‘Fundamental rethink': Investors dump China shares despite new efforts to shore up the economy

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Investors are selling Chinese stocks in unprecedented numbers, despite Beijing's efforts to boost growth through borrowing to fund additional spending.

Morgan Stanley strategists recently wrote that the outflow of foreign funds from China's A-shares market had reached a 'historic level'. The A-shares, which are yuan denominated shares of mainland China companies that trade on two stock exchanges - the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SSE), are the shares traded in mainland China.

The cumulative outflow viaStockConnect, a trading platform set up in 2014 to give international investors access mainland China shares, reached $22.1 billion between August 7 and October 19. This is the largest outflow ever recorded by the platform.

The CSI 300 Index on Monday, which tracks the 300 top stocks listed at the Shanghai and Shenzhen Stock Exchanges, fell to its lowest point since February 2019.

The index had a slight rebound on both Tuesday and Wednesday. This was in response to the news that China’s legislature approved 1 trillion yuan ($137billion) of sovereign bonds, and that China’s sovereign wealth fund bought funds to boost sagging stocks. The index is down almost 10% for the year. It's one of the worst performers on the planet.

Alex Capri is a researcher at the Hinrich Foundation, and a lecturer in the National University of Singapore Business School.

He said that 'China’s worsening economy feeds a much larger, more consequential phenomenon which is a complete collapse in confidence in the Chinese Communist Party'.

According to Brock Silvers of private equity firm Kaiyuan Capital, the world's declining appetite for China's shares is due to two main causes: the slowdown in the economy and the lack of a convincing response by the authorities.

He said: 'The real estate and debt crisis are structural problems that cannot be solved by simple technocratic solutions, but the authorities are unwilling to take any necessary steps.

These measures have not been able to reassure investors, despite the fact that officials announced a series of support actions over the past few months in order to boost their economy.

Capri added that they were also frightened by Beijing's "increasingly opaque, arbitrary and confrontational" behavior toward foreign businesses.

He added that the imposition of anti-espionage legislation, police raids against international companies, and the detentions of foreign corporate employees are "a throwback to Maoist times". Investors are now asking whether China has become more trouble than it is worth.

Investors were further unnerved by an investigation conducted into Foxconn, the Taiwanese firm best known for producing Apple's iPhones.

The case was made public just weeks after one of China's largest private employers, the founder of the firm, announced that he would run for the next presidency of the island. A spokeswoman from China's Taiwan Affairs Office informed reporters on Wednesday that the investigation was part of 'normal law-enforcement behavior'.

George Magnus is an associate with the China Centre at Oxford University. He said that whatever the motive, the probe was just another example in which executives and employees of foreign and local firms are harassed and targeted.

This is only fueling the erosion in confidence.

Experts said that the rising tensions between China & US is also a major factor in this exodus.

The United States has increased its pressure on global asset managers and venture-capital firms over their investments made in China.

In August, Joe Biden signed an executive order limiting US investment in advanced technology industries of China.

Goldman Sachs reported on Monday that $42 billion in capital left China's capital and current accounts during the month of August. In September, around $75 billion left the country. This was the largest net outflow since 2016, when the People's Bank of China devalued its yuan.

Beijing is trying to boost the stock market, which has fallen.

The National People's Congress (NPC) approved on Tuesday the issuance in the fourth quarter of new bonds to help rebuild after natural disasters.

Central Huijin Investments, an arm within China's sovereign fund, purchased an undisclosed sum of exchange-traded products the day before and promised to increase their holdings. This move follows the purchase of millions of dollars worth of banking shares earlier this month.

The PBOC injected a massive amount of cash last week to maintain ample liquidity in the banking system.

Temporary measures such as stock intervention or policy stimuli do not change the sentiment. They only convince people that now is the time to leave, before the impact of the intervention fades away,' said Derek Scissors.

The supportive measures that matter would be to create more room for the private sector expansion, by gradually reducing state economic influence. This appears highly unlikely under Xi.

Even Chinese investors are losing faith in China's future economy.

Dingtai Capital is a Shenzhen based private equity fund that shocked the market last week when it asked its investors to redeem shares. The fund cited 'unprecedented uncertainties' regarding the economy.

The coming crisis will be different from regional financial crises in 1997 and 2008. The fund wrote in an email to investors that the crisis would hit the economy in a indiscriminate and all-around way.

The fund issued a statement on October 17, downplaying the letter, referring to it as the opinion of "some individuals" at the firm.

Craig Singleton said that Xi Jinping, senior China Fellow at the Foundation for Defense of Democracies (FDD), clearly prioritized politics over economic gains.

'Xi may wield enormous control in China but he cannot compel investors from around the world to risk their capital or buy into his vision,' he stated.