Global investors dump Chinese securities as state support hopes fade


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Foreign investors have dumped Chinese stocks and bonds after losing confidence in Beijing’s promises of more help to shore up the country’s wobbling economy.

Financial Times calculations based on data from Hong Kong’s Stock Connect trading scheme show that investors have almost completely reversed Rmb54bn ($7.4bn) in net purchases of Chinese equities that followed a July 24 pledge from the politburo of top Communist party leaders to increase policy support.

Meanwhile, bondholdings of foreign institutional investors fell by Rmb37bn in July to Rmb3.24tn, according to figures released by China’s foreign exchange regulator on Wednesday.

Portfolio managers and analysts said selling, which appeared to slow following the politburo meeting, had gained pace in August and was likely to accelerate in the wake of a surprise cut to a benchmark interest rate this week.

The reversal of flows into Chinese securities reflects crumbling confidence in promises made late last month by party leaders who pledged to boost weak consumer spending, tackle high youth unemployment and provide more support to the country’s troubled property sector.

“The measures taken so far appear to have disappointed the market,” said Mohammed Apabhai, head of Asia trading strategy at Citigroup. “There is increasing frustration and concern from investors about the lack of any solid policy action.”

Line chart of Cumulative net investment inflows to China via stock connect programme (US$bn) showing China stocks' politburo bounce fades in the absence of action

The challenges to Beijing’s narrative of a more robust post-Covid recovery have mounted this month. Recent missed payments by Country Garden, which had been one of the only private property developers to avoid default throughout a multiyear crackdown on excessive borrowing in the sector, have highlighted Beijing’s reluctance to bail out struggling companies.

Readings on consumer spending have continued to disappoint and the official gauge of youth unemployment has been discontinued just weeks after hitting a record high.

The negative news has weighed on Chinese share prices, with China’s benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks having almost completely reversed its 5.7 per cent rise following the politburo meeting.

“The current market [for Chinese securities] is heavily driven by sentiment,” said Wei Li, a portfolio manager at BNP Paribas Asset Management. “With flows, things can change very quickly.”

Li said the widening difference in yields between US and Chinese bonds had spurred further selling of renminbi debt. The gap, which has grown as US interest rates have surged while China has cut rates, this week hit a 16-year high.

Pessimism about China is becoming entrenched. In Bank of America’s latest Asia fund manager survey from early August, 84 per cent of respondents said they believed Chinese equities were in the middle of a structural derating — in other words, a lasting contraction in the proportion of overall investment allocated to the country’s stocks.

Line chart of Yield differential between 10-year US and Chinese government bonds  (percentage points) showing US Treasuries' edge over Chinese debt climbs to 16-year high

Continued selling by foreign investors is also expected to weigh on the renminbi’s exchange rate. After rallying in July backed by direct and indirect state support, the currency has since reversed course. On Thursday, the renminbi weakened past Rmb7.3 against the dollar and was close to falling past the 15-year lows touched last October during disruptive Covid-19 lockdowns across China.

Analysts at Nomura said in a note on Wednesday that the outflows from China’s stock and bond markets would put more downward pressure on the renminbi and reiterated “maximum conviction” in their bet against the Chinese currency.

However, BNP’s Li said the People’s Bank of China had shown its opposition to rapid depreciation by repeatedly setting the renminbi’s daily trading band at a stronger level than the market expected.

He added that the central bank could also order state lenders to buy the renminbi to slow its fall, or reimpose informal limits on foreign exchange transactions that were lifted last year. “The central bank still has other tools in its toolbox,” he said.

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