China is experiencing an unprecedented decline in foreign investment in its stock market, marking the smallest annual purchases by overseas investors on record. Discouraged by a fragile economic recovery and escalating geopolitical tensions, foreign funds have only netted 44 billion yuan ($6.1 billion) in onshore stocks through trading links with Hong Kong in 2023. This figure, despite a notable surge in purchases at the year-end for positioning adjustments, represents the lowest level since Bloomberg began compiling annual data for both the Shenzhen and Shanghai bourses in 2017. In more favorable conditions, this amount would typically be acquired in just a month.
The year commenced with optimism for a post-Covid market revival, but the momentum waned as a prolonged housing slump, insufficient stimulus measures, and regulatory uncertainties triggered substantial sell-offs. The CSI 300 benchmark, down 12% this year, ranks among the world’s worst-performing major indexes, signaling a potential third consecutive annual decline.
December marks the fifth consecutive month of foreign funds exiting Chinese stocks, an unprecedented streak that underscores persistent concerns. While some fund managers advocate for buying opportunities amidst the market downturn, many remain skeptical about the long-term attractiveness of Chinese stocks. Corporate earnings are no longer experiencing robust growth, and worries persist about policy support for the private sector, coupled with expectations of moderated economic growth due to demographic challenges.
Nevertheless, a glimmer of hope emerged as foreigners injected 13.6 billion yuan into mainland shares on Thursday, marking the highest influx since July. Historical patterns suggest that overseas investors often act ahead of others to establish positions, as noted by Founder Securities analysts, including Cao Liulong, earlier this month.
Cao highlighted potential catalysts for a reversal, stating, “End of depreciation pressure for the yuan, combined with the Fed’s pausing of rate hikes and an improving economic outlook as supportive policies are ramped up, are likely to drive overseas investors back into China.”
The stock connect program with Hong Kong remains the primary channel for overseas investors to trade mainland shares. Daily flows are closely monitored as a significant gauge of sentiment, influencing onshore traders, even though foreign purchases constitute only 4% of the total shares outstanding for mainland firms.
