Nov 10, 2020 08:22 PM

Foreign Investors Ditch Pharmaceuticals, Switch to Consumer Goods as Economy Recovers

China has accelerated the opening of mainland stock markets to overseas investors over the past two years, but their overall holdings are still small.
China has accelerated the opening of mainland stock markets to overseas investors over the past two years, but their overall holdings are still small.

Institutional investors, including foreign firms, adjusted their Chinese mainland equity portfolios in the third quarter, adding exposure to industries benefitting from the country’s recovery from the coronavirus pandemic and moving out of sectors that did well during the Covid-19 outbreak, corporate and mutual-fund filings show.

Banking and non-banking financial institutions, and cyclical sectors such as automakers, transport and machinery were among the main beneficiaries of the shift, while pharmaceuticals, medical equipment and work-from-home goods such as laptops and computer desks –– which saw sales surge earlier in the year as the epidemic raged –– were among the losers, an analysis of the filings reveals.

“One of the core supports behind the shift is that the domestic economy has gradually returned to normal,” Chen Guo, chief strategist at Essence Securities Co. Ltd., wrote in an Oct. 29 research note (link in Chinese). “A string of macroeconomic data has begun to turn from negative growth to positive, different sectors have shown varying degrees of recovery, and on a micro level, the vitality of enterprises has returned to normal.”

As a result, institutional investors’ asset allocation has “entered the post-epidemic era,” Chen said, shifting from the narrow focus on “alcohol and medicine” to a broader selection of areas that are booming.

China has accelerated the opening of mainland stock markets to overseas investors over the past two years, but their overall holdings are still small even though their presence is having a growing effect on market sentiment. China’s Shanghai and Shenzhen A-share markets have a combined market value of around 58 trillion yuan ($8.8 trillion). But at the end of September, overseas holdings of A-shares stood at about 2.75 trillion yuan, or just 4.7% of mainland-listed equities in terms of market value, according to data (link in Chinese) compiled by the People’s Bank of China. Even so, that’s still well above the 4.15% share they held at the end of March.

Overseas investors participate in the A-share markets through Stock Connect programs linking the mainland with Hong Kong and two major inbound investment programs known as the Qualified Foreign Institutional Investor (QFII) program and its yuan-denominated sibling, the Renminbi Qualified Foreign Institutional Investor (RQFII) program.

Capital flowing into the A-share markets from Hong Kong via the Stock Connect programs, known as northbound funds, poured into biopharmaceutical industries in the first six months, but flocked to chemical and electrical-equipment sectors in the third quarter, analysts at Kaiyuan Securities Co. Ltd. wrote in a note (link in Chinese).

A net 24.4 billion yuan of northbound funds fled the mainland markets, with September’s outflow reaching 32.8 billion yuan after an inflow of 10.4 billion yuan in July, according to data from the Hong Kong Stock Exchange. That was the third-largest quarterly net outflow since the program started and surpassed only in the second quarter of 2019, when Sino-U.S. trade tensions escalated, and the first quarter of 2020, when China’s Covid-19 outbreak was at its peak, according to (link in Chinese) analysts with Guotai Junan Securities Co. Ltd.

At the end of September, the market value of mainland shares held by overseas investors through the QFII and RQFII programs reached 113 billion yuan, up 13% from the end of June. Their holdings via the stock connect programs totaled a record 1.87 trillion yuan, boosted by market gains fueled by the economic recovery, the Guotai Junan analysts wrote in their report.

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In the third quarter, QFII investors reduced some of their holdings in pharmaceutical and high-tech companies, after they racked up significant gains in the first half largely driven by the pandemic, and sunk more money into sectors expected to be boosted by economic recovery such as car manufacturing and electrical equipment, according to Caixin’s analysis based on listed companies’ third-quarter earnings reports.

A Canadian pension fund, Norway’s central bank, and the Monetary Authority of Macao each shed millions of shares in Shenzhen-listed Lepu Medical Technology (Beijing) Co. Ltd., which makes cardiovascular medicines and medical equipment. But other QFII investors including the Kuwait Investment Authority and the Bank of Korea, added to their holdings. Seven of the company’s 30 biggest shareholders at the end of the third quarter were QFII investors, according to (link in Chinese) its latest earnings report.

China State Construction Engineering Corp. Ltd., the world’s biggest construction company by revenue, was the top loser in the third quarter, with the biggest sell-off in shares by QFII investors. Perennial favorite Midea Group Co. Ltd., a home-appliances manufacturer, was the biggest winner, with QFII investors adding the most shares of any listed company.

China has been making efforts to ease foreign institutional investors’ access to its financial markets. Starting Nov. 1, the QFII and RQFII programs were combined to further expand the scope of investment and lower requirements for overseas investors, following the scrapping of quota restrictions in May. In the first nine days after the November change, 15 foreign institutions applied to (link in Chinese) join the QFII program, public records show.

Contact editor Nerys Avery (

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