How Low Can the China Allocation Go?

A lower bound based on the index weight of China in Emerging Markets

First, a recap of what we’ve been saying lately:

• The global risk-off on China is mainly driven by international politics, i.e. deep-rooted misunderstanding, confusion and speculation surrounding China’s position on Russia-Ukraine. This will hopefully ease soon.

• Investors are increasingly worried about China’s zero tolerance COVID policy, which has had a visible impact on domestic consumption and the supply chain. This is now the No. 2 risk on global investors’ radar.

As a result, there has been “unprecedented” foreign capital outflow from China recently. However, I think global investors will eventually get over the political overhang on China with time. Plus there is a “limit” on how much China that global institutional investors can sell. (The following discussion may get a bit technical. I will do my best to explain).