Optimism on Chinese stocks climbed to a five-year high

BEIJING – Money in mainland Chinese and Hong Kong stocks hasn’t been seen since 2018, according to research firm EPFR Global.

Active foreign fund managers invested $1.39 billion in mainland Chinese stocks in the four weeks ended January 25, EPFR data showed. Active fund flows into Hong Kong stocks exceeded $2.16 billion during that time.

“Active managers have never been so positive on the China markets in the past five years,” said Steven Shen, manager of quantitative strategies at EPFR.

“In the very short term we should expect more flows from active managers,” he said, pointing to factors such as China’s reopening from zero-Covid. The EPFR says it tracks fund flows of $46 trillion in assets worldwide.

Active money managers are more involved in choosing portfolio investments, while passive money managers follow stock indexes.

According to Wind Information, the Shanghai Composite rose more than 5% in January, the most since rising nearly 9% in November. The Hang Seng index climbed more than 10% in January, its third-straight month of gains.

Shen said the money is coming in faster than early 2022. At the time, some institutional investors said the time had come to buy Chinese stocks because of Beijing’s emphasis on stability in a politically crucial year.

Back then, local investors were more cautious. The highly contagious Omicron variant and China’s zero-covid policy subsequently locked down the city of Shanghai for two months, while disrupting business activity across much of the country. In 2022, GDP is projected to grow by 3%, one of the slowest in decades.

China abruptly ended its increasingly stringent Covid controls in December. Tourism boomed again, including travel abroad during the Lunar New Year in late January.

Local investor sentiment is also recovering this year.

“With the macro environment in China I think in 2023 we’re going to see a lot more [mainland China] “Clients’ money is coming back into the market, into secondary market funds,” Lawrence Lok, chief financial officer at wealth management firm Hyvin, said in early January. Secondary market refers to the public stock market.

Lok said those clients had refrained from taking risks due to the turbulent market last year. Shanghai and Hong Kong stock indexes fell more than 15% last year.

For Hywin’s clients with funds outside China, Lok said they are looking for ways to invest in US-listed Chinese companies or Hong Kong stocks, among other offshore funds.

Hiwin had over 40,000 active clients as of June 2022 and 4.5 billion yuan ($642.9 million) in assets under management.

EPFR’s Shen said real estate and renewable energy-related sectors are showing interest, but the technology has been relatively quiet. He said flows were also less aggressive when it came to Chinese stocks listed in the US.

According to the EPFR, for passive money managers, cumulative net inflows into mainland Chinese, Hong Kong and US-listed stocks stood at $7.05 billion for the four weeks ended January 25.

According to Morgan Stanley, US-based money managers who invest for the long term bought a net $1.3 billion of US-listed Chinese stocks last month through January 25 – the second-straight month of such inflows.

“US-based long-only managers shared that they have started reducing their underweight on China, or are in discussions with investors,” Morgan Stanley analysts said. “They expect a spurt in inflow of property owners in 2Q23.”

pinduoduo, baidu And bilibili The biggest inflows were seen in US-listed Chinese stocks, the report showed.

However, analysts at Bernstein cautioned that Chinese stock gains may not extend further if US active investors — who have dropped out of the rally — and local investors don’t buy.

The “excessive” inflows of the past three months threaten whether the market rally can continue for another three months, analysts at Bernstein said in a January 27 report. “We believe in the short term, investors need to be more selective when choosing China exposure.”

The recent euphoria about Chinese stocks also came after two years, in which the sudden suspension of Ant Group’s IPO, crackdown on tech and real estate businesses and tighter Covid controls weighed on sentiment.

Bruce Liu, CEO of Esoterica Capital, said in January that while he’s been talking with some affluent Chinese about global diversification since 2019, he didn’t actually start taking action until the second half of last year. His firm manages less than $50 million in assets.

“What happened in the last two years left a mark on his mind,” Liu said. “It’s a matter of confidence. I don’t see that confidence coming back. At least the people I’m talking to.”

“It is a strategic decision from their point of view,” he said. “Maybe they have enough Chinese assets. It’s more important for them to diversify.” [globally] Instead of taking advantage of this current, the current is coming back.”

The story of China’s reopening is not just about capital. Now that the borders are open, some investment businesses are also physically coming into the country.

Taylor Ogan, CEO of Snow Bull Capital, moved with his team of three to Shenzhen, China in January to open a research office.

“The more we looked at it, the more we needed to be in China just for the research,” Ogan said. He said many Chinese companies don’t have much English-language content, even if they list in Hong Kong, and some giant Chinese public companies told him they had not had any foreign analyst visits since the pandemic.

“We started to see it as an opportunity.”

— CNBC’s Michael Bloom contributed to this report.