Global investors abandon Chinese stocks in longest streak on record as growth concerns persist

Foreign traders have sold nearly 172 billion yuan (US$23.5 billion) of A shares in the past three months via the Stock Connect scheme
Investors are abandoning Chinese stocks to chase higher-yielding assets like the 10-year US Treasury whose yield hit a 16-year high of 5 per cent this month

China stock market

Zhang Shidongin Shanghai

Published: 2:21pm, 31 Oct 2023

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Overseas investors continued to offload Chinese stocks for a record third consecutive month in October, amid jitters about the country’s wobbly economic outlook and capital flows to higher yielding assets.

Foreign traders dumped 4.75 billion yuan (US$649 million) of yuan-denominated stocks via the exchange link programme with Hong Kong on Tuesday, taking the net sales for the month to 44.8 billion yuan, according to Bloomberg data. With total outflows of 127 billion yuan in August and September, the three-month sell-off was the longest since December 2016, when the Shenzhen exchange joined the Stock Connect scheme.

The unrelenting sell-off underscores widespread concerns among global fund managers that China’s recovery may not be sustainable, as the downturn in the property market continues and consumption sputters after the release of pent-up demand for travel during the summer and the “golden week” holiday in October.

“The Chinese government appears willing to accept slower economic growth in order to prioritise structural changes within the economy, implying a shift in focus from rapid growth to long-term sustainability,” said Stephen Innes, a managing partner at SPI Asset Management in Bangkok. “Increasing geopolitical tensions can threaten China’s economic growth and hinder risk appetite.”

The allure of Chinese stocks has also waned, with the yield on 10-year US Treasury touching a 16-year high of 5 per cent during the month, spurring a flight to the fixed-income asset.

The CSI 300 Index declined 3.2 per cent in October, with some of its biggest members like Kweichow Moutai, Ping An Insurance and Contemporary Amperex Technology losing at least 5.9 per cent.

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The retreat comes despite China’s economy growing by a faster-than-expected 4.9 per cent in the third quarter, with retail sales and industrial production both beating economists’ consensus projections in September.

The combined holdings of overseas investors, including those who trade China’s yuan-denominated A shares via the northbound channel of the exchange link, stood at 2.3 trillion yuan as of mid-September, accounting for less than 3 per cent of the total market cap.

“While northbound A-share ownership and turnover are not high, their frequent trading data disclosures have a significant impact on onshore investors’ expectations,” said Meng Lei, a strategist at UBS Group in Shanghai.

The foreign exodus comes at a time when the government has stepped up state buying to prop up China’s US$9.4 trillion stock market. Central Huijin Investment, a unit of the nation’s US$1.35 trillion sovereign wealth fund, bought an unspecified amount of exchange-traded funds (ETFs) earlier in October.

Earlier this week, E Fund Management, the biggest onshore money manager, said it would invest 200 million yuan in its own index-based ETF, joining the peers who have bought back 1.4 billion yuan of their own equity-investment products since August.

State media is trying to downplay the impact of fund outflows. Economic Daily ran an article in September, cautioning individual investors against following foreign traders. Li Bei, a top-performing Chinese hedge fund manager, blamed overseas sellers as the main driver of volatility in the market and called them “a bunch of aimless flies”.

An official purchasing managers’ index report on Tuesday showed China’s manufacturing contracted in October, which may reinforce overseas investors’ view of slowing growth momentum in the fourth quarter.

“Market underperformance may be reflecting concern about economy-wide deflation and much weaker nominal growth,” said Aninda Mitra, a strategist at BNY Mellon Investment Management in Singapore.