Record Foreign Capital Outflow from China as China’s Tech Stocks Fall Into Bear Market

June 7, 2019 Updated: June 7, 2019

China’s stock market indices have been continuously dropping during the past week.

Although the Chinese regime issued licenses to state-run mobile carriers to roll out 5G that same day, telecom stocks dropped by 5.3 percent, the most out of all Chinese sectors on the exchanges.  

Meanwhile, new data shows that about $12 billion in foreign capital has left Chinese securities during April and May, the largest exodus since the Chinese exchanges opened up to foreign investors via a special program five years ago.

China doesn’t allow foreigners access to its main stock markets directly. In November 2014, the government launched the stock connect program, which allows foreign investors to trade securities in China via the Hong Kong exchange.

Falling Stocks

On June 6, the Shanghai Composite Index (SSE) fell by 33.62 points to 2,827.8, a 1.17 percent drop compared to the day before. This is the sixth consecutive day that the Shanghai exchange has declined; on May 30, the market closed at 2,914.7. This means the exchange fell by a total of 86.9 points, or 2.98 percent.

Meanwhile, the Shenzhen Component Index (SZSE) dropped by 161.11 to 8,584.94, a 1.84 percent decline. This is the seventh consecutive day that the SZSE fell—from 9,035.69 on May 29. That is a 450.75-point, or 4.99 percent decrease.

And ChiNext, a NASDAQ-style board on the Shenzhen exchange, fell by 35.12 points to 1,416.06, a 2.42 percent drop. The index has dropped 89.1 points, or 5.92 percent, in the past seven trading days.

Telecom stocks performed the worst.

China’s Ministry of Industry and Information Technology, the government agency for regulating and developing the telecom industry, has issued four licenses to: China Mobile, China Telecom, and China Unicom, all state-run mobile carriers; and China Radio and Television Network. But this news did not help improve the performance of their stocks.

Meanwhile, technology stocks in general on the ChiNext also dropped dramatically in what the Wall Street Journal (WSJ) described in a June 6 report as falling “into bear-market territory.”

Experts told WSJ that they believed that the stocks’ bad performance was due to ongoing trade tensions with the United States and the subsequent strains on China’s banking system.

Amy Lin, senior analyst at Capital Securities, told WSJ that the recent travel warning issued by China’s Ministry of Culture and Tourism telling Chinese tourists to avoid traveling to the United States made investors feel that there would be no immediate resolution to the trade dispute.

At the same time, Beijing has adopted stimulus measures in an attempt to boost its slowing economy. But it has limited room to cut banks’ interest rates, as they are already low. Investors also feel that they are limited options for Beijing to improve the economy. “If you ease monetary policy, money will flow to the property market, instead of the real economy,” WSJ quoted Wu Zhaoyin, chief strategist at AVIC Trust Co., as saying.

People take a nap inside a shop at a shopping mall in Beijing on May 17, 2019. (NICOLAS ASFOURI/AFP/Getty Images)

Record Outflow From China Equities

Since the United States imposed tariffs on billions of dollars worth of Chinese goods last year, more and more foreign manufacturers are moving out of China in order to avoid the added duties. Now even Chinese manufacturers are thinking of moving production of their goods for U.S. export.

Yang Yuanqing, CEO of Lenovo, a Chinese maker of laptops, smartphones, and other electronic devices, told Nikkei on May 23: “If our rivals move production to places where tariffs do not apply, we may adjust accordingly.”

Yang said Lenovo may increase the capacities of its Mexico and U.S. production bases.

A similar exodus is happening in China’s stock markets.

The Financial Times (FT), in a June 4 report citing data from CEIC, a U.S.-based data service company, and Morgan Stanley, a U.S-based investment banking company, stated that in April and May this year, about $12 billion in foreign investments left China’s securities markets, the largest on record.

This was the first dramatic dip from global investors since late 2014.

“Their withdrawal exacerbated the volatility of the index which, in turn, triggered further withdrawal of funds,” the FT report quoted John Zhou from MQ Investment, a Shanghai-based asset management company, as saying.

Zhou predicted that more foreign investors would leave the China market in the near future.

Chinese companies listed on U.S. exchanges may also face trouble, as U.S. lawmakers introduced the Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act on June 5.

The bill seeks to increase U.S. regulatory oversight of Chinese and other foreign firms listed on U.S. exchanges, and to delist those firms that do not comply with U.S. regulators.

A number of experts have warned about the inherent risks of investing in listed Chinese companies, as U.S. regulators are restricted from auditing them, and they are subject to the same levels of disclosure, oversight, and governance by Chinese regulators.