As Asian fixed income investments and stocks saw an influx of foreign investors, it propelled emerging market portfolio inflows to $10.4 billion in May, and offset Chinese bonds, which suffered their third month in a row of outflows, according to the Institute of International Finance (IIF).
Even despite outflows of $7.2 billion from Chinese debt compared to a minor $100 million inflow into the nation’s equities, the IIF registered the fifth consecutive month of positive foreign investor cash flows to emerging markets.
Although the nation’s equities have experienced $33.7 billion in inflows over the past year, foreign investors have pulled about $59 billion out of debt from China.
IIF economist Jonathan Fortun wrote in a note, “While our data shows a positive picture overall, this is the fifth consecutive month of China debt outflows and only marginal China equity inflows.”
Investor enthusiasm for China has been dissipating amid a background of disappointing economic numbers, deteriorating relations between the US and China, as well as regulatory crackdowns from Beijing which spooked investors.
Overall, investors moved $6.9 billion into emerging market equities, as well as $3.5 billion into debt.
Although positive, the figure were unable to maintain the optimism from earlier in the year, when inflows reached a two-year high due to the reopening of China’s economy following the pandemic, as well as hopes that globally, interest rate hikes would be put on pause.
Fortun added, “We maintain our view of lower inflation in the coming months for the U.S. and a controlled landing of the economy, which may benefit EM flows overall.”
Most of the inflows, roughly $16.4 billion, were placed in Asian emerging markets, with equities in India, Taiwan and Korea all seeing large investments.
Emerging markets in Africa and the Middle East saw investors withdraw a total of $5.8 billion. Outflows from South Africa, which battled rolling power cuts and declining investor sentiment, reached $562 million in equities and $816 million in debt.
Fortun wrote, “Moving forward, we see seasonal patterns in EM dollar debt turn progressively weaker over the next few months, as tight liquidity has historically discouraged creditors from adding exposure before the last quarter in a year. We thus expect the level of inflows lowering, mainly explained by a more cautious market.”
