Investors cautious on China markets amid growth concerns, delisting fears

Investors cautious on China markets amid growth concerns, delisting fears

BEIJING — Investors turned more and more cautious on Chinese language shares, particularly these listed abroad, within the first quarter of the yr that was rocked by geopolitical tensions and worries about growth.

That is in line with information from analysis agency EPFR World.

Whereas the interval ended with greater than $20 billion in web inflows to mainland Chinese language shares, the majority occurred in January, and the tempo of shopping for dropped sharply because the quarter progressed, the information confirmed.

The primary three months of the yr noticed the U.S. and Europe sanction Russia over its invasion of Ukraine, whereas China pursued a extra impartial place. The quarter additionally noticed rising worries about pressured delisting of Chinese language shares from U.S. markets amid a flurry of bulletins from each nations’ securities regulators.

“Anything that relates to China we can find in causality and reasoning from either Russia or [the] U.S. right now,” mentioned Steven Shen, supervisor of quantitative methods at EPFR. The agency says it tracks fund flows throughout $52 trillion in belongings worldwide.

ESG funding flows

Chinese language inventory funds targeted on ESG — environmental, social and governance components — noticed inflows till mid-February, after they started seeing outflows as a substitute, Shen mentioned.

In distinction, international ESG inventory funds noticed “very consistent” inflows over the primary three months of the yr, he mentioned.

The agency didn’t share particular causes for the divergence.

ESG-related considerations drove different funding allocation adjustments.

Among the many headlines of the primary quarter, Norges Financial institution Funding Administration — an funding arm of Norway’s central financial institution which manages the world’s largest sovereign wealth fund — introduced it will exclude shares of Chinese sportswear firm Li Ning “due to unacceptable risk that the company contributes to serious human rights violations.”

When contacted by CNBC in late March, the fund declined to elaborate additional, however famous the Norwegian authorities requested the fund to freeze investments in Russia and put together a plan for divesting from the nation. The fund had a market worth of greater than $1.2 trillion as of Monday.

Li Ning didn’t reply to a CNBC request for remark.

Swapping U.S. shares for Hong Kong ones

Whereas mainland Chinese language inventory funds held onto inflows, European inventory funds noticed billions of {dollars} in web outflows within the first quarter, in line with EPFR.

Japanese inventory funds noticed declines as effectively, the information confirmed. It additionally confirmed U.S. inventory funds retained sturdy web inflows, for a complete of greater than $100 billion within the first quarter.

For Chinese language shares listed in Hong Kong and the U.S., Shen famous a “consistent decrease” in funds’ publicity.

Starting late 2021, fund managers started to promote U.S.-listed shares of a Chinese language firm for these traded in Hong Kong, which has contributed to declines in these share costs, Shen mentioned. The method for exchange-traded funds sometimes takes three to 6 months, he mentioned.

Many Chinese language corporations have provided shares in Hong Kong as political strain in each the U.S. and China elevated the danger of a New York delisting.

“Moves by the US regulator on ADRs and the Russia-Ukraine conflicts have further complicated the situations and caused substantive market swings this year,” Max Luo, director of China asset allocation at UBS Asset Administration, mentioned in a press release. “We noted sizeable outflows from China equities since last year, reflecting a notable de-risking on China.”

ADRs are American Depositary Receipts, which seek advice from shares of non-U.S. corporations which are traded on U.S. exchanges.

“We have turned more conservative toward equity overall as the Russia-Ukraine conflicts flare up amid an uncomfortably high inflation level,” Luo mentioned. Nevertheless, he mentioned his agency has “become more constructive on Chinese equities” on account of authorities coverage assist.

Worries about growth

Mainland Chinese language shares noticed a surge of shopping for at a stage not seen since January 2019, Shen mentioned.

He identified that it passed off when index firm MSCI added the mainland Chinese language shares to a benchmark, which pressured fund managers monitoring the index to purchase the mainland shares.

However the Shanghai composite stays greater than 12% decrease for the yr thus far.

That is regardless of a mid-March elevate to shares after state media stories of comments from Vice Premier Liu He eased worries about Beijing’s crackdown on tech and real estate, and overseas IPOs.

Many investment banks had turned positive on mainland Chinese stocks as 2022 kicked off, despite poor domestic market sentiment.

“The macroeconomic backdrop appeared to improve at the end of last year,” David Chao, global market strategist, Asia Pacific (ex-Japan) at Invesco, told CNBC in early April.

“But I think expectations have gotten ahead of themselves” especially since the property market hasn’t found a bottom yet, he said. “Market sentiment seems to be impacted by a property market downturn.”

Real estate and related industries account for about 25% of China’s GDP, according to Moody’s.

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On Monday, China reported first quarter GDP rose 4.8% compared to the previous year, topping expectations of a 4.4% increase.

While economic data for January and February beat expectations, those released so far for March have started to show the impact of Covid-related lockdowns in major economic centers like Shanghai.

“Heading into the second quarter there continues to be many uncertainties about China’s Covid response,” Invesco’s Chao said. “And that will be the most significant variable for the current quarter, whether their pandemic policies evolve or not.”

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