China snaps 2023 debt outflow streak as emerging markets shine in July -IIF

By Jorgelina do Rosario

LONDON (Reuters) – Foreign investors funneled over $3 billion into Chinese debt in July in the first net monthly inflows this year for the world’s second-largest economy, data from the Institute of International Finance (IIF) showed on Thursday.

Inflows were less than a third of the $10.6 billion poured into Chinese bonds in December as China geared up to lift nearly two years of strict COVID-19 curbs. July also saw a $7.7 billion inflow from non-locals to Chinese stocks, a big jump from the $1.9 billion in June and the second-largest monthly inflows in 2023.

“Diminished currency volatility enhances the allure of carrying offshore and is encouraging foreign creditors to benefit across EM local yield curves, making debt assets more attractive to foreign investors,” IIF economist Jonathan Fortun wrote in a report, adding that bonds benefit from less volatility in the market.

However, many analysts say the outlook for flows to China is unclear and the latest IIF data tracks capital movements mostly before disappointment set in over a lack of fresh stimulus measures by the Politburo at the end of July and before renewed turmoil in the property sector rocked its markets as data showed the nation tipping into deflation.

July proved to be a benign month for emerging market assets more widely, with stocks attracting $17.6 billion in net inflows from non-locals while $15.2 billion was poured into bonds.

The total inflow tally of $32.8 billion is the largest for portfolio flows to developing economies since January, and compares with $22.6 billion in June and an $11 billion outflow a year ago. Since the start of the year, emerging markets have attracted $137.4 billion, IIF data showed.

On a monthly basis, flows to Asia were the strongest regionally at $19 billion, followed by Latin America with $7.8 billion. Emerging Europe saw inflows increase to $4.8 billion from $300 million in July 2022.

“The emerging market credit outlook should continue to improve as a soft-landing for the US economy becomes more apparent, inflation eases and the geopolitical climate turns more market friendly,” Fortun added.

“Nevertheless, region-specific factors, upcoming elections and surprises in the market could derail the momentum that is building.”

(Reporting by Jorgelina do Rosario, editing by Karin Strohecker and Hugh Lawson)