(Yicai Global) March 29 -- There has been a surprising outflow of foreign funds from the Chinese mainland's capital markets in recent weeks and although the country continue to be very attractive to many foreign investors, the concerns harbored by some are likely to be due to a change in profit-seeking logic, rather than panic motivated.

Over USD10 billion in foreign capital drained out of the country in the two weeks prior to March 18, only exceeded during the global liquidity crisis in 2020 and the slump in the Chinese mainland stock markets in 2015.

It is an usually high amount, considering how the value of the Chinese stock markets has remained low over the past year with small fluctuations. Yet this only accounted for 3.6 percent of total net foreign purchases.

The beginning of the US Federal Reserve’s interest rate hike cycle and recent changes in geopolitical risks will have a certain impact on the investment decisions of foreign investors. These two factors have not greatly affected the mainland stock markets but will slow down inflows of foreign funds into the nation’s bond market and thus put some pressure on Chinese yuan exchange rates.

Before, big outflows of foreign funds from the Chinese stock markets were part of profit-taking or to stop losses, except in extreme circumstances such as the US dollar liquidity crisis and in general the panic died down within a month.

This time, the outflow from some actively managed foreign funds, while there continues to be inflow in passively managed funds, probably indicates that the transfers are not panic motivated, but rather are a change in the profit-pursuing logic in asset allocation. It will take time to see when long-term investment in China will resume.

China has shifted the focus of its policies to stabilizing the economy and market expectations, according to recent speeches by the country’s high-level officials. Risk factors causing big outflows of foreign funds have been basically resolved, and foreign investors will gradually recover confidence in Chinese assets as measures are implemented.

Editor: Kim Taylor