Foreign investors flock back to Chinese stocks as disruption from China’s reopening fades faster than many expected

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Global funds are marching back into Chinese equities in full force as the country’s rapid reopening after lifting Covid restrictions and the likelihood of policy stimulus to rescue economic growth have improved the gloomy backdrop for stocks in 2023. 

In less than three weeks of the new year, foreign investors have bought a net 103.6 billion yuan ($15.3 billion) of Chinese stocks via the trading link between Hong Kong and the mainland, according to data compiled by MarketWatch. The purchases have exceeded a total of 90 billion yuan ($13 billion) in net buying in all of 2022, the lowest since 2017. 

As of January 19, offshore investors added about 8 billion yuan ($1.2 billion) in Contemporary Amperex Technology Co. Limited
300750,
-0.39%
,
the world’s largest producer of lithium-ion batteries and the battery supplier of Tesla Inc.
TSLA,
-1.89%
.
They also bought a net 7.6 billion yuan ($1.1 billion) in Ping An Insurance Group Co.
601318,
+0.50%
,
and a similar amount in spirit maker Kweichow Moutai Co.
600519,
-0.68%
,
according to MarketWatch calculations of Hong Kong Exchanges data.

The flows have pushed the benchmark CSI 300 Index
000300,
+0.62%

to its highest level in almost five months and rallied over 18% from its October low. The CSI 300 benchmark rose 7.3% so far this year, according to Dow Jones Market Data. 

These purchases add to growing optimism that foreign investors still remain bullish in the country’s economy despite low growth in 2022. On Monday, China reported 3% GDP growth for the full year of 2022, the second-slowest growth rate it has seen since 1976. 

Investor sentiment has changed drastically since the China’s Communist Party Congress which concluded in October. Pessimism about Chinese equities peaked when China’s leader Xi Jinping secured a groundbreaking third leadership term and introduced a new Politburo Standing Committee which was seen by many as a formal ending of the pro-economic growth reform era. Hong Kong’s Hang Seng China Enterprises Index
160462,
-0.38%

recorded the worst-ever five-day losing streak with a weekly loss of 8.9% in the week of October 24, while CSI 300 Index capped that week with a loss of 5.4%, the worst since July 2021. 

See: Why investors are fleeing Chinese assets as Xi tightens grip on power

However, sentiment has been buoyed by a sudden shift in the country’s zero-COVID policies in December, followed by the official reopening of its border in early January. 

See: What China’s reopening means for markets, according to Goldman Sachs

Economists and market analysts expect disruption from China’s reopening to weigh heavily on business activity well into the first quarter, but they said that disruption is already fading rapidly, which indicates a faster and earlier economic recovery when most developed countries might be heading into a recession.

“Coupled with a wider shift toward more pro-growth policies, this points to a reopening rebound starting this quarter and a stronger 2023 as a whole. We now expect China to grow by 5.5% this year,” wrote Julian Evans-Pritchard, senior China economist at Capital Economics, in a note. 

“China’s faster reopening fits with our investment theme that more risk tolerant investors can ‘anticipate the inflections.’ We think that the economic damage from the initial COVID-19 shock following the reopening will be concentrated in 4Q22 and 1Q23, paving the way for a quicker rebound thereafter,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in a Tuesday note.

The U.S. dollar traded at 6.78 Chinese yuan in offshore dealings, while ICE U.S. Dollar Index
DXY,
-0.00%
,
a measure of the dollar against a basket of six major currencies, dropped 0.2%, at 102.21 on Thursday. The dollar index has retreated over 10% from its 20-year high in October.

See: Bet on a falling U.S. dollar because the Fed is likely to pivot, says TS Lombard

“This year is set up for a year where the dollar will probably come back down a little bit for international equities to do well, which I think that trend of money flowing into international equities will continue as this year goes, so I think China ends up being another potential for more bulls, or support for the people that think equity markets may do better,” Jimmy Lee, CEO of Wealth Consulting Group, told MarketWatch on Wednesday.



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