Foreign investors bought a record $6 billion in Chinese stocks in the first three months of 2022.
Chinese stocks took a major hit earlier this week as Covid-19 cases surged in major cities like Shanghai and Shenzhen, extending declines that have proved sustained year-to-date.
Local investment has picked up again after Beijing signaled it would take a range of pro-market measures. But foreign holdings of stocks listed in mainland China have not.
That divergence, investors and fund managers say, reflects a number of concerns that have battered valuations, even at companies that led the rally in Chinese equities in 2020, as the market rallied amid Beijing’s early success with its strict “Zero” World Best Wins Recorded -Covid” policy.
“Chinese equities have been in a perfect storm over the last two weeks,” said Pruksa Iamthongthong, senior investment director for Asian equities at fund management giant Abrdn. She added that global investors’ confidence in Chinese stocks “is so low that some of this volatility will continue.”
Pat Lu, a Hong Kong-based portfolio manager for Neuberger Berman who specializes in emerging markets, added: “When we’re scared of markets in general, we tend to look for risk, and that’s what happens.”
Chinese stocks have lagged all year. The benchmark CSI 300 index is just 4 percent above its level at the end of 2019, when the first Covid-19 outbreaks were reported in China. The Nasdaq Golden Dragons index of major Chinese tech firms listed in New York is down about a quarter.
By comparison, the U.S. S&P 500 and the technology-focused Nasdaq Composite are up about 37 percent and 52 percent, respectively, over the same period.
Foreign outflows through Hong Kong’s so-called Stock Connect trading schemes with Shanghai and Shenzhen began on March 7 but increased dramatically earlier this week.
As of Friday’s close, net sales by offshore investors this year were nearly Rmb 40 billion (US$6 billion), on track to mark their worst quarter since the merger program began in 2014. The sell-off marks a sharp contrast to 2021, when net inflows were recorded through the scheme topped Rmb430bn.
Investors pointed to three main reasons for overseas sales: renewed concerns about potential delistings for Chinese stocks trading in New York, the surge in Covid-19 cases in major mainland cities including Shanghai and Shenzhen, and concerns about the possibility that China is supporting Russia in its invasion of Ukraine.
On Tuesday, after Chinese stocks posted their second day of double-digit declines, JPMorgan downgraded 28 of the 29 Chinese internet stocks it covers to underweight or neutral. “We recommend investors avoid the Chinese internet over a 6-12 month horizon,” the analysts wrote, describing the sector as “unattractive with no near-term valuation support.”
An executive at the Hong Kong arm of a global hedge fund said the start of the week “felt like 2015” when the leverage-fueled equity bubble burst seven years ago.
But on Tuesday, Liu He, vice premier and President Xi Jinping’s closest economic adviser, announced that the government would take measures to “stimulate the economy in the first quarter” and introduce “market-friendly policies.”
State media immediately backed He’s message with reports of talking points from a special session of China’s Financial Stability Committee he just chaired, which included a call for “swift full corrections of China’s major tech platforms” and a move to end regional test runs for property taxes that are hard on property developers had charged.
“The message is very clear: the Chinese government wants to send a strong signal of market support,” said Jessica Tea, investment specialist for Greater China and Asia Pacific equities at BNP Paribas Asset Management. “It appears they are pausing the regulatory tightening to provide more support and boost market confidence.”
A series of market-friendly promises from Beijing were quickly followed by some global investment banks moving to upgrade Chinese equities.
Credit Suisse announced on Thursday that it was increasing its allocation to Chinese equities to overweight as Michael Strobaek, the bank’s global chief investment officer, described Beijing’s move as “significant.”
Strategists at Citigroup also upgraded Chinese stocks to overweight on Thursday, saying that if authorities live up to their pledges “it would eliminate almost any slack in Chinese stocks that the market was concerned about.”
But both banks framed their intent to buy more shares as “tactical” — typically an indication that purchases will be limited or target specific stocks, rather than increasing exposure to the Chinese market overall.
Analysts also warned that after so much pain for Chinese stocks over the past 12 months, it would take time and concrete action to regain global investor confidence that had been repeatedly burned.
Thomas Gatley, an analyst at Beijing-based consulting firm Gavekal Dragonomics, said the committee’s statement was “so positively worded that if they don’t deliver results over the course of the next month . . . we will see another decline in the markets.”
Gatley added that the explanation, like many pledges from top officials, was carefully drafted to allow for plausible denial in case Beijing’s priorities suddenly change or regulators push ahead with disruptive enforcement actions already underway.
“That [approach] works pretty well for macroeconomic policy in general and running a large, diverse country,” he said. “But it’s not great for market signals.”
https://www.ft.com/content/1554991d-ffed-47a0-adde-13844b46f42d Foreign investors are selling Chinese stocks at a record pace