Although China’s markets have begun to recover and rally, with authorities working hard to restore confidence, foreign investors see no reversal in the economy’s fundamental factors and still perceive continuing risks in the country.
They say the recent surge in stock prices is just a temporary relief, adding that while overall sentiments remain negative, they may take some time to turn positive again.
“If you look over any multi-year time horizon, the rally in benchmarks like the Hang Seng Index over the past month looks more like a blip, with a long way to go before we can really say the trend has reversed,” Tariq Dennison, portfolio manager at GFM Asset Management LLC, a U.S.-registered investment adviser, told The Epoch Times.
He sees “this rally more as an overdue correction against the downtrend that has made Hong Kong-listed stocks some of the most oversold in the world.”
Hong Kong’s stock prices, represented by the Hang Seng CSI 300 Index (HSI), which closely mirrors China’s economic performance, have recovered since March due to increasing investor interest. The HSI closed higher on May 13, rising 27.8 percent from the year’s low on Jan. 22, putting it firmly in a technical bull run.
Similarly, the Shanghai Composite CSI 300 Index has returned over 13 percent from Feb. 2 through May 13, reflecting a significant rally in mainland China stock prices as well.
Analysts have attributed this to several factors, including government support, policy reforms, and changing sentiments among local and some global investors.
Still, some analysts are cautious, suggesting that the momentum behind this rally might not be sustained at the index level.
“One of the factors driving the upside has been a surge in southbound [local investors buying shares listed in the Hong Kong stock exchange flows]. Chinese investors bought more than HKD 73 billion (USD 9.3 billion) worth of stocks via the southbound trading links in April, according to data compiled by Bloomberg,” said Union Bancaire Privé (UBP), a Geneva-headquartered private bank and wealth management firm, in a client note on May 6, viewed by The Epoch Times.
According to UBP, the HSI greatly benefitted from a few measures announced by the China Securities Regulatory Commission (CSRC) in April that expanded the scope of market accessibility between Hong Kong and mainland China. These measures essentially make it easier for onshore investors to tap the “safer” U.S. dollar-denominated assets in Hong Kong. The Hong Kong dollar is pegged to the U.S. dollar.
No Fundamental Reversal
“What we have not yet observed is a reversal in fundamental factors, boosting inflows from international institutional investors,” UBP said.“Granted, there may have been some buying by foreign investors to capitalize on upside momentum and lower valuations. But the current rally is clearly not driven by a rebound in earnings expectations, which have continued to decline on average, in line with the same pattern observed during the past four years,” it added.
Moreover, the HSI seems to be overbought based on technical indicators.
In a note on May 7, global investment bank Morgan Stanley warned investors not to chase the recent gains further at the index level, fearing that the momentum behind one of the world’s biggest stock rallies in China will likely diminish.
The global research firm said it has identified near-term technical overbought signals, which could deter further buying by global quant funds.
The term “overbought” in stock investing refers to the opinion of the investor when the market price of a stock or a bond has increased too quickly compared to its intrinsic growth fundamentals. Investors use many key indicators to determine if an investment option is overbought and make investment decisions accordingly.
Apart from that, the rebound of Chinese equities from multiyear lows is stoking optimism that the market has bottomed, with analysts at Goldman Sachs Group Inc. saying that fear of missing out is building among traders.
Masking Negative Data
“Rather than using a big bazooka from the get-go, the government seems to slowly be doing everything possible until they hit on a combination of cumulative solutions that work,” Michael Ashley Schulman, chief investment officer at California-based Running Point Capital, told The Epoch Times in an email.On May 13, for example, China reportedly stopped showing real-time data on the buying and selling of local equities via trading connections with Hong Kong.
Under the new structure, the Northbound Stock Connect system will no longer provide live trading data for movements from Hong Kong to Shenzhen and Shanghai bourses. Turnover information will be released following the close of daily trading sessions.
In 2014, the Shanghai-Hong Kong Stock Connect was launched to facilitate a two-way trading link between the Shanghai Stock Exchange (SSE) and the Stock Exchange of Hong Kong Limited (SEHK), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited.
Stock Connect enables traders to trade between the SSE and the SEHK as long as they don’t exceed their daily limit. In other words, Stock Connect allows qualified buyers from mainland China to buy and sell eligible Hong Kong shares (Southbound) and trade eligible China’s “A” shares (Northbound).
While officials reportedly stated that this was consistent with international procedures, the move also represents an attempt to mitigate the impact of data showing foreign funds selling on market sentiment.
According to Brendan Ahern, chief investment officer at Krane Funds Advisors and investment manager for a Chinese exchange-traded fund, Beijing is also buying mainland China stocks to stabilize the domestic stock market, influence stock market indices, and “talking it up.”
Geopolitical Concerns
Experts also expect Washington to take further steps to discourage U.S. investment in China, which might accelerate the flight of U.S. money out of China.“If there’s one thing the two U.S. political parties [Republicans and Democrats] do seem to be able to agree on is getting tougher on China in any way that can somehow benefit U.S. constituencies,” says Mr. Dennison.
“There may be some slight differences between which specific sectors or companies a Biden versus Trump second administration might target, but I wouldn’t count on U.S. investment as a catalyst,” he added.
According to Mr. Schulman, former President Donald Trump and President Joe Biden have maintained a tough stance on China, and regardless of who wins in November, that stance will probably be maintained, at least verbally.
“Fresh foreign direct investment into China has lost momentum since 2021 and turned negative since mid-2023. It may take a while for that to turn positive again, especially as more companies invest in near-shoring or off-shoring and assembly away from China,” he said.
