Source: Cailian Press Author: Hu Jiarong.
① Why did the capital flow in and then out recently? ② What is the total amount of Chinese assets held by global funds?
There was a continuous inflow in the Hong Kong stock market from mid-April to mid-May. However, Citic Sec pointed out that the foreign capital inflow during this period was mainly short-term funds. Although actively managed long-term funds showed a narrowing trend in outflows, there was no significant increase in allocation.
Many investors have doubts about whether foreign capital can return to the Hong Kong stock market. While the influence of southbound funds on the Hong Kong stock market is increasing, the trend of foreign capital is still a focus of attention.
The trend of long-term capital outflow has narrowed.
As of April 30th, the total scale of Chinese assets held by global funds (foreign capital) counted by EPFR is about US$244.3 billion, which is one of the more representative statistical methods.
In terms of regions, Greater China region funds, Asia (excluding Japan) funds, emerging market funds, and Asia Pacific funds have relatively high proportions of Chinese assets, accounting for 61.7%, 31.1%, 22.3%, and 20.5% respectively. Among them, actively managed foreign funds hold approximately US$78.2 billion of Chinese assets, accounting for only 32% of all foreign funds holding Chinese assets, which is far lower than the proportion of actively managed funds holding positions in Chinese assets. Therefore, Citic Securities believes that the active foreign capital allocation situation can better represent the actual sentiment changes of foreign capital.
Funds in the Greater China region received inflows, and the trend of long-term capital outflow from China narrowed. The actively managed funds counted by EPFR are mainly long positions funds, which can better represent the sentiment of long-term capital. Since 2021, the proportion of active foreign capital allocation to Chinese assets has shown a downward trend, dropping cumulatively by 7.8 percentage points to 6.2% in March this year, which is the lowest level ever. However, they have observed that the proportion of Chinese asset holdings in April rose again by 0.7 percentage points to 6.9%. Active foreign capital began to increase allocation to the Chinese market.
From the perspective of foreign capital inflows to regional assets, since mid-April, the outflow of funds from active foreign capital to the Chinese market has significantly converged, from a weekly outflow of US$780 million to a net outflow of only US$100 million. In view of the global capital flow, Citic Securities pointed out that from April to May, global capital did not show the so-called "East rises and West falls" phenomenon, that is, while flowing out of markets with higher valuations, it flowed into Chinese assets. It was the marginal easing of global capital brought about by the easing of external disturbances. Since late May, foreign capital has flowed out of the Chinese market again.
The proportion of holdings of Hong Kong stocks has reached a record low.
From the perspective of the custody of Hong Kong stocks, the flow of foreign capital is as follows: from April 22nd to May 20th, the net inflow of the Hong Kong stock connect, foreign intermediaries, and domestic intermediaries was HKD 33.2 billion, HKD 26.7 billion, and -HKD 58.4 billion respectively, and foreign capital turned to flow into the Hong Kong stock market. At the same time, the proportion of foreign capital holding Hong Kong stocks also rose by 0.6 percentage points to 73.6%; since May 20th, against the backdrop of policy expectations falling, foreign capital has flowed out of the Hong Kong stock market again, with the proportion of holdings dropping 1 percentage point to 72.6%, once again reaching a historic low.
What is the geometric future of foreign capital inflows?
Citic Securities compares the current phased foreign capital inflow from April to May with the four phased foreign capital inflows with similar macro backgrounds since 2022. Most of the five rounds of market rebounds have similar characteristics such as temporary easing of external risks (geopolitical risks or monetary tightening expectations), rising expectations of internal policies (steady growth, stable real estate, etc.), absolute low valuations, and expected improvement in future fundamentals. However, the current rebound has relied more on policy expectations and market sentiment driving, and the improvement trend of the fundamentals has not yet been reflected.
If future fundamentals and policy expectations continue to decline, then this round of foreign capital inflows may have reached the end point. However, with the further implementation of real estate destocking policies in the future, combined with the expectation of sustained improvement in the fundamentals for the third quarter, 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, the estimated total flow of foreign capital under the custody calculation still has a space of HKD 20-40 billion.
Editor/Lambor