Record outflows from China’s mainland-listed stocks confound expectations that their inclusion in indexes would underpin investor appetite
By Mike Bird
2019 was meant to be the year many Western investors began buying Chinese stocks. It is turning out to be the first year many investors began selling them.
Foreign investors are offloading shares listed in Shanghai and Shenzhen through Hong Kong’s flagship Stock Connect platform. In the 20 trading sessions up to May 14, they sold so-called A-shares, worth 52 billion yuan ($7.56 billion), net of purchases—by some distance the largest amount on record.
On one level this isn’t surprising: Mainland-listed stocks are down around 11% over the past month as trade talks between the U.S. and China have taken a turn for the worse and Beijing’s efforts to stimulate the economy have petered out. International investment in equities is usually closely related to their recent performance.
But it marks a change for China. Overseas investors had barely ever sold equity on a net basis through the Stock Connect system before. Last year, when the MSCI China A Onshore index fell roughly 31%, the drawdowns lasted no more than a few days and ran to a fraction of the size of the current one.
The shift could be related to the fact that access has been progressively widened to allow more buying and selling.
The previous pattern of inflows reinforced the idea that international investors would prove to be a prop for Chinese markets. Photo: Eddie Moore/Zuma Press
The previous pattern of inflows reinforced the idea that international investors would prove to be a prop for Chinese markets. A lot of the commentary around the inclusion of A-shares in major global indexes, which started in 2018 and ramped up significantly this year, focused on the prospect of a wave of passive money. Some predicted inflows worth hundreds of billions of U.S. dollars over a number of years.
Chinese policy makers have been content with a gradualist approach to liberalizing capital inflows, based on a long-running desire to avoid the hot-money outflows recorded by its near neighbors during the late-1990s Asian financial crisis. Officials can exert considerable pressure on domestic investors, freezing trading accounts and instructing or advising investors not to sell. The new legions of international investors will be harder to control.
To be sure, the recent outflows aren’t enough to derail the performance of mainland Chinese stocks, whose market capitalization runs to over $5 trillion. And inflows could well return later in the year.
But the current reversal shows that index inclusion isn’t enough to sustain permanent inflows to China. The traffic won’t all be one way.
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