China slowdown prompts record fund outflow

China bicyclesConcerns about the Chinese economy triggered the highest weekly outflow from China equity funds on record in the week ending March 18.

The figures from data provider EPFR Global record a net $1.5 billion (€1 billion) outflow from China equity funds in the week, as analysts continue to voice concern about a hard landing in the country's export, banking and property sectors.

Some investors may have reallocated capital to neighbouring countries like India and Korea, whose equity funds each registered a modest net inflow according to EPFR Global figures.

Investors seem to be reacting to weak economic data. A number of recent surveys have pointed to a fall in Chinese manufacturing activity, the latest being a flash purchasing managers index from HSBC and Markit, released today, which suggests an unexpected decline in purchase orders.

Maarten-Jan Bakkum, senior emerging markets strategist at ING Investment Management, is particularly bearish, claiming it is “increasingly difficult to imagine a scenario where a credit crisis or a drastic slowdown can be avoided”.

He says total Chinese debt as a proportion of GDP has risen by more than 70 percentage points in the last five years and says state-owned companies and local government are "up to their ears in debt”.

However, some say the economic weakness could lead to good equity performance – because it will spur the Chinese authorities into taking stimulus measures.

“The current growth weakness could lead to the government re-prioritising growth in the short-term in order to limit the speed of the slowdown, as they balance it with reform announcements such as this weekend’s currency band widening,” says Stephen Cohen, chief investment strategist for iShares in Europe, the Middle East and Africa.

“They could act as they did last June after a very similar slowdown, through easing monetary conditions and boosting investment, but potentially earlier. As such, there could soon be an opportunity for Chinese equities to perform in the near-term on the prospect of possible policy action.”

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