China posts first debt inflows of 2023 with US$3 billion added in July, but weak economy set to limit sustainability

Chinese debt saw a net inflow of funds from foreign investors for the first time this year in July as optimism grew on the wider emerging market assets, according to the Institute of International Finance (IIF).

Chinese equities also posted US$7.7 billion worth of inflows from overseas funds in July, the IIF said, compared with June’s inflow of US$1.9 billion.

“For the case of debt flows, our data shows July 2023 as the first month of China debt in positive territory, breaking a six-month tendency of outflows from this category,” the Washington-based IIF said in its monthly capital flow tracker.

“Diminished currency volatility enhances the allure of carrying offshore, and is encouraging foreign creditors to benefit across emerging market local yield curves, making debt assets more attractive to foreign investors.

“Additionally, the positive momentum in equity markets in recent weeks has benefited our figures.

“This, combined with a perspective of lower inflation in the coming months for the US, should benefit emerging market flows overall.”

The IIF data also showed strong inflows for emerging Asia and Latin America, totalling around US$19 billion and US$7.8 billion, respectively.

Overall, emerging market equities and debt saw a total inflow of US$32.8 billion in July from foreign investors.

The US-based association for the global financial services industry expects further inflows into emerging market assets in the coming months.

The yuan has lost 4 per cent against the US dollar since the start of the year as US increases have widened the interest rate gap between the two countries, adding pressure on the Chinese currency.

However, analysts believe China’s economic performance may be the key driver of investors’ appetite for stocks and bonds going forward, meaning its equity rebound is unlikely to be sustained.

“Our analysis of country exposure in major emerging market equity funds suggests that investors have started to return to China in recent weeks,” said London-based research firm TS Lombard on Monday.

“In our view, equity investor optimism is overdone. Economic and property scarring continues to weigh on consumer sentiment, reducing the efficacy of stimulus.

“At the same time, however, relatively attractive equity valuations compared with some other emerging markets, as well as underweight investor positioning, could limit the downside for markets.”