Foreign investors flee China’s stock markets at record pace in US$900 billion wipeout with near term return unlikely

Overseas investors have sold an aggregate US$10.7 billion of Chinese stocks in 13 consecutive trading sessions, the longest selling streak since records began in 2016
Foreign investor favourites bore the brunt of the selling -liquor distiller Kweichow Moutai, retail lender China Merchants Bank, solar panel manufacturer LONGi Green

China stock market

Zhang Shidongin Shanghai

Published: 5:00pm, 24 Aug 2023

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Global asset managers have dumped Chinese onshore stocks at an unprecedented pace this month that triggered a US$900 billion destruction of market value after a gloomy growth outlook, feeble stimulus, and unresolved geopolitical conflicts between the world’s two biggest economies convinced investors the rout is far from over.

Overseas investors have sold an aggregate 77.9 billion yuan (US$10.7 billion) of stocks in the world’s second-largest equity market in 13 consecutive trading sessions through Wednesday via the northbound channel of the cross-border exchange link programme with Hong Kong, according Bloomberg data. The streak of selling is the longest since data compilation began in December 2016.

The bout of selling is the latest sign of the lack of confidence among foreign investors that are fleeing on worries over China’s gloomy growth outlook. Top policymakers have refrained from introducing more forceful pro-growth packages after a late July Politburo meeting hinted at more policy easing. This flight has sent both the onshore and offshore yuan to the weakest level against the US dollar since November despite the intervention by China’s central bank.

“The cause is the concerns about China’s policies and economy,” said Yang Qinqin, an analyst at China Fortune Securities. “Northbound capitals are the barometer of the A-share [onshore] market. A massive exodus will keep weighing on market sentiment and liquidity.”

Logos of China Merchants Bank are seen in Hangzhou, Zhejiang province, China. Photo: Reuters

The pressure has been mounting with the three-year old property crisis continuing to reverberate, as the latest bout of defaults threaten to trigger a contagion effect on the sector.

“The intensifying economic and financial woes add pressure on Beijing to pursue a more aggressive policy, including for the property market. The government needs to act quickly and decisively to shore up activity and confidence before the current pessimism becomes entrenched and hits growth harder,” said Chi Lo, senior investment strategist at BNP Paribas Asset Management.

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Meanwhile, China’s recent moves to shore up growth and stocks have underwhelmed. The blue chip CSI 300 Index slumped to a nine-month low even after commercial lenders lowered the one-year loan prime rate and the securities regulator pledged to revive confidence by easing fundraising access for technology companies and encouraging more Chinese companies trading in the US to list in Hong Kong. Goldman Sachs cut the earnings growth forecast for the stocks on the MSCI China Index and the price target for the gauge earlier this week, citing the contagion risk from the beleaguered property market.

Foreign investor favourites bore the brunt of the selling. Liquor distiller Kweichow Moutai, retail-bank giant China Merchants Bank, solar panel manufacturer LONGi Green Energy Technology and lithium-ion battery maker Contemporary Amperex Technology topped the list of foreign selling over the past two weeks, according to the data from the Hong Kong exchange. These are among the most valuable constituents of the CSI 300.

Although foreign investors turned buyers of Chinese stocks on Thursday, snapping up 3.9 billion yuan of the shares via the link scheme, they are net sellers of 72 billion yuan in the month to date, with August heading for the biggest monthly outflow on record, Bloomberg data shows.

Foreigners own less than 4 per cent of total A shares outstanding, according to a report this month from China International Capital, and they accounted for just around 6 per cent of the total onshore turnover this year and their selling led one hedge fund manager to call them “a bunch of aimless flies”.

While hope springs eternal, investors are starting to moderate their expectations which could have the market trending sideways in the coming months.

“The market hopes the government will have more specific actions in the coming weeks,” said Bank of America in a report this week. “We think the government will only have weak stimulus policies to support the economy and expect a largely range-trading market.”