From mid-April to mid-May, foreign capital continued to flow into the Hong Kong stock market due to factors such as domestic policy convergence and mitigation of peripheral disturbances. However, during this period, inflows of foreign capital were mainly short-term capital. Although actively managed long-term capital showed a narrowing trend in outflows, there was no obvious significant increase in allocation. Furthermore, markets such as the US, Japan, Taiwan, and India all experienced significant inflows of capital during this period. We judge that this is a reflection of marginal easing of global capital brought about by the mitigation of peripheral disturbances in this round. Unlike the historical period of foreign capital inflows, which prefer to allocate growth stocks, this round of foreign capital has significantly flowed into the procyclical, financial, and internet sectors. Looking back, assuming that the trend of improving economic fundamentals in the third quarter is established, we estimate that there is still room for foreign capital to return HK$20-40 billion under the escrow capital scale.
Global capital flow analysis: US and Japan received additional printing allocations.
We track global capital flows through EPFR data. As of April 30, EPFR estimates that the total size of global funds is about US$3.66 trillion. Among them, global funds (excluding the US) funds, global funds, emerging market funds, and European funds are the largest, accounting for about 43.2%/29.2%/13.3%/6.0%, respectively; the total size of actively managed funds is about US$1.14 trillion, accounting for about 31% of the total. For overseas markets (especially developed markets in Europe and America), passive investment has become the mainstream method in the market. We believe that the flow of total capital may be more representative of changes in market liquidity. Looking at capital flows from major global markets, since the beginning of the year, markets such as the US, Japan, Taiwan, and India have all ushered in significant capital allocations, with inflows of about US$1252/162/124.121 billion, respectively. Meanwhile, foreign capital flows from markets such as the United Kingdom, Thailand, Vietnam, and Indonesia are showing an outflow trend. It is worth noting that the Indian market showed a sharp increase in allocation of both active and passive capital; the Japanese market has been reduced by foreign investment since May.
How is foreign investment allocated to China?
Looking at the flow of foreign capital from the EPFR: Active foreign investment is more effective. As of April 30, EPFR estimates that global funds (foreign capital) hold a total of about US$244.3 billion in assets in China, which is one of the most representative statistical methods. Looking at the subregions, Greater China funds, Asian (excluding Japan) funds, emerging market funds, and Asia Pacific funds hold relatively high shares of Chinese assets, at 61.7%/31.1%/22.3%/20.5%, respectively. Among them, actively managed foreign funds hold about 78.2 billion US dollars in Chinese assets, accounting for only 32% of all foreign-funded funds holding Chinese assets, which is far lower than the actual share of actively managed funds in Chinese assets. Therefore, we believe that the active allocation of foreign capital is more representative of actual changes in foreign investment sentiment.
Greater China regional funds have flowed in, and the trend of long-term capital outflows from China has narrowed. Active funds in EPFR statistics are mainly long-term funds, which are more representative of long-term capital sentiment. Since 2021, there has been a trend decline in the proportion of Chinese assets allocated by active foreign capital. As of March of this year, the cumulative decline was 7.8 percentage points to 6.2%, the lowest level in history. However, we observed that in April, China's asset holding ratio rebounded by 0.7 percentage points to 6.9%, and active foreign investment began to shift to increasing the Chinese market. From the perspective of foreign capital inflows into regional assets, active foreign capital outflows from the Chinese market have clearly subsided since mid-April, narrowing from the weekly outflow of 780 million US dollars to only 100 million US dollars. Looking at global capital flows, we judge that from April to May, global capital did not rise or fall, the so-called “rise and west” phenomenon, that is, flowing out of highly valued markets and flowing into Chinese assets at the same time, but rather marginal easing of global capital caused by the mitigation of peripheral disturbances. Since late May, foreign capital has once again flowed out of the Chinese market.
Looking at the foreign capital flow from Hong Kong stock escrow fund estimates: Hong Kong stock escrow funds represent the total capital situation in the market. We estimate that between April 22 and May 20, Hong Kong Stock Connec/foreign intermediaries/domestic intermediaries had net inflows of HK$332/267/-58.4 billion, respectively, and foreign capital turned into the Hong Kong stock market. At the same time, the share of foreign investors holding the Hong Kong stock market value also rose 0.6 percentage points to 73.6%; since May 20, foreign capital also once again flowed out of HK$104 billion against the backdrop of falling policy expectations; the holding ratio fell 1 percentage point to 72.6%, once again hitting the lowest level in history. Looking at industry segments, from mid-April to mid-May, there was a sharp inflow of foreign capital into the procyclical sector of Hong Kong stocks, including the real estate industry chain (home appliances, etc.), big finance (insurance, diversified finance), and the Internet. Since mid-May, despite the overall outflow of foreign capital, it has shown a trend of continuing to increase its holdings in the Internet sector (Internet services, Internet healthcare); in addition, it has also continued to increase its holdings in major financial sectors, including real estate property management, home, and diversified finance.
What is the future inflow space for foreign investment?
We compared the current round of phased inflows of foreign capital from April to May with the four phased inflows of foreign capital with similar macro backgrounds since 2022. Most of the five rounds of market rebound have similar characteristics: phased mitigation of peripheral risks (geographical risk or monetary tightening expectations), rising internal policy expectations (steady growth, stable real estate, etc.), absolute low valuations, and improvements in future fundamental expectations. However, up to now, the rebound has been driven more by policy expectations and market sentiment, and fundamentals have yet to show a trend of continuous improvement. If fundamentals and policy expectations continue to decline, then this round of foreign capital inflows may have reached the end. However, with the further implementation of the future real estate inventory removal policy, combined with the expectation that fundamentals in the third quarter will continue to improve, this round of foreign capital inflows may be comparable to the situation from November 2022 to January 2023. Assuming that the trend of improving economic fundamentals in the third quarter is established, we estimate that there is still room for the return of foreign capital of HK$20-40 billion under escrow capital.
Risk Factors:
1) Different statistical measures may not necessarily represent the actual overall financial situation; 2) domestic policy introduction and economic recovery fell short of expectations; 3) monetary easing by overseas central banks fell short of expectations; 4) Sino-US relations deteriorated further; 5) geographical conflict spread.
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