More than two years of growth-squelching policies sent international investors fleeing China. It’s taken all of two weeks to lure them back.
From Morgan Stanley and Bank of America to TCW, Fidelity International and Franklin Templeton, some of the biggest players in global markets are turning increasingly bullish on Chinese assets. It’s a stark contrast from just last month, when foreign firms pulled an estimated $8.8 billion from the nation’s slumping stocks and bonds, and analysts were predicting more gloom ahead.
The dramatic about-face comes as Beijing seemingly shifts toward a more pro-growth footing, tweaking Covid policies to minimize economic and social costs, delivering a plan to rescue the beleaguered property market and dialing back tensions with the West. The result: mainland shares are up more than 7% in November, while the yuan is on pace for its first advance in nine months. With concerns that monetary-policy tightening in the US and Europe could soon tip the developed world into a recession, foreign firms are increasingly looking to China as a key portfolio hedge.
“Investors have to start thinking about what is going to be one of the big, global trades of 2023, which is going to be the China reopening trade,” David Loevinger, a sovereign analyst at TCW Group Inc. and former US Treasury Department senior coordinator for China affairs, said in a podcast last week. “The direction of China’s Covid policy is clear, tail risks are lower, and this is not going to be lockdowns forever.”
That’s not to say that international investors are ready to throw caution to the wind. Chinese stocks closed lower on Monday and the yuan weakened as the country’s first documented Covid deaths in almost six months sparked concern authorities could dial back the easing of restrictions.
Plenty of firms that have dialed back their China exposure in recent months have expressed little appetite to ramp it back up anytime soon. There’s unease over whether the country’s leadership is turning less pragmatic in guiding the world’s second-largest economy, pursuing increasingly ideological policies instead. And relations with the West remain fraught.
But amid the first annual foreign portfolio outflows in more than two decades and one of the nation’s biggest-ever stock-market routs, China’s leadership appears to be, if not acquiescing to the appeals of global investors, at minimum heeding their concerns.
“We’re starting to hear of emerging-market long-onlys looking to build up their onshore capacity,” said Winnie Wu, co-head of China equity research at Bank of America Corp. in Hong Kong. Her team recently turned bullish on Chinese stocks. “As long as the money-making effect is there, investors will return.”
Foreign capital has flocked to China for the better part of a decade as regulatory reforms opened the nation’s domestic markets to global money managers.
Overseas investors have accumulated 3.38 trillion yuan ($472 billion) worth of bonds in the onshore interbank market, according to official data as of October, while about 11% of mainland Chinese shares are held by foreigners, JPMorgan Chase & Co. estimates.
Yet international portfolio outflows across mainland stocks and bonds are on track to exceed an unprecedented $100 billion this year, according to Morgan Stanley, as President Xi Jinping has shown he’s willing to crack down on some of China’s largest companies and sacrifice growth in an effort to rein in debt, reduce income inequality and protect the country from Covid-19.