Not long ago, investors, especially the "smart money," opted to invest heavily in the Chinese stock market even as other major stock markets were flourishing.
However, global investors' interest in China's stock market is rapidly waning. According to Bloomberg, global investors have recently sold off Chinese blue chips at an unprecedented rate, marking the longest duration of capital outflow on record. This record capital outflow indicates that, amidst a more pessimistic economic growth outlook, risks in real estate and certain financial institutions, blue chips in China's stock market have fallen out of favor.
Bloomberg's latest individual stock flow data shows that between August 7 and 18, foreign investors sold off 6.2 billion yuan ($851 million) worth of Kweichow Moutai, making it the most sold stock. This has rendered the biggest producer of Baijiu in China to encounter significant sales. Renewable energy leader Longi Green Energy and major bank China Merchants Bank saw sales of 4.7 billion yuan each.
In the recent downturn of China's stock market, the ten most sold stocks by foreign investors were all components of the CSI 300 index. By August 18, leading distiller Wuliangye Yibin, Ping An Insurance, and electric vehicle maker BYD were each sold off by at least 2.9 billion yuan.
Affected by the sluggish real estate market and the "explosion" of certain financial institutions escalating the industry crisis, overseas investors sold a total of $10.7 billion worth of Chinese stocks within 13 days up to this Wednesday, marking the largest scale of foreign capital outflow since Bloomberg began tracking this data in 2016.
Besides the capital outflow shown by Bloomberg data, Goldman Sachs' commodities brokerage division found that hedge funds had net sold Chinese stocks for three consecutive trading days, with net sales occurring in 12 out of the last 16 trading days. Goldman Sachs stated that this month's net sales of Chinese stocks (including onshore and offshore) are nearing record levels compared to the net monthly inflows over the last ten years, as calculated by Prime's nominal cumulative amount.
Importantly, long positions unwinding account for more than 70% of the nominal net sales MTD (Month-To-Date), and this month's selling has already exceeded the levels of August 2011 and July 2015, potentially making it the largest in the past decade.
Including MTD activities of August, hedge funds have now reversed all the cumulative nominal net purchases of Chinese stocks from November 22 last year to January 23 this year. Since the beginning of February, about 56% of the cumulative nominal net sales came from A-shares, with the rest roughly spread between H-shares and ADRs (American Depositary Receipts).
Currently, Chinese stocks account for about 7.6% of the global Prime net market value, lower than 9.5% at the beginning of August and 11.2% at the beginning of 2023, marking the lowest level since last November. The long/short ratio of Chinese stocks is currently about 2.2, not only lower than the approximately 2.7 at the beginning of the year but also the lowest since last November.
Despite the gradually dim prospects for China's economic growth, the crisis in the real estate market and some financial institutions worsening, supported by the low positions held in the Shanghai and Shenzhen stock markets and potential stimulus measures from China, foreign investors were still significantly entering the Chinese market. However, after the meeting of the Central Political Bureau in July, the new round of economic stimulus measures that investors were expecting did not appear, causing the freshly entered overseas funds to withdraw quickly, dragging the CSI 300 index down to its lowest point since last November.
Besides investors from developed markets in Europe and America, investors from emerging markets are also withdrawing from the Chinese market. Another analysis by Bloomberg showed that emerging market funds have increased their average reduced positions from 24 basis points three months ago to nearly 100 basis points in the second quarter of this year, whereas they had increased by 40 basis points at the end of 2022.
The momentum of overseas investors withdrawing is far from over, with the latest data showing that on this Wednesday, foreign capital sold another 10.5 billion yuan of Chinese stocks. A Chinese macro hedge fund has blamed global capital for dragging down the Chinese stock market, describing them as a swarm of aimless flies, triggering market volatility in China's finance.
