Analysis: How to Keep Foreign Capital Flowing Into Chinese Stocks

In early 2023, the Chinese mainland stock market experienced a surge of foreign capital, prompting analysts to consider the factors needed to sustain investor confidence [para. 1]. Data from the Stock Connect program, which facilitates trading between Hong Kong’s and mainland China’s stock exchanges, showed that net overseas investment reached 83 billion yuan ($11.7 billion) in the first five months of the year, nearly doubling the total of the previous year but still falling short of 2021's figures [para. 2].

The influx of foreign investment was attributed to stronger-than-expected profits from listed companies, notably internet giants, and reduced concerns over systemic risks due to China’s prolonged property slump, according to UBS Investment Bank Research's James Wang [para. 3]. Historically, foreign funds have tended to flow into Chinese markets during index rebounds or periods of strong policy support [para. 4]. Recent policy efforts in China have aimed to support the lagging property market, improve capital markets, and tackle other economic challenges, thereby boosting foreign investor confidence [para. 5].

Significant policy measures included a May 17 announcement that removed the national mortgage interest rate floor and reduced some minimum down-payment requirements to support the housing market. Concurrently, the State Council issued the “National Nine Articles” to enhance the quality of listed companies and restore investor confidence in mainland stocks [para. 6]. Additionally, overseas market conditions, such as volatility in U.S. and other Asian stock markets and a stronger U.S. dollar, made Chinese stocks appear more attractive to investors [para. 7][para. 8].

Global mutual funds held only 5.7% of their assets in Chinese stocks by the end of April, a historically low share over the past decade, as reported by Goldman Sachs [para. 9]. The favorable conditions following last year’s market slump made Chinese shares relatively cost-effective, drawing in short-term funds looking to capitalize on low prices [para. 10]. Brendan Ahern of KraneShares noted improving earnings expectations for internet companies and better economic recovery bolstered by policy support as key factors attracting global investors [para. 11].

Despite the earlier momentum, the Stock Connect program saw a slowdown, with net overseas investment in mainland shares dropping to 38.6 billion yuan in the first half of the year as investors reduced their holdings in June [para. 12]. Analysts had grown cautious about the market as early as May [para. 13]. JPMorgan Chase & Co. analysts pointed out that domestic bond yields were at record lows, house prices were anticipated to decline further, and global investors remained hesitant, driven primarily by fundamental factors like nominal growth and corporate earnings [para. 14].

In May, the MSCI China Index rose by approximately 30% from its January low, primarily due to improved sentiment rather than enhanced earnings expectations [para. 15]. For sustained inflows of foreign capital, analysts emphasized the importance of solid economic fundamentals. JPMorgan emphasized the need for comprehensive property rescue plans and stronger domestic demand to foster a positive outlook on Chinese equities [para. 16]. Moreover, Goldman Sachs highlighted that the sustainability of the stock market rally hinges on U.S.-China relations and economic fundamentals [para. 17]. Without significant positive shifts in Sino-U.S. trade tensions and economic recovery, sustained foreign capital inflows remain uncertain, as observed by Ci Weiwei from Western Securities Co. Ltd. [para. 18].

Reporters Qing Na and editor Michael Bellart provided contact details [para. 19].