China s not only facing the pressure of covid lockdowns on the economy but the pressure is also coming from the regular outflow of the foreign capital. In the last three months, almost $100Bn of outflows has been seen in the bond market and equity faces a neutral month after outflows for two months.
Is covid policy to blame or there are other factors? The answer to that is a simple Yes. There are other factors as well impacting such a swift change of flows. During the period of large liquidity, the bond rates were attractive given the stability of the current account and the currency. But now as the liquidity is being tightened the rates become unattractive, as the slowdown would bring higher risk to the current account and the currency.
There have been some large investors like Ray Dalio and others who have been pouring money into China along with being vocal about it. But now the same money has been flying out at a much faster pace than it came in.
The margin debt of China has reduced from 2.09 Trillion Yuan to 1.69 Trillion Yuan within two months. This fall has been one of the sharpest on record resulting in a further correction in equity markets that started with the endless regulatory crackdown.
There also have been large defaults on offshore bonds but the same companies have been paying the onshore bondholders. This method of selective payments is also not going down with foreign investors.
A combination of all these factors is resulting in the outflow that is weakening Yuan as well. Further support to the economy will bring in inflation risk as well. And by July the important restructuring plan of Evergrande has to be presented to offshore bondholders for approval.