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Domestic Investors Bullish on China Stocks, Foreign Investors Cautious

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Buoyed by China’s recent measures to invigorate its flagging economy, domestic investors are eagerly purchasing undervalued stocks, while foreign investors remain cautiously optimistic.

China’s latest measures, including a historic support package for the property sector announced last week, are part of a broader strategy to stimulate consumption, inject state funds into priority sectors, and support the stock market. Since February, these initiatives have helped share prices rebound from multi-year lows. The benchmark Shanghai index (.SSEC) has risen over 3% since the property sector rescue plans were unveiled, marking a gain of 20% in three and a half months. Similarly, Hong Kong-listed Chinese shares (.HSCE) have surged nearly 38%. However, the rally paused on Tuesday as investors awaited further details on the implementation of these measures.

Data indicates that this rally is primarily driven by mainland investors who are returning to a market they had largely abandoned during the pandemic. In contrast, foreign investments have been minimal.

Sunil Krishnan, head of multi-asset funds at Aviva Investors in London, remarked, “The announced measures are not yet substantial enough to significantly boost GDP. This poses a challenge for investors.” Krishnan’s funds have no active positions in China but are exposed to commodities that may benefit indirectly if China’s property market recovers. Aviva Investors is gradually shifting from a bearish stance on China to a more neutral position, acknowledging the Chinese government’s increasing recognition of necessary economic reforms.

The central bank and provincial governments’ recent property measures, which include buying unsold homes and easing mortgage rates, signal Beijing’s commitment to reviving a sector that once contributed to a fifth of the country’s GDP. The People’s Bank of China has pledged to establish a 300 billion yuan ($41.46 billion) relending facility for state-owned enterprises to purchase completed, unsold homes. While the financial commitment was deemed “slightly underwhelming,” Zhenbo Hou, a strategist at BlueBay Asset Management, viewed the intent as constructive. “They are no longer in denial about the problems and are moving towards market-based solutions, which explains the positive market response,” Hou noted.

Market Flows and Investor Sentiment
Efforts to stabilize the markets began with regulatory measures to curb short-selling, initiatives to stimulate strategic technology sectors, and policies to raise pensions and subsidize housing. These measures aim to encourage Chinese consumers to spend more. However, foreign investors remain cautious, seeking signs of a more sustainable economic turnaround and more substantial stimulus measures.

An analysis of fund flows into Japan-focused and China-focused funds from LSEG’s Lipper database shows that while Chinese funds saw net inflows this month, investors have withdrawn $1.2 billion from China so far this year, compared to $18 billion invested in Japan. Chi Lo, senior markets strategist at BNP Paribas Asset Management in Hong Kong, noted that although sentiment towards China is less negative, investors are not yet reallocating substantial funds away from other markets like Japan and India.

Long-term money managers, including Jason Hsu, chief investment officer at Rayliant Global Advisors, are waiting for significant developments in Sino-U.S. relations and more robust stimulus proposals before committing heavily to Chinese equities. Domestic investors, meanwhile, prefer Hong Kong-listed shares, which are cheaper and likely to experience stronger gains if foreign investors join the rally.

Mainland investors have invested approximately $33 billion into Hong Kong stocks via the Stock Connect scheme. Data from Ping An Securities shows that mainland equity ETFs attracted 23.6 billion yuan of inflows in April, a tenfold increase from March. Conversely, global ETFs focused on China, such as those from Krane Funds Advisors and Blackrock, have seen declining inflows for months. KraneShares recommends a neutral or underweight position on China, despite evidence of increased buying by Chinese investors.

George Maris, chief investment officer and global head of equities at U.S. Principal Asset Management, believes that negativity on China has been overdone. Maris is bullish on several sectors, including technology, and has re-allocated capital to China since September. However, he noted that a broad re-rating of Chinese equities by global investors is unlikely until markets demonstrate sustained rallies.

As domestic investors continue to show confidence in China’s economic reforms, the cautious stance of foreign investors reflects a wait-and-see approach, influenced by geopolitical factors and the need for more comprehensive economic measures.