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Thursday, December 2, 2021

Global holdings of Chinese stocks and bonds will increase by US$120 billion in 2021

Despite the recent volatility and regulatory crackdowns in Beijing, foreign investors are still chasing returns in the Chinese market. In 2021, global holdings of Chinese stocks and bonds have increased by approximately US$120 billion.

According to calculations by the Financial Times, as of the end of September, international investors held 750 million yuan (US$1.1 trillion) in stocks and fixed income securities, an increase of approximately 760 billion yuan from the end of 2020.

This rise highlights how investors can directly access the Chinese mainland market, rather than through financial instruments listed in global financial centers such as New York and Hong Kong. At the same time, some analysts and investors worry that the strong returns in developed markets may be exhausted, leading them to seek opportunities elsewhere.

China’s offshore listing has gone through a turbulent year, and a series of regulatory crackdowns have undermined investor confidence in industries ranging from technology to education. At the same time, the liquidity crisis of the real estate developer Evergrande prompted Chinese issuers to sell high-yield U.S. dollar bonds for international transactions.

However, in pursuit of greater diversification and higher returns, global capital has become increasingly closely linked with China’s domestic finance.

Investors have long relied heavily on companies listed in New York and Hong Kong (such as Alibaba and Tencent) to gain exposure to China, partly because the offshore market provides greater regulatory certainty.

However, since July, large Chinese technology groups listed overseas have been hit by a series of regulatory restrictions in Beijing, causing significant losses to well-known shareholders including SoftBank Vision Fund and Bailey Gifford.

“Now, regulation is just the opposite. [US-listed stocks] As the policy is pending, it is not suitable for investment,” said the fund manager of a large global asset management company in Hong Kong. The manager added that investors are looking for interesting stories about the so-called A shares listed on the Shanghai and Shenzhen stock exchanges.

Michelle Lam, a Greater China economist at Societe Generale, said that FTSE Russell’s decision to include Chinese government bonds in its influential World Government Bond Index last year supported China’s onshore bond market purchases, which accounted for more than 140 billion U.S. dollars. The main passive bond market paved the way. Inflow.

She added that despite the recent economic disruption, the resilience of the renminbi has “enhanced people’s confidence in buying renminbi assets”.

The histogram of the value of RMB-denominated securities held by foreign investors (in billions of dollars) shows that global exposure to Chinese stocks and bonds exceeds 1 trillion dollars

The widespread purchase of Chinese assets has sparked criticism from well-known investors including George Soros, who in September called on the US Congress to pass legislation that would allow the US Securities and Exchange Commission to restrict the flow of funds to Chinese stocks.

But the huge demand means that the impact of this call to action is limited. According to data from the Central Bank, the inflow of funds in the 12 months to the end of September has caused foreign holdings of RMB-denominated bonds to exceed 3.9 tons, while foreign shareholding has climbed to nearly 3.6 tons, both of which have increased by about 30 compared to a year ago. compared to.

The increase in foreign shareholding in 2021 does not match the substantial growth in 2020, partly because the recent downturn in the real estate industry and energy supply disruptions have put pressure on growth. However, in particular, stock purchases through the Southbound Stock Connect program have been fierce, and this year’s net purchases exceeded a record US$50 billion.

Chinese officials welcome foreign investment in response to the volatility caused by fast-trading retail investors (especially stocks). According to estimates by investment bank Huaxing Capital, in the past ten years, the share of amateur investors in the free float of the stock market has fallen from 66% to about 30%, while the proportion of foreign shares has risen to 6%.

Analysts said that overseas traders are already creating the trend of onshore stocks. “People are getting more signals from foreign investors,” said Bruce Pang, head of research at Huaxing Capital.

Cumulative net purchases of Chinese stocks purchased through Shanghai-Hong Kong Stock Connect (US$ billion) show that Shanghai-Hong Kong Stock Connect purchases have risen at a record rate

With Western banks such as Goldman Sachs and JPMorgan Chase pushing to obtain licenses and wholly-owned subsidiaries in mainland China, foreign transactions of domestic stocks and bonds have increased, which has led to increased research on Chinese companies. HSBC and Fidelity have recently been optimistic about Chinese assets for the first time since the regulatory crackdown began in July.

However, overseas fund managers face unique challenges in domestic stock transactions, including limiting the proportion of foreign shareholding in Chinese companies to 30%. According to data from brokers and stock exchanges, at least 9 large-cap companies listed in Shanghai have almost reached the foreign shareholding limit.

When local traders catch up, buying companies in bulk can also be counterproductive to offshore investors. “When domestic investors find that foreigners are buying it, they will be one step ahead,” said the Hong Kong-based fund manager. “Foreigners are always late for parties in China.”

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