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Foreign investors unwind $33bn bet on China growth rebound

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Nearly nine-tenths of the foreign money that flowed into China’s stock market in 2023 has already left, spurred by mounting doubts about Beijing’s willingness to take serious action to boost flagging growth.

Since peaking at Rmb235bn ($33bn) in August, net foreign investment in China-listed shares this year has dropped 87 per cent to just Rmb30.7bn, according to Financial Times calculations based on data from Hong Kong’s Stock Connect trading scheme.

Traders and analysts said the reversal reflected pessimism over the outlook for the world’s second-largest economy among global fund managers. International investors have been persistent net sellers since August, when missed bond payments by developer Country Garden revealed the severity of a liquidity crisis in the country’s property sector.

“The confidence issue goes beyond real estate, although real estate is key,” said Wang Qi, chief investment officer for wealth management at UOB Kay Hian in Hong Kong. “I’m referring to consumer confidence, business confidence and investor confidence — both from domestic and foreign investors.”

Chinese shares have continued to underperform global peers in recent weeks despite a run of positive economic data, signs of a thaw in US-China relations and moves to give the financial system a stronger buffer against slowing growth by cutting the rates most lenders pay on deposits.

Line chart of Net investment flows year to date via Stock Connect programme (Rmb bn) showing Foreign investors reverse China stock-buying spree

Yet in contrast to a 4.7 per cent rise by the S&P 500 index this month, China’s benchmark CSI 300 index of stocks listed in Shanghai and Shenzhen has fallen more than 3 per cent. Net foreign sales of China-listed shares have reached about Rmb26bn in December.

“It’s so counterintuitive — the data is getting better and the general environment should be quite positive for Chinese stocks,” said Alicia García-Herrero, chief Asia-Pacific economist at Natixis. “Frankly there’s no reason for this other than investors basically giving up and saying: ‘We don’t see the upside’.”

The exit by offshore investors has been facilitated by widespread share buybacks from listed companies in China and by large-scale purchases from domestic investment funds and state-run financial institutions — all of which are under pressure from Beijing to prop up sagging valuations.

The protracted foreign sell-off threatens to end the year on a sour note for Chinese markets. When markets close on Friday, they are set to record the smallest annual foreign inflow since 2015, the first full year of the Stock Connect programme. The cross-border trading scheme, run out of Hong Kong, is the dominant channel through which offshore investors trade mainland-listed equities.

Traders said a nascent recovery in market sentiment had been stymied on Friday by a sharp sell-off of gaming stocks, including Tencent and NetEase, after Beijing announced tough new regulations for the sector.

“It’s damaging for appetite,” said an investment bank trading desk head in Hong Kong. He described the sell-off, which partially reversed on Monday, as “knee-jerk reaction and panic selling . . . but it just shows you that sentiment is so, so fragile now”.

Column chart of Net investment flows via Stock Connect programme (Rmb bn) showing Foreign purchases of China stocks drop to eight-year low in 2023

Hong Kong-based traders said global long-only investors had proven particularly wary of Chinese stocks, expressing almost no interest in the market since a surge in buying about a year ago on hopes growth would rebound as the country emerged from disruptive “zero-Covid” restrictions.

Global investor perceptions of Chinese equities deteriorated substantially in the second half of this year, as pledges of policy support in July were quickly followed by missed payments at Country Garden and other cash-strapped developers.

A survey of Asia-focused fund managers by Bank of America conducted this month showed a majority were underweight Chinese shares — unchanged from November. The CSI 300 is set to close out the year down more than 15 per cent in dollar terms.

“The question I get from clients [about Chinese equities] is ‘Which sectors?’” said García-Herrero at Natixis. “But when they push me, I don’t know what to tell them, because there is no sector.”

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