Optimism on Chinese stocks soars to five-year highs

Optimism on Chinese stocks soars to five-year highs

Trucks and passenger cars drive across the Sutong Bridge in the city of Suzhou near Shanghai on Jan. 27, 2023, during the Lunar New Year holiday.

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BEIJING — Money is flowing into mainland Chinese and Hong Kong stocks in ways not seen since 2018, according to research firm EPFR Global.

Active foreign fund managers put $1.39 billion into mainland Chinese stocks in the four weeks ended Jan. 25, EPFR data showed. Active fund inflows into Hong Kong stocks were even greater during that time, at $2.16 billion.

“Active managers have never been this positive toward China markets in the past five years,” said Steven Shen, manager of quantitative strategies at EPFR.

“In the very short term we should be expecting more inflows from the active managers,” he said, pointing to factors such as China’s reopening from zero-Covid. EPFR says it tracks fund flows across $46 trillion in assets worldwide.

Active money managers are more involved with picking portfolio investments, while passive money managers tend to follow stock indexes.

The Shanghai composite gained more than 5% in January, the most since a surge of nearly 9% in November, according to Wind Information. The Hang Seng Index climbed by more than 10% in January, a third-straight month of gains.

The money is coming in faster than it did in early 2022, Shen said. At the time, a few institutional investors had said it was time to buy Chinese stocks due to Beijing’s emphasis on stability in a politically important year.

Back then, local investors had been more cautious. The highly transmissible omicron variant and China’s zero-Covid policy subsequently locked down the city of Shanghai for two months, while constraining business activity in much of the country. In 2022, GDP grew by 3%one of the slowest paces in decades.

China abruptly ended its increasingly stringent Covid controls in December. Tourism, including travel abroad, rebounded during the Lunar New Year in late January.

This year, local investor sentiment is also recovering.

“With the macro environment in China I think 2023 we’re going to see a lot more [mainland China] client money shifting back into the market, into the secondary market funds,” Lawrence Lok, chief financial officer of wealth management firm Hywin, said in early January. The secondary market refers to the public stock market.

Lok said those clients last year avoided taking risk due to the turbulent market. The Shanghai and Hong Kong stock indexes plunged more than 15% last year.

For Hywin’s clients with funds outside of China, Lok said they are looking for ways to invest in U.S.-listed Chinese companies or Hong Kong stocks, among other offshore funds.

Hywin had more than 40,000 active clients as of June 2022 and 4.5 billion yuan ($642.9 million) in assets under management.

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While real estate and renewable energy-related sectors are seeing interest, tech has been relatively quiet, EPFR’s Shen said. He said inflows were also less aggressive when it came to U.S.-listed Chinese stocks.

For passive money managers, cumulative net inflows into mainland Chinese, Hong Kong and U.S.-listed stocks stands at $7.05 billion for the four weeks ended Jan. 25, according to EPFR.

U.S.-based money managers who invest for the longer term bought a net $1.3 billion of U.S.-listed Chinese stocks last month as of Jan. 25 — the second-straight month of such inflows, according to Morgan Stanley.

“U.S.-based long-only managers shared that they just started to reduce their underweights on China, or were in discussion with investors to release mandate constraints on China exposure,” Morgan Stanley analysts said. “They expect inflows from asset owners to accelerate in 2Q23.”

Pinduoduo, Baidu and Bilibili were among the U.S.-listed Chinese stocks that saw the largest inflows, the report showed.

Deeper concerns

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