China is seeing unprecedented fund outflows since the Russian invasion of Ukraine, according to the Institute of International Finance (IIF).

China has seen steady fund inflows from foreign investors building exposure in the country, even amid shocks specific to the mainland, such as U.S. tariffs and the emergence of the Covid-19 virus, the IIF said in a note last week.

«So it is all the more notable that we are now seeing unprecedented capital outflows from China, which began after Russia’s invasion of Ukraine in late February,» the IIF said, noting it was too early to be certain the war was to blame.

Divergent Response to Invasion

China’s response to Russia’s invasion of Ukraine has diverged widely from the international community’s condemnation. China has reportedly indicated willingness to provide Russia with military and economic assistance, amid media reports Russia has specifically requested military equipment, including drones, from Beijing. Russia had denied seeking military assistance from China, while Chinese sources reportedly has not directly denied receiving the request. China has also generally not joined the sanctions against Russia, although China’s banks reportedly have been largely adhering to them. 

Earlier this month, Wang Yi, China’s foreign minister, reportedly told his Spanish counterpart Jose Manuel Albares that «China is not a party to the crisis, nor does it want the sanctions to affect China.»

Unprecedented Outflows

The IIF noted that fund outflows from China are coming as flows to non-China emerging markets are flat, a situation it described as «unprecedented.» China has generally had stable capital flows in recent years as foreign investors had little exposure to the country, compared with other emerging markets, IIF said.

«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,» IIF said. «Foreign investors are under-positioned to begin with, so why are they selling? The timing of outflows – which built after Russia’s invasion of Ukraine – suggests foreign investors may be looking at China in a new light.»