Chinese equities boomed in late 2022 after the much-anticipated lifting of Covid restrictions that were among the world’s strictest. Fast forward nearly a year, and the reopening gains have evaporated amid a steady drumbeat of disappointing economic news, leading to a $3 trillion equity rout. Foreign funds have been steady sellers even as the government has undertaken a barrage of measures to try to prop up domestic markets and the economy. A structural divestment from the world’s second-largest stock market would make it harder for China to raise overseas funds to help finance future growth.

This was supposed to be China’s comeback year, but investor sentiment has been dragged down by prolonged trouble in the property sector, local government debt stress and growing US-China tensions over semiconductors and other technology investments. China’s economy gained momentum in the third quarter, but there’s a lot of trepidation about calling a bottom, especially as real estate remained a sore spot. Yuan weakness and consumer price deflation are adding to worries about corporate profits. Indeed, earnings expectations for the MSCI China Index are looking overly optimistic by one metric, according to Bloomberg calculations. Other factors include worries about another crackdown on private enterprise such as what hit Big Tech a few years ago, low trust in the government following President Xi Jinping’s consolidation of power in 2022, and increasing opacity following raids at consulting and due diligence firms that help global investors understand the country.