Covid-19 and China's International Capital Flows

The outlook for the global economy and financial markets has undergone significant changes since the outbreak of Covid-19 in early 2020. International capital flows in China's capital market also encountered short term fluctuations. By early May，it became apparent that the shocks to China's capital market from Covid-19 could be divided into two stages: the first began with the outbreak in late January followed by the center of the financial storm on February 3 when the stock market reopened after the Spring Festival. When the pandemic was brought under control in China in late February，there was a period of stability that concluded that phase of the crisis. The second stage started with the outbreak in Italy and other countries in late February. The asset price plunge in mid-March was the center of the financial storm in this stage. This too was followed by a period of stability. And we can see that the reasons behind the movements of international capital during these two stages were different.

First，cross-border capital fluctuations during the first stage were mainly due to the economic uncertainties in China. In late January，there were uncertainties over the main features of the virus，whether it was preventable or controllable，and what the impact would be on China's economy. Stocks are risky assets and investors tend to avoid uncertainties. It was the uncertainties linked to the Covid-19 pandemic that led foreign investors to cut holdings of Chinese stocks. When the price decline made the risks less pronounced and there were signs of the pandemic coming under control in China，funds gradually returned to the market. During this stage，the behavior of foreign investors，especially institutional investors，perfectly reflected the concept of value investment.

Next，fluctuations in cross-border capital flows in the second stage were caused mainly by the economic shocks in the US and the international economy coupled with the global "dollar shortage." During this stage，instead of China's domestic market and public health situation，foreign investors were more concerned with global factors. These mainly included the panic caused by the global spread of the coronavirus and the financial market panic and margin call requirements brought about by the fall in oil prices. At the same time there was a rise in global risk factors. On March 16，for instance，the S&P Volatility Index (VIX) was higher than it was at the peak of the 2008 financial crisis. Market fears of a severe global recession had ris