Overseas investors’ appetite for Chinese stocks continues to recover after second month of buying in March

A shift in stance by foreign investors is ‘a positive signal for Chinese stocks’: analyst
Sentiment is shifting and portfolio allocations to China are rising, HSBC strategist says

China stock market

Zhang Shidongin Shanghai

Published: 12:00pm, 31 Mar 2024

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Global fund managers have increased their exposure to Chinese yuan-traded stocks for a second month in March, indicating that foreign appetite for these shares is recovering.

Overseas investors bought a total of 22 billion yuan (US$3 billion) of onshore shares for the month through the Stock Connect programmes with Hong Kong, according to Bloomberg data. That followed net purchases of 60.7 billion yuan in February and a record exodus over the previous six months. For the first quarter, overseas buying amounted to 68.2 billion yuan, the data shows.

The return of foreign inflows is an indication that the worst of a three-year decline in Chinese stocks is probably already over, as Wu Qing, the newly appointed chairman of the China Securities Regulatory Commission (CSRC), has taken a slew of steps to revive investor confidence. These include calls for more dividend issuances and buy-backs by listed companies, further curbs on stake reductions by key shareholders and a higher bar for new listings.

“We’ve seen a shift in stance by foreign investors and that’s a positive signal for Chinese stocks,” said Dong Zhongyun, an analyst at Avic Securities. “It’s worthwhile watching the flows of northbound investment [through the Stock Connects], as that’s where fresh capital comes from, and it might sway the market.”

Overseas investors continued to raise their holdings in banks and food and beverage makers, while cutting exposure to computer-linked stocks, Sinolink Securities said without providing any specific names.

Offshore hedge funds and foreign long-only funds have led the inflows since late January, although it remains to be seen whether the return is tactical or strategic, HSBC Holdings said in a report this month. More overseas buying is expected going forward, because of battered valuations, light positioning in Chinese equities and the prospects of more stimulus policies, it said.

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Stretched valuations in the United States, Europe and Japan markets have increased the appeal of Chinese equities, which were out of favour for a while with foreign investors because of a moderation in economic growth and escalating geopolitical risks, according to Capital Securities.

The CSI 300 is valued at 13 times projected earnings, while the Nikkei 225 is trading at 23.6 times, according to Bloomberg data. The multiple for the S&P 500 is 21.6 times and that for Europe’s Stoxx 50 Index is 14.3 times.

“There has been an increasing number of bullish reports on Chinese assets by foreign investment banks recently,” said Wang Shijin, an analyst at Capital Securities. “Against the backdrop of oversized gains in other key markets like the US and Japan, Chinese assets might become part of the ‘barbell trade’ adopted by overseas hedge funds.”

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A barbell trade is a strategy that is often deployed in bond trading and refers to a more balanced tactic of adding low-risk assets in portfolios to provide a hedge and mitigate risks.

However, overseas buying in March cooled compared with February, which suggests lingering concerns among global fund managers about the strength of China’s economic recovery and corporate earnings. The economy presented a mixed picture in the January-February period, with industrial production and investment strengthening and retail sales remaining subdued.

For Herald van der Linde, a strategist at HSBC, Chinese stocks stand to benefit from Japan’s scrapping of its negative interest rates this month, a move that might alter fund flows in Asia and prompt some funds to move back to China.

“Sentiment is shifting,” van der Linde said. “The market has started to reward positive news on earnings, and portfolio allocations to China are rising. We remain overweight on Chinese equities.”