Foreign investors’ selling of Chinese shares gained some momentum in May, as flagging domestic demand and expectations for weak corporate earnings led to steep falls on mainland and Hong Kong stock markets.
Refinitiv data shows foreigners sold $1.71 billion worth of mainland shares this month via Stock Connect, a key cross-border link between the mainland and Hong Kong exchanges, after selling $659 million in April.
The selling marks a slow reversal of their heavy investment totalling $20.92 billion in January when China reopened its economy after three years of COVID restrictions, spurring a wave of bullish expectations for growth.
Such hopes were dashed as domestic and overseas demand wilted, and the recovery proved uneven. According to data from the National Bureau of Statistics, profits at China’s industrial firms slumped in the first four months of the year.
Despite outflows in February, April and May, foreigners’ net purchases of mainland shares still stood at $25.05 billion for the first five months of this year, compared with net buying of about $6.36 billion worth over the whole of 2022.
China’s manufacturing activity contracted more than expected in May, according to the official purchasing managers’ index (PMI) survey released on Wednesday. Though a private sector survey, the Caixin/S&P Global manufacturing PMI released on Thursday, showed China’s factory activity unexpectedly swung to growth in May from decline.
In April, imports contracted sharply, factory gate prices fell, property investment slumped, industrial profits plunged and factory output and retail sales both missed forecasts.
Over the past month, analysts have cut their forward 12-month earnings forecasts of China’s large- and mid-cap companies by over 0.7 percent, with mining and real estate sectors seeing over 3 percent cuts.
“Confidence among consumers and business investors is not recovering as fast as the market had hoped,” said Pruksa Iamthongthong, senior investment director of Asian equities at abrdn.
“We think that the economy would take time to recover, and we would see a period of risk aversion over the short term in response to risks around slowing activity against a backdrop of a potential global recession.”
According to Morningstar, US funds that invest exclusively in China, Taiwan, and Hong Kong have seen an outflow of $1.15 billion between February and April after witnessing an inflow of $2.5 billion in January.
The Allianz All China Equity WT saw an outflow of $ 137.6 million in the week ending May 25, the biggest weekly outflow since at least July 2018, while iShares Core MSCI China ETF (HKD) faced $103.72 million worth of net selling, as shown by Refinitiv.
