This year has seen a significant reversal in the flow of foreign investment into China’s stock market, with almost 90% of the foreign money that entered the market in 2023 now leaving. This has led to growing uncertainty about China’s economic growth prospects.
Data from Hong Kong’s Stock Connect trading scheme shows that net foreign investment in China-listed shares has decreased by a substantial 87% to just Rmb30.7bn, down from its peak of Rmb235bn ($33bn) in August.
Traders and analysts attribute this reversal to doubts about the Chinese economy among global fund managers. There has been a persistent trend of net selling among international investors since August, when missed bond payments by developer Country Garden exposed a liquidity crisis in China’s property sector.
Wang Qi, the chief investment officer for wealth management at UOB Kay Hian in Hong Kong, has expressed concerns about confidence issues beyond real estate, including consumer, business, and investor confidence.
Despite positive economic data, signs of improved US-China relations, and efforts to strengthen the financial system against slowing growth, Chinese shares have underperformed global peers. While the S&P 500 index has seen a 4.7% increase, China’s benchmark CSI 300 index has fallen by over 3%. Foreign sales of China-listed shares have reached about Rmb26bn in December.
Alicia García-Herrero, chief Asia-Pacific economist at Natixis, has expressed confusion about the situation, stating that there seems to be no reason for the lack of investor interest, given the positive economic data in China.
The exit of offshore investors has been facilitated by share buybacks from listed companies in China and large-scale purchases from domestic investment funds and state-run financial institutions, all under pressure from Beijing to support the struggling market.
It is expected that this year will end with the smallest annual foreign inflow since 2015 through the Stock Connect trading scheme. The recent tough regulations announced by Beijing for the gaming sector have also caused a sharp sell-off of gaming stocks, further dampening market sentiment.
Global long-only investors have shown significant wariness towards Chinese stocks, and the perception of Chinese equities among Asia-focused fund managers has deteriorated substantially in the second half of the year. The CSI 300 is expected to close the year down more than 15% in dollar terms.
The overall sentiment seems to be that investors are giving up on Chinese stocks as doubts about the country’s economic prospects persist. The exit of foreign investors has left the Chinese market in a fragile state, with serious concerns about where it’s headed next.
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