China’s stock market resists strong foreign capital outflows

Foreign investors have dumped $9.5 billion worth of mainland Chinese stocks this month, reflecting a reassessment of geopolitical risk following Russia’s financial isolation.

The outflow from March 24, via a trade link to Hong Kong known as Stock Connect, is on track to be the second largest monthly drop since the program began in 2014. The largest occurred in March 2020 when Covid -19 rocked global markets. and offshore investors sold a net $10.6 billion of shares onshore.

Foreign investors have poured huge sums of money into China in recent years. As onshore markets have ballooned in size, Beijing has made them easier to trade and these securities have joined influential indices managed by providers such as


In December, foreigners held more than $600 billion worth of stocks and bonds in the country, central bank data shows.

Analysts and investors say it is too early to call a turning point in China’s gradual embrace. But they say something might have changed in the middle of the recent market turmoilwhich was also fueled by US delisting concerns and worsening Covid-19 outbreaks in China.

Foreign investors got a wake-up call when Russia invaded Ukraine, a war many in finance didn’t expect would happen, said Robin Brooks, chief economist at the Institute of International Finance. The questions they ask about China now are different than they were a few weeks ago, he said.

“Questions are being asked about why we got it so wrong in Russia and what else we might be getting wrong. I think that’s where China could potentially be coming in,” said Brooks, who tracks international capital flows.

China’s ambiguous stance on the war is part of the problem, said Qi Wang, chief executive officer of MegaTrust Investment (HK), a Hong Kong-based fund manager that focuses on grounded stocks, or A-shares. “There is a lot of misunderstanding, confusion and speculation around the China’s position, which looks like a big risk factor for global investors,” said Mr. Wang, former head of China equity research at MSCI.

The exodus was worst on March 14 and 15, when Chinese stocks onshore and abroad plunged. Then Chinese lawmakers weighed in on March 16, to reassure investors, there were two days of strong inflows, after which more moderate outflows resumed.

Jim McCafferty, joint head of Asia-Pacific equity research at Nomura, said many emerging-market-focused money managers had been told by end investors to leave Russia. He said that some of those asset owners had also decided to leave China, given some political similarities between the two countries.

“Some global investors just don’t want anything to do with it,” McCafferty said.

The sell-off is modest compared to the overall scale of the Shanghai and Shenzhen markets, which are valued at roughly $13 trillion in total. Some international banks and asset managers have said that some Chinese stocks have sold off more than warranted based on their financial outlook and these stocks remain attractive despite short-term volatility risks.

Analysts at Goldman Sachs said they remain overweight China, meaning they recommend investors invest a higher proportion of their holdings in Chinese stocks than the benchmarks they track, and said long-term demand for Chinese equities it is intact. Citigroup argued in an online “Wealth Insights” publication that cheaply priced Chinese stocks presented a tactical opportunity. Many investors have also rejected the idea that Chinese stocks, whether listed at home or abroad, are not investable.

Still, the pullback this month is rare. Foreign investors have been net buyers in about five out of six months since the Stock Connect program began and outflows in other months have rarely exceeded $3 billion, Wind data shows. The buying spree continued during last year’s tech crackdown, which was largely focused on foreign-listed companies.

The Stock Connect data does not capture all foreign trade, as some purchases and sales are made under another system known as the “qualified foreign institutional investor” program.

The outflows come as a huge surge in Chinese bond money has subsided. If foreign financial investment dries up or starts to flow out of China, that would remove a plank of support for the yuan, which has been buoyed by capital inflows and rising exports from the country.

Foreigners sold the equivalent of $5.6 billion of Chinese government bonds in yuan last month, a record monthly outflow. In January, the extra yield offered by Chinese sovereign debt over US Treasury bonds. fell below 1 percentage point for the first time in nearly three years, reducing its relative attractiveness to investors.


Do you see Chinese actions as a geopolitical risk in the current climate? Why or why not? Join the conversation below.

The consequences of the harsh economic sanctions against Russia are already being felt around the world. The WSJ’s Greg Ip joins other experts to explain the significance of what has happened so far and how the conflict could transform the global economy. Photo illustration: Alexander Hotz

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