.
The Chinese stock market has recovered since last week as China’s top policymaker assured official support to stabilize capital markets.
