Investors channel billions into emerging markets, but China drops again - IIF

Foreign investors piling into Asian fixed income and stocks propelled emerging market portfolio inflows to $10.4 billion in May, offsetting Chinese bonds suffering a third straight month of outflows, the Institute of International Finance (IIF) found.

The fifth consecutive month of positive foreign investor cash flows to emerging markets came despite outflows of $7.2 billion from Chinese debt and a small $100 million inflow to the country's equities, the IIF found.

Over the past year, foreign investors have taken some $59 billion out of Chinese debt, though the country's equities have seen $33.7 billion of inflows in the same period.

"While our data shows a positive picture overall, this is the fifth consecutive month of China debt outflows and only marginal China equity inflows," IIF economist Jonathan Fortun wrote in a note.

Investor appetite for China has been cooling against a backdrop of disappointing data, deteriorating Sino-US relations and regulatory crack-downs from Beijing that unsettled markets.

Overall, investors put $6.9 billion into emerging market equities and $3.5 billion into debt.

The figures, while positive, again failed to maintain the optimism from early this year, when inflows hit a two-year high on China's post-pandemic reopening and hopes that a global interest rate hiking cycle was on pause.

"We maintain our view of lower inflation in the coming months for the US and a controlled landing of the economy, which may benefit EM flows overall," Fortun added.

The bulk of the incoming cash – a total of $16.4 billion – went to Asian emerging markets, with equities in India, Taiwan and Korea drawing large investments.

Investors pulled a total of $5.8 billion from emerging markets in Africa and the Middle East. Outflows from South Africa, which struggled with rolling power cuts and souring local investor sentiment, hit $562 million in equities and $816 million in debt.

"Moving forward, we see seasonal patterns in EM dollar debt turn progressively weaker over the next few months, as tight liquidity has historically discouraged creditors from adding exposure before the last quarter in a year," Fortun wrote. "We thus expect the level of inflows lowering, mainly explained by a more cautious market."