Foreign investors have been selling Chinese securities for the last two years, the Atlantic Council said.
President Xi Jinping's policies and growing geopolitical tensions have helped spur the retreat.
"Putting money in China is going to become riskier, and de-risking is only going to become more commonplace."
China's disappointing economic performance recently has been a letdown for foreign investors, but they have retreating from Chinese markets for the last two years, according to a report from the Atlantic Council.
Talk of "de-risking" from China has been trendy lately, especially as geopolitical tensions grow and the economy's post-COVID rebound has started to lose momentum.
"But foreign fund managers have already stolen a march on the policy: They've been selling vast amounts of securities over the past two years in response to Chinese leader Xi Jinping's policies and mounting US-China tensions," wrote Jeremy Mark, a senior fellow with the Atlantic Council's Geoeconomics Center.
In fact, international institutional investors have sold a net $148 billion of China's bonds since early 2022, and Chinese stocks have seen sharp declines, especially on exchanges in New York and Hong Kong, he said.
Separate reports have also shown that foreign investors are selling Chinese stocks at a faster pace. And a former IMF official predicted China's economy is likely headed for a so-called lost decade.
Mark said that this shift in market sentiment underscores how de-risking is as much about the bottom line as it is about diplomacy.
"And it does not bode well for China amid growing anxiety about the country's economic prospects," he added.
In addition to China's weak rebound from zero-COVID policies, Mark listed long-term structural challenges the economy faces, including a rapidly aging workforce, weak productivity, worsening inequality, and a massive property crisis.
To be sure, China doesn't need foreign capital as much as it did a generation ago, but investors' reluctance to "will reverberate through the economy over time," he warned.
Fund managers are worried about Beijing's regulatory crackdown on companies, including Western firms, Mark said.
"The bottom line for many foreign fund managers is that the risk of investing in Chinese securities has soared over the past year and the returns have not kept up," he said, adding that many large institutions have stopped buying Chinese assets completely and are shifting capital to places like India.
Meanwhile, the US is applying measures to counter China's ability to develop sensitive technology, and China is limiting its companies from launching offshore IPOs.
Mark acknowledged Chinese efforts to bring back some overseas investment, but foreign capital flows are set to keep declining, especially with new US restrictions on the horizon. Already, private equity investments in China led by Americans fell 76% last year.
"Combined with recent Biden administration restrictions on sales to China of advanced semiconductors and cutting-edge chip-making gear, the message to all classes of investors will be clear: Putting money in China is going to become riskier, and de-risking is only going to become more commonplace," he concluded.
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