China's economy is growing again. So why are investors getting out?

Hong Kong CNN

Investors betted on China's economic recovery following the lifting of pandemic-related restrictions.

CNN calculated that since April 18 when China announced its first-quarter output figures, the stocks of Chinese firms around the globe have lost $540 billion. Investors reduced their exposure to China due to economic uncertainty, geopolitical tensions rising and Beijing's crackdown against international consulting firms.

Since April 18, the Nasdaq China Golden Dragon Index has dropped more than 5%. Hong Kong's Hang Seng Index (HSI), has also lost 5%. Shanghai Composite Index, Shenzhen Component Index, and Shanghai Composite Index all fell 3% or 6.5%. The Nasdaq Composite Index grew 4% during the same time period.

The selling does not stop at equities. In the last month, the Chinese yuan has fallen over 2%, which is a good barometer for investor sentiment. In offshore trading on Wednesday, the Chinese yuan fell below 7 dollars to the US dollar, breaking that important level for the very first time in this year. On Friday, the currency fell further and hit its lowest level for nearly six months.

Investors are still sceptical about China for two main reasons. Brock Silvers is the chief investment officer of Hong Kong's Kaiyuan Capital. He said that first, there hasn't been a robust recovery.

He said that global investors are also concerned about the country's "fundamental investmentability", referring to risks associated with geopolitics and Chinese policies.

In the last few months, the relationship between the United States of America and China has become more tense. Washington has increased sanctions against chipmaking and other key Chinese industries. Beijing is showing a growing mistrust of foreign companies. It has cracked down on international consulting firms and expanded the counter-espionage laws last month.

Michael Kelly, the global head of multiassets at PineBridge Investments in New York, said: 'Unfortunately, after two decades mutual benefit, tensions between China and US have increased.

Patchy recovery

In late October, Chinese stocks started a rapid rally on the hope that China would abandon its expensive zero-Covid policies. Beijing dropped the strict restrictions in early December. This led to a rapid rebound in economic activity.

Recent economic data indicate that despite a solid growth driven by consumption of 4.5% in first quarter, the second largest economy in the world is experiencing an uneven recovery.

China released economic data on Tuesday that disappointed investors. Nomura and Barclay both lowered their estimates to 5.5% and 5,3% respectively after the release of data. UBS and Goldman Sachs have maintained their growth forecasts for the year, which are 5,7% and 6% respectively.

In April, the consumer price index increased by only 0.1%, which is the lowest rate in over two years. The producer price index (which measures factory-gate pricing) declined by 3.6% in April, the largest contraction in the last three years and underscoring deflation.

Imports fell 7.9% in April, confirming signs of a weak domestic demand. In April, the unemployment rate for 16-24-year-olds reached a new record of 20,4%.

Silvers said that China's real estate sector is 'failing', which was once the main engine of its economy. This remains a serious concern. In the last few decades, this sector has contributed up to 30% of China's gross domestic product.

The National Bureau of Statistics announced on Wednesday that new home prices increased by only 0.3% in April after rising 0.4% in march. This suggests that pent-up consumer demand is fading following the end of the pandemic restrictions. Home prices were in a historic decline before February.

Crackdown on spying

Business people are unnerved by a campaign to discredit consulting and due diligence companies, even as politicians have tried to attract foreign investment.

Beijing updated its anti-espionage laws last month. This expanded the list activities that can be considered spying. In the last few months, Chinese officials have conducted a number of raids against consultancies such as Capvision, Bain & Company, and Mintz Group.

Capvision, a company based in Shanghai, New York and London, was accused of helping leak military secrets to foreign forces. Authorities have announced a national investigation to determine if the consulting industry was used for espionage.

Neil Thomas, a fellow with the Asia Society Policy Institute’s Center for China Analysis, said that Beijing's efforts to restrict foreign access to business intelligence and domestic information make equity investments in China more difficult.

'The increased focus on national safety in economic policymaking shows how Xi’s leadership creates political risks, which make it harder for foreign companies to do business in China.

Analysts and fund managers say that the crackdown has made it harder for foreign investors to obtain routine information on Chinese companies, which would otherwise be a factor in their decision-making.

Beijing has also restricted access from overseas to certain Chinese data sources such as Wind, which is a database containing key financial information.

Close shop

Some fund and research companies are closing down.

According to reports, Forrester Research is a US-based research and advisory company that focuses on technology. It plans to reduce the number of analysts in China. Forrester responded to CNN by saying that its China office would be closing as part of global restructuring.

A spokesperson stated that the 'unsteady economy' and our ongoing product changes were the main drivers of the change. The spokesperson stated that the size of the China business was 'not significant' in comparison to the global revenue. It would serve its clients in China via its global research team.

Ontario Teachers' Pension Plan (OTPP), one of the largest pension funds in the world, has closed down its Hong Kong-based China Equity Investment team.

In a CNN statement, Dan Madge, the spokesperson for the pension funds, said that the fund would no longer be establishing country-specific stock-picking groups in Asia. This will result in the departure of 5 of its colleagues from the Hong Kong office.

Some investors are still convinced that China will rebound.

Kelly, from PineBridge Investments, said that while there's no doubt that China's stock exchange has experienced a significant correction... it's also important to remember that China led most major stock exchanges off their October lows.

He added that the more Western economies crack, the more global investors would need to invest in Chinese assets.