Domestic share buyers step in as foreign funds flee China

Newborn Town

02/11/2022 10:32

By Summer Zhen and Samuel Shen
       HONG KONG/SHANGHAI, Nov 2 (Reuters) - As foreign funds
head for the exit, Chinese stock investors are snapping up
beaten-down shares of mainland firms, betting outside views of
China are overly pessimistic.
    The gap in perceptions between offshore and onshore
investors is so divergent, it has driven the wedge between
markets in Hong Kong and China to their widest in 13 years. 
    Hong Kong's benchmark Hang Seng  .HSI  plunged 15% in
October - the biggest monthly loss in 14 years, as Chinese
President Xi Jinping consolidated power at the twice-a-decade
Communist Party Congress, which triggered concerns Beijing will
sacrifice economic growth for ideology.
    "Foreign funds were making a carnage of China assets," said
Yuan Yuwei, a hedge fund manager at China-based Water Wisdom
Asset Management.
    Hong Kong stocks don't look promising in the U.S. rate hike
cycle, "but with companies like Tencent falling to P/E ratio of
just 9," further accelerated falls are not justified by
fundamentals, he said over the weekend.    
    Amid the foreign selling, local money has poured into
China's battered stocks via the Stock Connect scheme, with $12
billion flowing into Hong Kong in October, the biggest monthly
volume since early 2021. Hong Kong-focused exchange-traded funds
(ETF) also saw massive inflows.
   "We remain confident," said Wang Qing, chairman at Shanghai
Chongyang Investment Management. "In our opinion, a major
overhang was removed after the conclusion of the Party
Congress," he said, adding he expects China will gradually exit
its zero-COVID strategy.
    The asset manager added positions in industry leaders with
extremely low valuations, including internet platform companies
and some blue chip A-shares, because "both the trading
behaviours and valuation look already extreme."    
    That contrasts with the views of overseas investors, many of
whom fear Xi will prolong the strict COVID-19 policies and
private sector crackdowns during his third leadership term.
    Net selling from international active funds totalled around
$30 billion in Chinese equities over the past year and global
hedge fund allocations in Chinese equities have declined from
15% at the peak in 2020 to 8% now, Goldman estimates. 
    China stocks suffered $1.8 billion in foreign outflows via
Stock Connect last week.
        BARGAIN HUNTING
    As China's top financial regulators sought on Wednesday to
allay investor fears that economic growth remains a priority and
reforms and liberalisation will continue, some saw the foreign
selloff as a buying opportunity.  urn:newsml:reuters.com:*:nL1N31Y09G
    "This is the right time for action," Dean Li, a
Shanghai-based individual investor, said. "I like pouncing onto
potential high-flyers whose valuations are lying on the ground."
     
    Li spent half a million yuan ($68,766) buying Hong
Kong-listed Newborn Town Inc  9911.HK  last week, when the
Chinese social networking company fell to historic lows, and
plans to buy more this week.
    Domestic buyers have zoomed in on larger companies. Tencent
 0700.HK , Wuxi Biologics  2269.hK , Meituan Dianping  3690.HK 
and Kuaishou Technology  1024.HK  were on the top mainland
buying list under the Connect last week amid foreign panic
selling, according to Goldman Sachs.
    Shanghai-listed ChinaAMC Hang Seng Technology ETF
 513180.SS , one of China's biggest ETFs targeting the Hang Seng
Tech Index  .HSTECH , saw a nearly 40% jump in its shares in
October, reflecting massive inflows as the tech index touched
historic lows.
    Yuan of Water Wisdom Asset Management added that despite the
retreat by foreigners, there are many investment opportunities
in China's A-shares, which are much less vulnerable to global
flows. 
        Domestic stocks also benefitted from a largely
state-owned financial sector who heeded the government's call to
stabilise the market.
    As testament to the diverging foreign and Chinese views,
China-listed A-shares are now nearly 55% more expensive than
their Hong Kong-traded peers, with an index tracking the premium
 .HSCAHPI  hitting the highest since 2009.
    Pruksa Iamthongthong, senior investment director of Asian
equities at abrdn, who maintains an underweight rating on China,
said she prefers the onshore to offshore market, citing policy
tailwinds in areas such as digitalisation, health and green
investment.
    Pierre Hoebrechts, CIO at Hong Kong-based Arowana Asset
Management, bought some large caps in financial and
infrastructure sectors last week.
    "These companies are not going out of business unless you
think the end of China is coming, which seems to be a ridiculous
argument to us," he said. 
    "If you are a long-term investor, and you don't start to buy
China at this level, one has to wonder when you would ever buy
it."   
($1 = 7.2710 Chinese yuan)
 (
Editing by Vidya Ranganathan and Jacqueline Wong)
 ((samuel.shen@thomsonreuters.com;  +86 21 20830018; Reuters
Messaging: samuel.shen.thomsonreuters.com@reuters.net))