Foreign Capital Returns to A-shares, but Long-Term Confidence Depends on Continued Fundamental Improvements (AI Translation)

【周刊提前读】外资短期回流A股 长期信心还看基本面持续改善

In the first five months of 2024, net purchases of A-shares by northbound funds exceeded 90 billion yuan, surpassing the total for the entire year of 2022 and more than doubling the 2023 total. The record single-day net purchase was set on April 26th, at 22.449 billion yuan, since the launch of the Shanghai/Shenzhen-Hong Kong Stock Connect. Moreover, iShares MSCI China ETF experienced significant inflows for the first time in 16 months, indicating increased bullishness from foreign investors on Chinese assets [para. 1].

Several factors are driving foreign investments. Key among these are improved corporate profits particularly among large internet firms, diminished systemic risks associated with the real estate sector, and stronger correlations between stock prices and company fundamentals. Long-term overseas funds with conservative policy expectations are showing more confidence in Chinese stocks due to these improved fundamentals [para. 2][para. 6].

Externally, heightened market volatility in the US and Asia has driven institutional investors to seek out A-shares, perceived as competitively priced, especially with a strengthening US dollar. With rising expectations of interest rate cuts and medium-term dollar depreciation, foreign investors are incentivized to invest in the Chinese market [para. 3][para. 7].

A report from Goldman Sachs noted that global mutual funds and overseas hedge funds have historically low allocations to Chinese stocks, suggesting room for further growth, provided market rebound and favorable return rates persist [para. 5]. However, since the surge on April 26th, the pace of northbound fund inflows has fluctuated, with only two dates (April 29 and May 17) reaching over 10 billion yuan [para. 6][para. 8].

Experts believe that the continuation of foreign capital inflows heavily relies on economic fundamentals, with concerns that without significant improvements, the current trend may be short-lived. J.P. Morgan highlights the need for comprehensive real estate policies and sustained domestic demand increases as key to a more optimistic outlook [para. 9]. Contrarily, an unexpected return in foreign capital with robust inflows in various ETFs, particularly the iShares MSCI China ETF and KraneShares CSI China Internet ETF, suggests a renewed interest in Chinese assets [para. 10][para. 14].

Moreover, the reallocation of capital back into A-shares suggests a shifted perspective among foreign investors towards undervalued Chinese equities. This is manifested via the data from Goldman Sachs showing continuous net buys from global hedge funds in recent weeks [para. 3][para. 10]. However, fluctuating net buys post-April 26th are cautionary signals, stressing the need for clear economic recovery and sustained profitability among A-share companies [para. 16][para. 20].

Academic analysis and market experts alike highlight that fundamental economic recovery and solid policy support remain critical for the sustainability of this foreign capital influx. Notably, factors such as stabilized real estate, diminished geopolitical tensions, and supportive economic policies are integral to maintaining investor confidence [para. 21][para. 35]. Goldman Sachs and several analysts, therefore, express cautious optimism but underscore the necessity for significant positive economic changes for long-term stability [para. 36][para. 37].

In closing, adjustments to real-time data disclosures regarding northbound capital trading volumes aim to reduce market volatility by curbing "herd" trading behaviors among investors. Authorities intend for these measures to align better with international practices and reduce excessive market focus on northbound capital flows [para. 42][para. 47]. Analysts underscore the strategic value of low-frequency disclosure in mitigating excessive market fluctuations and maintaining more consistent capital flow trends [para. 50].