Global stock traders dumped Chinese equities by the most in 15 months during the third quarter, as they unwound their holdings of the shares that have made outsize gains for their portfolio.
International fund managers sold 24.4 billion yuan (US$3.6 billion) worth of the yuan-traded equities through the transborder investment channel via Hong Kong known as the Stock Connect, in the three months ended in September, according to Bloomberg data. That was the biggest sell-off since the second quarter of 2019, when global investors sold 29.1 billion yuan of China’s yuan-denominated A shares.
Consumer and technology stocks that have made spectacular run-up this year bore the brunt of the selling. China Tourism Group Duty Free, the nation’s biggest franchiser of duty-free shops, liquor distiller Wuliangye and Apple supplier GoerTek were among the stocks that were sold most by foreign investors, according to data by the Hong Kong exchange. Shares of the three companies have climbed at least 60 per cent this year.
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“The US risk-off trade ahead of November’s US presidential election has affected onshore/offshore sentiment for Chinese equities, adding to the negative sentiment including a new wave of Covid-19 cases in parts of Europe and weakness in US high-frequency data,” said Wendy Liu, head of China strategy in Hong Kong at the Swiss bank UBS Group.
The tumult came even after the major gauges of Chinese onshore stocks are all posted gains in the third quarter and the yuan strengthened the most against the US dollar in more the two years. The risk-aversion in the run-up to the US presidential election and the angst about the resurgence of the coronavirus pandemic and the growth outlook hold sway in the mindset of foreign traders now, according to UBS.
While global funds were pulling out, Chinese investors were piling into Hong Kong, loading up on the city’s equities for the third consecutive quarter this year, as they took advantage of the cheapest valuations among Asian markets – except for Pakistan and Sri Lanka – to hunt for bargains. Inflows boosted the Hong Kong dollar, forcing the city’s monetary authority to repeatedly sell the city’s currency to weaken it to within a tightly controlled trading band against the US dollar.
Mainland Chinese traders bought a total of HK$170.6 billion (US$22 billion) of Hong Kong stocks via the Connect programme in the July-to-September period, Bloomberg data showed. That followed the purchase of HK$71.7 billion and HK$228.3 billion respectively for the previous two quarters.
The Hang Seng Index is valued at 12.4 times estimated earnings, the cheapest among the world’s major market benchmarks. It dropped 4 per cent this quarter.
Foreign inflows may return in the coming quarter as the repercussion of the US election abates and China’s recovery gather further strength. In the latest sign of the resilience of the world’s second-largest economy, China’s purchasing managers’ index has remained above the expansion line for a seventh straight month in September.
Chinese stocks “have high values of allocations in the global perspective,” said Min Liangchao, a strategist at HSBC Jintrust Fund Management in Shanghai. “China’s A-share market is relatively cheap in valuation and China is the one of the countries that are most successful in containing the epidemic and recovering economic growth.”
The Shanghai Composite Index rose 7.8 per cent in the third quarter and the ChiNext gauge of small-cap stocks gained 5.6 per cent, while the yuan appreciated 3.6 per cent against the US dollar during the period.
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