Foreign investors poured a record $9bn into Chinese equities in January, the largest single-month inflow on record, betting the mainland market has bottomed out after a disastrous 2018 and anticipating that a more dovish US Federal Reserve will boost emerging markets. 

A more positive outlook for US-China trade talks is also brightening sentiment, with many investors taking the view that negotiations are likely to produce at least a deal to forestall an immediate increase in tariffs. 

The CSI 300 index, which tracks blue chips traded in Shanghai and Shenzhen, lost 25 per cent in 2018 but has rebounded by 9 per cent this year, including a 1.8 per cent gain on Monday when mainland markets reopened following a 10-day national holiday. 

Net inflows from Hong Kong to Shanghai and Shenzhen through the stock connect programme totalled Rmb61bn ($9bn) in January, the biggest month on record and far above the average monthly net inflow of Rmb25bn in 2018, according to stock exchange data. 

“A big factor is that the Fed has shifted its tight stance. People are no longer expecting another rate hike in March. This is an especially large support for emerging markets,” said Daniel Li, equity chief investment officer of Gaoteng Global Asset Management in Hong Kong. 

“Beyond that, investors are more optimistic about the US-China trade dispute. A big reason for last year’s sell-off was the US-China relationship, but now the two sides are negotiating, and markets are more optimistic about a deal.” 

The Hong Kong-Shanghai stock connect launched in 2014, followed in 2016 by a counterpart scheme for Shenzhen. Last year, China’s securities regulator increased the daily quota for foreign investment into the mainland — known as northbound flows — to Rmb52bn. 

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Regulators have taken other recent steps to attract foreign investment to mainland capital markets.

Late last month, China’s securities regulator proposed expanding the range of investments permitted under a separate scheme that allows approved foreign institutions to buy Chinese domestic stocks and bonds. 

The draft rules would enable participants in the Qualified Foreign Institutional Investor (QFII) programme to buy stocks traded on the National Equities Exchange and Quotations, a Beijing-based over-the-counter exchange that hosts high-tech companies unable to list in Shanghai and Shenzhen. The new QFII rules would also let foreigners buy Chinese hedge funds and futures, and conduct margin trading and short selling. 

Morgan Stanley forecasts that mainland equities will attract a record $70bn to $125bn of inflows this year. Around $15bn of that will come from passive money tracking FTSE Russell and MSCI indices, which were recently adjusted to include more mainland stocks. 

Low valuations were one of the most obvious reasons for the foreign inflows. The CSI 300’s trailing-12-month price/earnings ratio was 11.1 on February 1, down from 14.7 at the beginning of January, according to Wind Financial Information. While a number of companies have issued profit warnings in recent weeks, many analysts believe the worst is over.

“Earnings estimates have plunged to historical lows, similar to 1998, 2008 and late 2015. A lot of bad news has already been priced in,” said Hong Hao, head of research at Bocom International in Hong Kong.

Additional reporting by Yizhen Jia

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