China-eyed foreign investors react as US’ ‘renewed hawkish’ monetary stance spills into emerging markets
- Overall flow of funds from foreign investors into emerging-market securities slowed in February
- Analysts say monetary-policy uncertainty may boost demand for US dollar protection
Foreign investors poured more cash into emerging-market securities in February, but the pace could slow as the hawkish monetary stances of the US Federal Reserve and European Central Bank serve as stiff headwinds, according to a US-based association of the world’s largest financial institutions.
The Institute of International Finance (IIF) on Thursday estimated that emerging-market securities attracted around US$22.9 billion worth of foreign funds in February. In Chinese stocks, foreigners invested a total of US$2.4 billion last month, the IIF said.
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The overall flow of funds from foreign investors into emerging-market securities slowed from January, when such securities attracted US$65.7 billion, according to data from the IIF. Foreign funds also snapped up US$17.6 billion worth of Chinese equities in January.
“In the near future, we see the level of inflows lowering – the product of a more cautious market, given the still-hawkish monetary stance from the [US Federal Reserve] and [European Central Bank],” the IIF said, adding that the “renewed hawkish” sentiment of the US Federal Reserve is spilling over into emerging markets.
“Monetary-policy uncertainty may boost demand for dollar protection, as the relationship between emerging-market currencies and US interest-rate volatility continues to strengthen.”
US Federal Reserve chairman Jerome Powell on Wednesday reaffirmed his message of higher and potentially faster interest rate increases, but he stressed that a decision will be made based on data to be issued before the US central bank’s policy meeting in two weeks.
Meanwhile, the European Central Bank is expected to increase its key lending rate next week by 50 basis points, or half a percentage point, after its president, Christine Lagarde, said that rate increases would continue as long as required to tame inflation.
The US dollar has strengthened against the yuan of late, rising to 6.9 after reaching 6.7 in mid-January. A lower number means it takes fewer yuan to buy one dollar, reflecting a stronger yuan.
Meanwhile, China’s foreign exchange reserves declined by US$51.3 billion in February, to US$3.13 trillion, partly driven by valuation loss as major reserve currencies weakened against the US dollar, UBS said on Monday.
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“We estimate that underlying capital outflow pressures increased amid recent yuan weakness,” UBS said.
“Nonetheless, UBS still expects a weaker dollar and a [US Federal Reserve] rate cut later in 2023. While slowing external demand and China’s rapid reopening may lead to a narrower current account surplus, China’s growth recovery should boost market sentiment and attract foreign inflows.
“We maintain our US dollar to onshore yuan forecast at 6.8 for year-end 2023, with more two-way fluctuations.”
Additional reporting by Reuters
