Do global investors see China in a new light following Russia’s invasion of Ukraine? Judging by the coverage of China in the Western financial media, mounting concerns about Beijing’s close ties to Moscow – and the risk that China could be targeted with secondary sanctions if it helps Russia circumvent some of the West’s punitive penalties – mark a turning point in markets’ perception of the world’s second-largest economy. There is certainly plenty of evidence pointing to a sharp deterioration in sentiment towards China since the war began on February 24. In the first 24 days of March, foreign investors sold US$9.5 billion of mainland stocks through the northbound Stock Connect programme with Hong Kong, putting this month’s outflows on track to be the second-largest monthly drawdown since the scheme was launched in 2014. More worryingly, the selling pressure has spread to China’s hitherto resilient government debt market . In the third week of March, overseas investors sold US$1.1 billion of Chinese bonds, the largest weekly outflow on record, according to data from JPMorgan. A report published by the Institute of International Finance (IIF) on March 24 amplified concerns about the scale and severity of the capital flight. The IIF’s daily tracker of global capital flows revealed that investors had withdrawn money from China on an “unprecedented” scale since the war erupted, in contrast to other emerging markets which had not suffered large outflows. In a tweet on March 21, Robin Brooks, the IIF’s chief economist, said: “A realignment in global capital flows has started. Never before has China underperformed other [emerging markets] like this. Putin’s war is changing how investors look at China…” This is a bold assertion. There is no question that Russia’s invasion of Ukraine, which took markets by surprise, has forced investors to take geopolitical risks more seriously. It has also raised some uncomfortable questions for markets. If investors misjudged Putin’s intentions so badly, does it not stand to reason that they may also be misreading China, notably when it comes to tensions in the Taiwan Strait? This is undoubtedly a dangerous moment for China’s markets. Over the past month, many investors have looked at China through the prism of the West’s response to Russia’s war in Ukraine. Beijing’s ambiguous stance comes as the list of vulnerabilities in China’s economy and markets is growing, despite a pledge by policymakers to shore up growth and stabilise asset prices. However, sentiment was deteriorating sharply before the war erupted. More importantly, the risks to Beijing in siding with Moscow far outweigh the benefits, given President Xi Jinping’s focus on promoting stability. Both of these factors strongly suggest investors are reading too much into the falls in asset prices since the war began. First, there are more important issues influencing China’s markets. If there was a turning point in investors’ perception of China, it came last year when the government spooked markets by launching fierce crackdowns on private companies in a range of industries, taking regulatory risk to unprecedented levels. Investors have more than enough to worry about – the lockdown-induced damage caused by the worst Covid-19 outbreak since the pandemic began, the sharp downturn and financial contagion in the property market, and the persistent uncertainty over the scope and efficacy of a shift in economic policy – without trying to predict China’s response to a war that markets failed to anticipate in the first place. Second, a cursory glance at the performance of global markets over the past month shows that the outflows from China have been something of a sideshow. The far more consequential moves in asset prices have been in the government debt markets of advanced economies. The Bloomberg US Treasury Index lost 3.5 per cent in March, more than half of the nearly 6 per cent drop in the first quarter of this year, the sharpest quarterly decline since at least 1973, according to data from Bloomberg. Global bond markets are being pummelled by a toxic combination of a sanctions-induced commodity shock, soaring inflation and central banks’ increasingly hawkish stance. This is fanning fears about a policy mistake by the Federal Reserve, which plans to raise interest rates aggressively in the face of slowing growth. China’s government bond market, by contrast, remains a relative safe haven. The country’s 10-year bond yield has barely budged since Russia invaded Ukraine, underpinned by a central bank that prizes stability and is gently moving in the opposite direction from the Fed. Moreover, if there is an economy that is perceived less favourably by investors since the war erupted, it is not China, but Germany. On Wednesday, data showed that Germany’s inflation rate hit 7.6 per cent year on year in March, a post-reunification high, just as business confidence is collapsing. The euro zone as a whole, which is dangerously reliant on Russian gas supplies, now faces stagflation. Russia’s war in Ukraine was bound to put China in a difficult position. But Beijing’s predicament is not the key factor driving China’s markets. Investors have plenty of other things to worry about. Nicholas Spiro is a partner at Lauressa Advisory