Optimism on Chinese stocks hits five-year highs

Trucks and passenger cars cross the Sutong Bridge in the city of Suzhou, near Shanghai, on January 27, 2023, during the Lunar New Year holiday.

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BEIJING — Money is flowing into mainland China and Hong Kong stocks in a way not seen since 2018, according to research firm EPFR Global.

Active overseas fund managers invested $1.39 billion in mainland Chinese stocks in the four weeks ending Jan. 25, according to EPFR data. Active fund inflows into Hong Kong equities were even larger during this period, at $2.16 billion.

“Active managers have never been more positive towards Chinese markets in the past five years,” said Steven Shen, head of quantitative strategies at EPFR.

“In the very short term, we should expect more inflows from active managers,” he said, pointing to factors such as China’s reopening from zero-Covid. EPFR claims to track the flow of funds on $46 trillion in assets worldwide.

Active fund managers are more involved in selecting portfolio investments, while passive fund managers tend to follow stock indices.

The Shanghai Composite gained more than 5% in January, the most since rising nearly 9% in November, according to Wind Information. The Hang Seng index climbed more than 10% in January, a third consecutive month of gains.

The money is coming in faster than at the start of 2022, Shen said. At the time, a few institutional investors said it was time to buy Chinese stocks due to Beijing’s emphasis on stability in a politically important year.

At the time, local investors had been more cautious. The highly transmissible omicron variant and China’s zero-Covid policy then locked down the city of Shanghai for two months, while limiting business activity in much of the country. In 2022, GDP grew by 3%, one of the slowest rates in decades.

China abruptly ended its increasingly strict Covid controls in December. Tourism, including outbound travel, rebounded during the Lunar New Year in late January.

This year, local investor sentiment is also picking up.

“With the macro environment in China, I think 2023 we’re going to see a lot more [mainland China] client money is going back into the market, into secondary market funds,” said Lawrence Lok, chief financial officer of wealth management firm Hywin, in early January. The secondary market refers to the public stock market.

Lok said those clients had avoided taking risks last year due to market turbulence. The Shanghai and Hong Kong stock indexes plunged more than 15% last year.

For Hywin clients with funds outside of China, Lok said they are looking for ways to invest in U.S.-listed Chinese companies or Hong Kong stocks, among other offshore funds.

Hywin had more than 40,000 active clients as of June 2022 and 4.5 billion yuan ($642.9 million) in assets under management.

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While sectors related to real estate and renewable energy are gaining interest, technology has remained relatively quiet, said EPFR’s Shen. He said entries were also less aggressive when it came to U.S.-listed Chinese stocks.

For passive fund managers, cumulative net inflows into stocks listed in mainland China, Hong Kong and the United States amounted to $7.05 billion for the four weeks ending Jan. 25, according to the EPFR.

U.S.-based fund managers who invest for the longer term bought a net $1.3 billion of U.S.-listed Chinese stocks last month to Jan. 25 – the second consecutive month of such inflows , according to Morgan Stanley.

“U.S.-based long-only managers said they were just starting to reduce their China underweight, or were in discussions with investors to lift mandate constraints on China exposure” , Morgan Stanley analysts said. “They expect capital inflows from asset owners to accelerate in 2Q23.”

Pinduo-duo, Baidu And bilibili were among the largest inflows of U.S.-listed Chinese stocks, according to the report.

Deeper Concerns

However, Bernstein analysts have warned that China’s stock market gains may not go much further if active US investors – who did not participate in the rally – and local investors do not buy into it.

The “extreme” inflows of the past three months threaten a continued market recovery over the next three months, Bernstein analysts said in a Jan. 27 report. “We believe that in the short term, investors need to be more selective when choosing exposure to China.”

The recent enthusiasm for Chinese equities also follows a difficult two years in which the abrupt suspension of Ant Group’s IPO, a crackdown on tech and property companies and strict Covid controls weighed on sentiment. .

Bruce Liu, CEO of Esoterica Capital, said in January that while he had been talking to wealthy Chinese about global diversification since 2019, they only really started to take action in the second half of last year. His company manages less than $50 million in assets.

“What has happened over the past two years has left a scar on their minds,” Liu said. “It’s about trust. I don’t see that trust coming back yet. At least the people I’ve spoken to.”

“This is a strategic decision from their perspective,” he said. “Maybe they have enough Chinese assets. It’s more important for them to diversify [globally] rather than taking advantage of this current and continuous return.”

Moving to China

The story of China’s reopening is not just for capital. Now that the borders are open, some investors are even physically entering the country.

Taylor Ogan, CEO of Snow Bull Capital, moved his team of three to Shenzhen, China in January to open a research office.

“The more we examine it, the more we need to be in China just for research,” Ogan said. He said many Chinese companies don’t have much English material even though they are listed in Hong Kong, and some giant Chinese state-owned companies have told them that no foreign analysts have visited them since the pandemic.

“We started to see this as an opportunity.”

– CNBC’s Michael Bloom contributed to this report.

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