Investors look at stock prices at a securities exchange in Shanghai. Offshore investors are rallying behind China’s undervalued equities by ploughing billions of dollars into Hong Kong’s exchange-traded funds denominated in the yuan currency.
Reuters
Offshore investors are rallying behind China’s undervalued equities by ploughing billions of dollars into Hong Kong’s exchange-traded funds denominated in the yuan currency.
As a scheme to allow more foreign inflows into Chinese stocks draws near, fund managers are wagering on a sustained rebound for the Shanghai Composite Index after a prolonged four-year slump has opened up opportunities to buy on the cheap.
“There were some switchings from markets where fund managers had gained positive returns to places that they thought there could be more opportunities, and China was be one of them,” said Jackie Choy, an ETF strategist at researcher Morningstar.
ETFs under the Renminbi Qualified Foreign Institutional Investor (RQFII) posted significant net inflows of 8.2bn yuan ($1.33bn) last month, the highest since December 2012 and nearly doubling from June, according to Morningstar data.
The majority of the net inflows went into the CSOP FTSE China A50 ETF , which attracted an estimated 6.8bn yuan, followed by the Bosera FTSE China A50 Index ETF, which drew an estimated 2.4bn yuan.
A strengthening of the Chinese currency, which has gained 2% from 18-month lows hit in April this year, and a recovering economy, have also helped draw foreigners to these ETFs, analysts say.
Launched in 2011, RQFII enables financial institutions to use offshore yuan to invest in the mainland’s securities markets. Foreign investors, who cannot directly invest in mainland equities, have eagerly embraced the QFII and RQFII schemes to tap China’s onshore market.
Chinese equity markets were among the worst performers in the first half of this year. The Shanghai Composite Index dropped 3.2%, while the US market was up 7% during the same period.
However, the A-share index has rebounded by nearly 10% in the past month as investors prepared for the launch of the stock connect that is set to make a debut in October and speculate on price convergence of dual-listed shares. A-shares are generally only available for purchase by mainland residents. Stock connect would allow mainland investors to trade shares in designated companies listed in Hong Kong, and at the same time let Hong Kong investors buy shares in Shanghai-listed firms.
Thanks to this surge in fund flows, the Hong Kong Monetary Authority (HKMA) has had to intervene in the foreign exchange market in recent weeks to protect the Hong Kong dollar’s currency peg with the US dollar. The total injection of funds was around HK$75bn ($9.68bn) since July 1, a large chunk of it due to capital inflows into markets.
“Market sentiment has started to change in the past two to three weeks and fund managers are no longer that pessimistic about China,” Norman Chan, chief executive at the Hong Kong Monetary Authority, told reporters last Tuesday.
Chan was referring to the recent economic data suggesting China may have arrested a sharp loss of momentum at the start of the year.
The increased appetite has also seen RQFII quotas being exhausted quickly in the past few months, prompting fund managers to apply for fresh quotas from China’s State Administration of Foreign Exchange (SAFE).
