Foreign investors ‘seek shelter’ in undervalued Chinese assets, but scepticism remains
Analysts expect inflows into Chinese assets to persist as Beijing continues to implement easing measures
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Chinese assets are witnessing fund inflows from foreign investors, driven by Beijing’s recent large-scale stimulus measures and efforts to mitigate potential risks from the pace of interest rate cuts by the US Federal Reserve and the escalating conflicts in the Middle East, analysts said.
Huatai Securities cited fund flow and asset allocation data provider EPFR that a net inflow of US$1.8 billion went into Chinese equity assets from passive index-based foreign investors between September 19 and 25.
The figure, while only covering the two trading days following the raft of rate cuts and policies unveiled last week to boost the world’s second-largest economy, marked a notable increase compared to previous levels.
Gary Ng, a senior economist at French investment bank Natixis, said the inflow of foreign capital had been partly driven by the US Federal Reserve’s rate cut, which boosted risk appetite and benefited all assets in emerging markets, including China.
I think after the knee-jerk reaction to the stimulus, investors will still enter the China market, perhaps in a more cautious and calculated way
“With a relatively internally looking market nature, China is less correlated to the geopolitical risks in the Middle East than other markets, making it a possible shelter if a war breaks out,” Ng said.
Another cyclical bonus, according to Ng, was the recent recovery in sentiment, which can tell a better investment story than before.
Yan Liang, an economist at Willamette University in the US state of Oregon, said foreign investors are attracted by the recent rally of the equity market.
“I think after the knee-jerk reaction to the stimulus, investors will still enter the China market, perhaps in a more cautious and calculated way,” she said, adding that market sentiment and liquidity seemed to point in a positive direction.
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Conflicts in the Middle East and the escalation of the war in Ukraine have heightened risks and called for diversification for investors, she added.
The East Coast strike could have impacted US exports of food and other farm products, including to China, pushing up the prices of consumer goods.
“The US’ political uncertainty with the [presidential] election, the stagnant or tepid economic performance in Europe and Japan, and the overvalued market in India would all push some investors to diversify into China,” Liang added.
Mainland Chinese markets are closed until Tuesday for the golden week holiday after a market frenzy that pushed turnover on the Shanghai and Shenzhen bourses to a combined record of about 2.6 trillion yuan (US$369 billion) on Monday.
Last week, China’s central bank announced a raft of economic stimulus measures, including cutting bank’s reserve requirement ratio and its policy interest rate, while also reducing the mortgage rate for existing housing and introducing policy tools funded with 800 billion yuan (US$113.5 billion) to support the stock markets.
There is still a lot of scepticism about the Chinese market among Western institutional investors,
“Any major equity-market rally is going to draw in more foreign investors, at least to some degree, the scale and speed of the upswing so far is hard to ignore,” said Christopher Beddor, deputy China research director with Gavekal Dragonomics in Hong Kong.
“There is still a lot of scepticism about the Chinese market among Western institutional investors, so it’s reasonable to think that many will opt to stay on the sidelines for now.”
Beijing’s stimulus package was considered “a big step to end the deflationary deleveraging and to stimulate creative productivity”, according to Ray Dalio, the billionaire investor.
“That happened at the same time as Chinese assets were (and still are) very cheap, so it was a combustible combination of influences that set the markets on fire,” he said on Tuesday.
If China’s asset pricing followed its return on equity trend, driven by anticipated policy improvements, the forward price-to-book ratio could increase from 1.36 to 1.57, according to Thursday’s note from Huatai Securities, which noted that mid-October presented a window for a more aggressive market strategy.
Additional reporting by Ralph Jennings
