Growing China human rights concerns risk curbing foreign investment needed to support economy

Foreign investors’ holdings of Chinese government bonds declined by US$2.5 billion in March from the previous month, the first monthly drop since February 2019

Concerned with social issues and corporate governance, China’s alleged human rights violations in Hong Kong and Xinjiang are weighing on minds of fund managers

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In March, foreign investors’ holdings of Chinese government bonds declined by 16.5 billion yuan (US$2.5 billion) in March from the previous month to 2.04 trillion yuan (US$312 billion), the first monthly drop since February 2019. Photo: Reuters

Published: 10:15pm, 15 Apr 2021Updated: 10:44am, 16 Apr 2021

International criticism of China’s alleged human rights violations has grown louder in recent months, putting downward pressure on Beijing’s efforts to attract foreign capital into its financial markets to support the economy, analysts said.

Social issues and corporate governance have become important factors for North American and European fund managers screening their securities investments, and this is taking place amid increasing scrutiny over environmental, social and governance (ESG) factors practised at Chinese firms due to a deteriorating geopolitical environment.

So far there is little sign that the current policies point towards a wholesale investment decoupling from China, with only limited impact seen on the stock and bond performance of individual Chinese companies that are politically sensitive, analysts said.

Nevertheless, new sanctions on an increasingly large number of Chinese names are not helping with inflows into China’s financial markets.

If this becomes large scale, it means you are rejecting direct investment into China which would have serious implications. It is something that I’m worried about

Wei He

A wild card, though, is the potential for measures to morph into a broader row over China’s human rights record in Hong Kong and Xinjiang, causing wider pressure on government bonds and foreign investment, said Wei He, China economist at Gavekal.

“Anecdotally, this has led some investors to not buy Chinese government bonds because of ESG concerns,” Gavekal’s He said. “If this becomes large scale, it means you are rejecting direct investment into China which would have serious implications. It is something that I’m worried about.”

The number and extent of Western sanctions against China from the likes of the United States, Canada and the European Union for alleged human rights violations continues to grow, adding to concerns among investment managers.