SHANGHAI: China’s equities are increasingly attracting international investors due to the prospect of the country’s stabilising economic growth when the capital market is overcast elsewhere.

A glimpse at the northbound capital, the amount that foreign investors buy into the A-share market via the stock connect mechanism linking the Shanghai, Shenzhen and Hong Kong bourses, reflects A-share appeal amid prospects of recovering economic growth.

From June 1 to 17, the northbound capital reported an aggregate inflow of nearly 58.7 billion yuan (US$8.7bil or RM38.38bil), which was in sharp contrast to the 45.1 billion yuan outflow in March.

International investors have poured capital into the A-share market since mid-May, showing the most interest in the industrial, public utility and financial sectors, as calculated by Credit Suisse.

Indeed, A-share industrial companies have replaced consumer staples as the sector where international investors had the biggest exposure over the past few months, said Credit Suisse quantitative and systematic strategy in the Asia-Pacific head Will Stephens.

Not only are foreign investors interested in A-share large-cap blue chips whose development prospects are underappreciated, but they are also eyeing mid to small-cap companies with strong growth potential that have not been fully considered, said Stephens.

According to the Shanghai-based market tracker Wind Info, foreign institutions conducted 575 studies of smaller-cap companies listed on the tech-heavy ChiNext in Shenzhen, Guangdong, since the beginning of April.

They have also carried out another 641 studies on companies trading at the Star Market on the Shanghai bourse. During the same period, only 265 studies have been made on the large-cap companies listed on the A-share main board.

Investors poured nearly US$270mil into the US$7.2bil iShares MSCI China Exchange Traded Fund (ETF) on June 14, the biggest daily inflow since BlackRock rolled out the fund in 2011.This is the world’s largest overseas exchange-traded fund tracking Chinese equities.

KraneShares CSI China Internet ETF, the second-largest China-focused ETF, managed by New York-based Krane Funds Advisors, has also attracted net capital inflows of about US$454mil over the past 30 days.

“Chinese equities have rallied amid tightening liquidity globally, indicating the changes in China’s macroeconomy. The A-shares are now of increasing appeal to international investors,” Max Luo, China director for asset allocation at UBS Wealth Management said during a half-year outlook meeting on June 21.

Luo said, the logic of the A-share market has been changing.

This conclusion is supported by the recent stronger rather than weaker performance of the A-share market when the United States dollar is becoming stronger.

The A-share market has rallied as production resumed after the latest Coid-19 resurgence was contained and the stimulative economic policies started to take effect.

By June 24, the benchmark Shanghai Composite Index had gained nearly 5.3% in the month, and the Shenzhen Component Index had moved up almost 10%.

On the other hand, the mood has been sour in the US stock market on the back of the Federal Reserve’s (Fed) interest hikes to curb soaring inflation. As of June 23, the Dow Jones has slid 6.5% in in the month and the Nasdaq shed more than 6.3%.

A-share companies are now seeing their average price-to-earnings ratios approach a historic low. But their profitability will be improved as China’s economic growth further recovers.

“Globally, there are positive signals for the Chinese stock market. Chinese equities are welcomed not only by investors eyeing China assets but those considering global asset allocation,” he added.

The manufacturing purchasing manager index, returning to the expansion territory for the first time since February, showed a V-shaped rebound to come in at 50.2 in June. As experts from BlackRock understand, that is enough to be considered a turning point, showing that the impact of the latest Covid-19 resurgence has been subdued.

To further facilitate China’s economic recovery, more supportive monetary and fiscal policies will be introduced, said BlackRock experts. Home purchasing policies may be relaxed in some parts of the country and consumption coupons or subsidies granted in some Chinese cities will boost consumption.

Against that backdrop, economic recovery in the second half can be expected, which will be a positive signal, they said.

While Stephens from Credit Suisse stressed the relatively low correlation between the A-share market and other global markets, which will help international institutions diversify their investments, experts from Founder Securities depicted the A-share market as a “haven” for foreign investors, especially when overseas markets are lackluster.

With the relaxed policy environment, the A-share indexes will continue to move up amid fluctuations. Technology and growth enterprises will be responsible for most of the structural performance in the following months, said Founder Securities analysts.

Chinese bonds are also looking up. The five billion yuan in bonds issued by the People’s Bank of China in the Hong Kong Special Administrative Region on June 21 has been well-received by the market.

The six-month bill with a coupon rate of 2.3% saw its bidding reach 22.8 billion yuan , roughly 4.5 times the issued value.

Data from the Institute of International Finance showed that US$2bil flowed into the Chinese bond market in May, and that most EM experienced foreign net capital outflow.

 - China Daily