Global investors dump Chinese securities as state support hopes fade

Foreign investors are selling Chinese bonds and stocks after Beijing failed to deliver on its promises of additional help for the economy.

According to calculations based on Hong Kong Stock Connect data, investors have reversed almost entirely Rmb54bn in net purchases of Chinese stocks that followed a pledge made by the top Communist Party leaders of July 24th to increase policy backing.

According to data released on Wednesday by China, the foreign exchange regulator, the bondholdings by foreign institutional investors dropped by Rmb37bn to Rmb3.24tn.

Analysts and portfolio managers said that the selling of stocks, which had appeared to be slowing down after the politburo met, picked up in August. It is likely to increase in response to the surprise reduction in interest rates this week.

The reversed flow of funds into Chinese securities is a reflection of the crumbling confidence in pledges made by party leaders late last month to boost consumer spending, combat high youth unemployment, and provide more assistance to the troubled country’s property sector.

Mohammed Apabhai is the head of Asia Trading Strategy at Citigroup. He said that “the measures taken to date appear to have disappointed market,” Investors are growing more frustrated and concerned about the lack solid policy actions. This month, Beijing’s story of a robust recovery after Covid has been challenged. Beijing’s unwillingness to rescue struggling companies is highlighted by recent missed payment by Country Garden. This developer was one of only a few private property developers that avoided default during a multi-year crackdown against excessive borrowing.

The official measure of youth unemployment was discontinued only weeks after it reached a record-high.

Chinese share price has been affected by the negative news. China’s benchmark CSI 300 Index of Shanghai and Shenzhen listed stocks almost completely reversed their 5.7 per cent increase following the politburo.

Wei Li is a portfolio manager with BNP Paribas. He said that the current market (for Chinese securities) is heavily influenced by sentiment. “With flows, the market can move very quickly.”

Li said that the growing difference between yields on US and Chinese debt had prompted further sales of renminbi bonds. This week, the gap between US and Chinese interest rates reached a 16-year record.

Pessimism towards China is growing. Bank of America’s Asia fund manager survey, conducted in early August, revealed that 84 percent of respondents believed Chinese stocks were experiencing a structural devaluation — a permanent contraction of the overall amount of investment allocated to China’s stock market. Continued selling by foreign investors is also expected to weigh on the renminbi’s exchange rate. After rallying in July backed by direct and indirect state support, the currency has since reversed course. On Thursday, the renminbi weakened past Rmb7.3 against the dollar and was close to falling past the 15-year lows touched last October during disruptive Covid-19 lockdowns across China.

Nomura analysts said that in a note published on Wednesday, the withdrawals from China’s bond and stock markets will put further downward pressure on renminbi. They also reiterated their “maximum confidence” in betting against the Chinese currency.

BNP’s Li, however, said that the People’s Bank of China has repeatedly set the renminbi’s trading band at a higher level than what the market had expected.

He said that the central banks could also order state lending institutions to purchase the renminbi in an effort to slow down its decline, or reinstate informal limits on foreign currency transactions lifted last year. He said that the central bank has other tools to use.