Russia’s pariah status in the international investor community after Moscow’s invasion of Ukraine may be behind “unprecedented” cash flows out of China, the Institute of International Finance said on Thursday.
Many emerging market and global investors are faced with steep write-downs of their Russian holdings due to sanctions across the world that were triggered by last month’s invasion, which made Russia “uninvestable” for some.
“At this stage it is too early to say if the war is driving outflows or if other factors are to blame,” said Robin Brooks, chief economist at the IIF.
“But we think these outflows are notable enough to at least raise the possibility that Russia’s invasion of Ukraine may be pushing global markets to look at China in a new light.”
He said the Russia link would be consistent with the relatively recent nature of the observed outflows.
Flows to Chinese debt and equity portfolios have mostly held up even through a stock and bond selloff triggered by a shift in policy from Beijing that pressured the property sector and came to a head last year.
Net monthly foreign flows to emerging markets (EM) outside of China had all but stopped in the last quarter of 2021 and the trend continued into 2022.
But daily high-frequency numbers compiled by the IIF show a dramatic shift in flows from a mid-December peak, especially out of Chinese stock portfolios, exacerbated in late February.
What is unprecedented, says the IIF, is that investors are pulling out of China while the rest of the EMs hold up.
Investors may fear that if China will actively support Russia’s invasion, it would put it in line for a round of sanctions similar to Moscow’s.
“While we’re in this situation, I think there is going to be concerns that if China would really support Russia … could they be included in sanctions as well,” said Rick Meckler, partner at Cherry Lane Investments in New Jersey.
“Russia was very eye-opening. After all, you’re talking about companies with quite significant market caps.”
On Wednesday, the head of NATO said the Western military alliance worries that China could support Russia’s invasion of Ukraine, while the Biden administration warned Beijing not to take advantage of business opportunities created by sanctions.
China has not condemned Russia’s actions in Ukraine, though it has expressed deep concern about the war.
• Reuters with additional editing by Jim Pollard
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