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Foreign investors dumped Chinese stocks and bonds after losing faith in Beijing’s promise of more help to prop up the country’s faltering economy.
Investors have almost completely reversed their 540 percent net buying of Chinese stocks, following a July 24 pledge by the Communist Party’s top leader, the Politburo, to step up policy support, according to Financial Times calculations based on data from Hong Kong’s Stock Connect scheme. billion yuan ($7.4 billion).
Meanwhile, data from China’s foreign exchange regulator on Wednesday showed that bond holdings by foreign institutional investors fell by Rmb37bn to Rmb324m in July.
Portfolio managers and analysts said the sell-off appeared to have slowed after the Politburo meeting, but the pace picked up in August and could accelerate after this week’s surprise cut in the benchmark interest rate.
The reversal in inflows into Chinese securities reflects crumbling confidence in pledges made by party leaders late last month to boost sluggish consumer spending, tackle high youth unemployment and provide support for China’s struggling real estate sector. Provide more support.
“The measures taken so far appear to have disappointed the market,” said Mohammed Apabhai, head of trading strategy for Asia at Citigroup. “Investors are increasingly frustrated and concerned by the lack of any tangible policy action.”
This month, Beijing’s narrative of a stronger post-coronavirus recovery has faced more challenges. Country Garden, one of the only private property developers to avoid default during a years-long crackdown on excessive borrowing in the sector, recently defaulted on payments, underscoring Beijing’s reluctance to bail out struggling companies.
Consumer spending data continued to disappoint and the official measure of youth unemployment stalled just weeks after hitting a record high.
The negative news weighed on Chinese stocks, with China’s CSI 300 almost completely reversing a 5.7 percent gain after the Politburo meeting.
“The current (Chinese securities) market is largely driven by market sentiment,” said Li Wei, a portfolio manager at BNP Paribas Asset Management. “Things may change very quickly as flows increase.”
The widening gap between Chinese and U.S. bond yields has spurred further selling of yuan-denominated bonds, Li said. That gap has widened, hitting a 16-year high this week as U.S. rates surged and China cut them.
Pessimism about China is taking root. According to Bank of America’s latest survey of Asian fund managers in early August, 84% of respondents said they believed Chinese stocks were in the midst of a structural downgrade — in other words, the overall allocation to Chinese stocks continued to shrink.
Continued selling by foreign investors is also expected to weigh on the yuan. After rising in July on the back of direct and indirect state support, the yuan has fallen to near the low of 7.3 yuan hit in October last year during the Covid-19 lockdown across China.
Outflows from China’s stock and bond markets will put more downward pressure on the yuan, Nomura analysts said in a note on Wednesday, reiterating their “maximum confidence” in shorting the yuan.
However, BNP Paribas’ Li said the PBOC had signaled its disapproval of rapid depreciation by repeatedly setting the yuan’s daily trading band higher than market expectations.
The central bank could also order state-owned banks to buy yuan to slow its decline, or reimpose informal restrictions on foreign exchange transactions that were scrapped last year, he added. “There are other tools in the central bank’s toolbox,” he said.
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