Chinese stock rout accelerates as foreign investors sell out

A punishing sell-off for Chinese equities has worsened in recent days, as international investors who bet on a rebound lose faith that economic stimulus from Beijing is on the way.

The Hang Seng China Enterprises index, a closely followed gauge of large Chinese listings in Hong Kong, has dropped about 11 per cent so far this month after losing 14 per cent last year. The benchmark CSI 300 index for domestically traded stocks has shed more than 5 per cent, after taking into account the renminbi’s depreciation against the dollar.

The January downturn has confounded expectations from Wall Street banks including JPMorgan and Goldman Sachs that China’s stock market was primed for a recovery in 2024.

International investors “just threw in the towel” after a speech by Premier Li Qiang at Davos on Tuesday lacked any hint of new government measures to boost the economy or financial markets, said the head of trading at one investment bank in Hong Kong.

He added that institutional investors had been cautiously buying some large Chinese technology stocks such as Tencent and Alibaba during the first few days of the year, but “within three or four sessions they were already underwater, so they decided to dump that — and retail investors followed”.

Foreign investors, who by the end of 2023 had sold about 90 per cent of the $33bn of Chinese stocks they had purchased earlier in the year, have continued selling this year. Year-to-date outflows more than doubled on Wednesday after Beijing confirmed China’s annual growth was the slowest in decades and revealed the country’s population decline had accelerated in 2023.

Almost Rmb33bn ($4.6bn) of foreign money has already flowed out of China’s stock market this year, according to Financial Times calculations based on data from Hong Kong’s Stock Connect trading scheme.

Unless there is a sharp reversal, offshore investors are set to end January as net sellers of Chinese equities during the opening month of the year for the first time since the scheme began in 2014.

Li’s surprise announcement — a day ahead of schedule — that the economy last year grew an “estimated” 5.2 per cent was viewed by investors as a sign that top leaders are confident in China’s economy despite ongoing difficulties, said Grace Tam, chief investment adviser for Hong Kong at BNP Paribas Wealth Management.

“The market took that as a sign China is very comfortable [with the current growth rate] for now, and that we’re not going to see any big stimulus any time soon,” Tam said.

The risk of losses for foreign investors buying stocks in Shanghai and Shenzhen has been compounded by weakness in the renminbi, which has fallen 1.3 per cent to Rmb7.1957 against the dollar this month.

Many western investment banks had tipped Chinese stocks to mount a recovery this year. Strategists at Goldman Sachs set a 12-month target of 3,900 for the CSI 300 index, which would require a rise of more than 19 per cent from the gauge’s current level.

UBS Securities China equity strategist Meng Lei said that despite scepticism among some investors, now was still a “good time to turn more positive on the A-share market”.

This was because nominal gross domestic product, which was hit by deflationary pressure last year, was expected to turn more positive in 2024 as existing government stimulus measures came into effect.

A long “unwinding” of positions accumulated by fund managers following the market’s highs in 2021 was also due to come to an end this year, he said.