“The pace and continuity of northbound outflows are quite unusual,” said Liu Xiaotong, an analyst for Shenzhen-based Guosheng Securities. “It shows overseas institutional investors are widely pessimistic about the prospect of the trade war, which is currently the key driver of the market sentiment.”

The outflow partly explains why Shanghai’s benchmark index had deteriorated from the world’s biggest gainer in the first quarter to the sixth-biggest loser since March 29 with a 6.4 per cent decline.

Northbound funds, mainly consisting of foreign capital and money by offshore Chinese firms flowing back to China through Hong Kong, are often called smart money because their investors often have the advantage of being acutely familiar with China’s investing environment.

“Smart money from overseas has already started pulling out since last month, as risks are rising after a rapid surge in stocks earlier this year,” said Xu Wenyu, an analyst for Shanghai-based Huawen Futures.

That is a concern shared by Hong Kong’s Financial Secretary Paul Chan Mo-po, who noted the unprecedented northbound fund flows through the city into mainland China.

Although overall financial risks are “manageable” for now, he said the regulator is closely watching any capital flight arising from the effects of the trade war.

Negotiations ended last week without a resolution to the year-long trade war between the world’s two largest economies, with the US raising import tariffs to 25 per cent on US$200 billion of Chinese products last Friday on schedule.

Another US$325 billion of Chinese products could be subject to import tariffs in the US if China’s government doesn’t meet US demands for market access, end of forced technology transfer, and other conditions. China’s commerce ministry has pledged to retaliate with measures in kind.

The fundamental trigger of accelerated outflows may be China’s growth prospects, which have started to lag behind America’s growth rate, said Guotai Junan Securities’ chief strategy analyst Li Shaojun.

The US economy expanded by 3.2 per cent in the first quarter, beating market expectations and faster than last year’s 2.2 per cent growth. The correlation between northbound fund outflow and growth prospects in the US and China have become more noticeable since 2018, Li said.

The outlook offered by China’s economic data doesn’t instil confidence either. Exports and credit growth both fell last month, while fiscal support is also waning after local government front-loaded spending for this fiscal year.

“The stronger the US economy is, the bigger outflow will be,” he said. “Northbound funds have profited from the prior surge in the market. Now they are taking profit and running away quickly as bearish news emerged.”

Still, the gloom and doom may be tempered by MSCI’s decision to double the factor of China’s yuan-denominated A shares in its key benchmarks from 5 per cent to 10 per cent, while large-cap shares listed on the ChiNext start-up board will be added with a 10 per cent factor as well. The inclusion takes effect from market close on May 28.

The move will be followed by two additional increases in August and November respectively, which will see the weighting of A shares eventually lifted to 20 per cent.

From June, index provider FTSE Russell will also include eligible A shares in its global indices, with initial inclusion factor of 5 per cent.

It means those with passive funds, such as ETFs, will have to be buyers if they are benchmarking those indices.

“We are still upbeat about the long-term trend of foreign capital inflows,” said the CICC’s chief strategist Wang Hanfeng, who expects an additional US$20 billion of funds to flow into Chinese stocks after MSCI’s inclusion.

For the whole year of 2019, foreign capital inflows to Chinese equities will reach between 200 billion yuan to 400 billion yuan, according to the forecast by CICC.