Investors from abroad have been divesting from Chinese stocks and bonds due to a loss of confidence in Beijing’s assurances of increased assistance to stabilise the nation’s uncertain economy.
Data from Hong Kong’s Stock Connect trading scheme, analysed by Financial Times, reveals that nearly all of the Rmb54 billion ($7.4 billion) net acquisitions of Chinese equities that followed a July 24 announcement from the politburo – the leading body of the Communist Party – to enhance policy support, have been reversed.
In the same vein, China’s foreign exchange regulator disclosed that foreign institutional investors’ bondholdings plunged by Rmb37 billion in July to Rmb3.24 trillion.
While the pace of selling appeared to slow down after the politburo meeting, it has gained momentum in August and is likely to intensify following a surprising reduction in a benchmark interest rate earlier this week.
This change in investment patterns mirrors the declining trust in the commitments made by party leaders at the end of the previous month. These leaders had pledged to boost feeble consumer spending, address high youth unemployment, and provide more aid to the distressed property sector.
Mohammed Apabhai, the head of Asia trading strategy at Citigroup, remarked, “The measures taken so far appear to have disappointed the market. There is increasing frustration and concern from investors about the lack of any solid policy action.”
Challenges to Beijing’s portrayal of a stronger post-Covid economic rebound have mounted. Recent instances of missed payments by Country Garden, which had been one of the few private property developers to avoid default during a multiyear crackdown on excessive borrowing in the sector, have highlighted Beijing’s hesitancy to rescue struggling firms.
Indicators of consumer spending have consistently fallen short, and the official measurement of youth unemployment has been terminated shortly after hitting a record high.
These negative developments have cast a shadow over Chinese stock prices. China’s CSI 300 index, the benchmark index for Shanghai- and Shenzhen-listed stocks, has virtually erased its 5.7% gain that followed the politburo meeting.
“The current market [for Chinese securities] is heavily driven by sentiment,” noted Wei Li, a portfolio manager at BNP Paribas Asset Management. “With flows, things can change very quickly.”
Li explained that the widening yield gap between US and Chinese bonds has motivated further divestment from renminbi-denominated debt. This gap has widened as US interest rates rose while China decreased its rates, resulting in a 16-year high this week.
Pessimism regarding China’s economic prospects is deepening. In a recent survey by Bank of America involving Asia fund managers, 84% of participants indicated that they believe Chinese equities are in the midst of a structural derating, implying a prolonged reduction in the proportion of total investments allocated to the country’s stocks.
This continued divestment by foreign investors is anticipated to apply downward pressure on the renminbi’s exchange rate. Following a July surge supported by both direct and indirect state interventions, the currency has since reversed its course. On Thursday, the renminbi slipped beyond Rmb7.3 against the dollar, nearing the 15-year lows reached last October during the disruptive Covid-19 lockdowns across China.
In a Wednesday note, analysts at Nomura stated that the outflows from China’s stock and bond markets will exert further downward pressure on the renminbi. They reiterated their strong belief in their bet against the Chinese currency.
However, BNP’s Li pointed out that the People’s Bank of China has exhibited its opposition to rapid depreciation by consistently setting the renminbi’s daily trading range stronger than the market anticipated.
He added that the central bank could also instruct state-owned lenders to purchase the renminbi to slow its decline or reintroduce informal restrictions on foreign exchange transactions, which were lifted last year. “The central bank still has other tools in its toolbox,” he said.
