Title: Foreign Investors Dump Chinese Stocks and Bonds as Confidence in Beijing’s Promises Fades
Subtitle: Selling intensifies following Beijing’s surprise cut to benchmark interest rate
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In a significant blow to China’s economy, foreign investors have been divesting from Chinese stocks and bonds amid growing skepticism over Beijing’s ability to revive its struggling economy. The latest data reveals that investors have nearly entirely reversed Rmb54bn ($7.4bn) in net purchases of Chinese equities since July, following a pledge by top Communist party leaders to strengthen policy support.
Figures obtained from Hong Kong’s Stock Connect trading scheme indicate that foreign investors’ bondholdings also decreased by Rmb37bn in July, reaching Rmb3.24tn, according to China’s foreign exchange regulator. Portfolio managers and analysts predict that the selling, which initially slowed after the politburo meeting, picked up pace in August, especially in response to a surprise cut to a benchmark interest rate.
The reversing of flows into Chinese securities reflects a dwindling confidence in the promises made by the party leaders to boost consumer spending, address high youth unemployment, and provide more support to the property sector. Mohammed Apabhai, head of Asia trading strategy at Citigroup, remarks, “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.”
Troubling developments challenging Beijing’s narrative of a robust post-Covid recovery have further eroded confidence. Missed payments by Country Garden, a private property developer previously known for avoiding default during the sector’s borrowing crackdown, have underscored Beijing’s reluctance to rescue struggling companies. Additionally, disappointing readings on consumer spending and the discontinuation of the official youth unemployment gauge, just weeks after hitting a record high, have contributed to a decline in Chinese share prices.
Wei Li, a portfolio manager at BNP Paribas Asset Management, believes that the current market for Chinese securities is heavily driven by sentiment, stating, “With flows, things can change very quickly.” As US interest rates have surged while China has implemented rate cuts, the widening difference in yields between US and Chinese bonds has fueled further renminbi debt selling.
Analysts from Bank of America reported that 84% of respondents in their recent Asia fund manager survey believed Chinese equities were undergoing a structural derating, implying a lasting contraction in overall investment allocated to Chinese stocks. This pessimism is expected to weigh on the renminbi’s exchange rate, which has been falling against the dollar and approaching last October’s low of Rmb7.3.
Experts at Nomura predict that the outflows from China’s stock and bond markets will add more downward pressure on the renminbi. They have reiterated “maximum conviction” in their bet against the Chinese currency. However, Wei Li suggests that the People’s Bank of China could intervene to slow the renminbi’s fall by setting the renminbi’s daily trading band stronger than expected or by ordering state lenders to buy renminbi. He also mentions the possibility of reimposing informal limits on foreign exchange transactions, which were lifted last year.
As foreign investors continue to offload Chinese securities, the repercussions on China’s economy and currency remain uncertain. Beijing may need to take decisive action to restore investor confidence and address the concerns that have triggered the recent bout of mass divestment.
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