China has been witnessing “unprecedented” capital outflows since the beginning of the Ukraine war, a study by the Institute of International Finance (IFF) has found. 

“At this stage it is too early to say if the war is driving outflows or if other factors are to blame,” says the study, published on March 24. “But we think these outflows are notable enough to at least raise the possibility that Russia’s invasion of Ukraine may be pushing global markets to look at China in a new light.” 

The IFF study, which looks at non-resident portfolio flows into stocks and bonds of major emerging markets (EM), highlights that China registered a net outflow of capital in the first quarter of 2022, while flows to non-China EM are flat in the same period. 

“This kind of composition of flows – China going negative, while the rest of emerging markets holds up – is unprecedented,” the IFF study notes. 

Foreign portfolio investment into China has been stable over the years as foreign investors gained exposure to the country’s gradually opening financial market. However, from a macroeconomic perspective, foreign investors still have a low exposure to China’s financial market relative to other emerging markets, the IFF study highlights. 

“China was at the very low end of the spectrum in terms of foreign investment before the pandemic, something that remains true after COVID as well. This underexposure is what makes current outflows notable,” it reads. 

The drop in foreign portfolio investment adds up to an already challenging foreign direct investment (FDI) landscape. FDI into China sank to historic low in 2020, and recovered only partially in 2021 despite annual GDP growth of 8.1%.