China stock market

Last bull abandons Chinese stocks as global fund managers turn from net buyers to sellers

Foreign investors have bought US$40b of mainland equities in the first nine months of the year

PUBLISHED : Thursday, 11 October, 2018, 2:07pm
UPDATED : Thursday, 11 October, 2018, 10:23pm

Enough is enough and the last bull in China’s stock market has thrown in the towel.

Foreign investors, who were net buyers of Chinese stocks every month except February since 2017, have been dumping the mainland’s yuan-denominated shares daily in October through the exchange links with Hong Kong.

While local Chinese traders have shunned equities, sending the Shanghai Composite Index down by 22 per cent this year, overseas investors have maintained, until now, a strong interest, with global index compilers MSCI and FTSE Russell adding Chinese stocks to their benchmarks. Global fund managers bought a combined 277.5 billion yuan (US$40 billion) of mainland Chinese stocks, known as A shares, via the stock connect programmes in the nine months through September this year, according to Bloomberg data.

But foreign appetite for Chinese stocks quickly waned this month, as rising yields on US Treasuries and the outlook of interest rate increases by the Federal Reserve rattled financial assets worldwide from equities to emerging-market currencies.

“There’s definitely the risk of foreign capital outflows out there in the short term,” said Min Liangchao, a strategist at HSBC Jintrust Fund Management in Shanghai.

“Overseas funds will systemically reduce global allocations of stocks, because of the rising US Treasury yields. A shares are no exception.”

Overseas funds will systemically reduce global allocations of stocks, because of the rising US Treasury yields. A shares are no exception
Min Liangchao, HSBC Jintrust

Foreign fund managers sold 3.5 billion yuan of Chinese stocks so far on Thursday trading, Bloomberg data showed. Net sales totalled 17.5 billion yuan so far in October, according to the data.

Liquor distiller juggernaut Kweichow Moutai, Ping An Insurance Group and China Merchants Bank were among the companies that bore the brunt of the sell-off, data from the Hong Kong exchange showed.

The unwinding of foreign holdings hammered Chinese stocks further. The Shanghai Composite tumbled 5.2 per cent to 2,583.46 on Thursday, posting its steepest drop since February 2016. The decline was also the biggest among all the markets in Asia for the day, except Taiwan which sank 6.3 per cent.

About 1,100 stocks on the Shanghai and Shenzhen exchanges – almost a third of the total listings – slumped by the 10 per cent daily limit at the Thursday’s close. Forty-five per cent of the stocks on the Shanghai exchange have already fallen to oversold levels, and the ratio in Shenzhen is 46 per cent, according to Bloomberg data.

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The selling was reminiscent of February, when foreign investors sold a total of 564 million yuan of Chinese stocks as trade tensions with the US escalated and increases in borrowing costs loomed at the time.

Buying returned subsequently, as MSCI officially added the mainland’s stocks to its emerging markets index in June and FTSE Russell said last month it would do likewise next year.

“In the long run, it’s a trend that foreign investors will keep adding Chinese stocks,” said Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai.

“But now, they need to hedge against the risk because many of them manage active stock funds.”