While mainland Chinese equity funds held up inflows, European equity funds saw billions of dollars in net outflows in the first quarter, with declines in Japanese equity funds as well, according to EPFR.
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BEIJING — Investors became increasingly cautious about Chinese equities, especially those abroad, in the first quarter of the year shaken by geopolitical tensions and growth concerns.
This is evident from data from research agency EPFR Global.
While the period ended with more than $20 billion in net inflows into mainland Chinese equities, the bulk of it happened in January, and the pace of purchases declined sharply as the quarter progressed, the data shows.
In the first three months of the year, the US and Europe punished Russia for invading Ukraine, while China took a more neutral stance. The quarter also saw mounting concerns about the forced delisting of Chinese stocks from US markets amid a spate of announcements from both countries’ securities regulators.
“Everything to do with China we can find in causality and reasoning from Russia or… [the] US right now,” said Steven Shen, quantitative strategies manager at EPFR. The company says it tracks fund flows across $52 trillion in assets worldwide.
ESG investment flows
Chinese equity funds that focused on ESG — environmental, social and governance factors — saw inflows until mid-February, when they started seeing outflows instead, Shen said.
By contrast, global ESG equity funds saw “very consistent” inflows in the first three months of the year, he said.
The company does not share specific reasons for the difference.
ESG-related concerns led to other changes in investment allocation.
Under the headlines of the first quarter, Norges Bank Investment Management – an investment arm of the Norwegian central bank that manages the world’s largest sovereign wealth fund – announced that it will exclude shares of Chinese sportswear company Li Ning “because of the unacceptable risk the company contributes to serious human rights violations.”
When CNBC contacted the fund in late March, it declined to elaborate, but noted that the Norwegian government had asked the fund to freeze investments in Russia and prepare a plan for divestment from the country. The fund had a market value of more than $1.2 trillion on Monday.
Li Ning did not respond to a request from CNBC for comment.
Swap US stocks for Hong Kong stocks
While mainland China equity funds held up inflows, European equity funds saw billions of dollars in net outflows in the first quarter, according to EPFR.
Japanese equity funds also saw declines, the data showed. It also showed that US equity funds maintained strong net inflows, totaling more than $100 billion in the first quarter.
For Chinese stocks listed in Hong Kong and the US, Shen noted a “consistent decrease” in the funds’ exposure.
Beginning in late 2021, fund managers began selling US-listed shares of a Chinese company for shares traded in Hong Kong, contributing to declines in those stock prices, Shen said. The process for exchange-traded funds typically takes three to six months, he said.
Many Chinese companies have offered shares in Hong Kong as political pressure in both the US and China increased the risk of a delisting in New York.
“Relocations of the US regulator of ADRs and the conflicts between Russia and Ukraine have further complicated the situation and caused significant market swings this year,” Max Luo, director of China asset allocation at UBS Asset Management, said in a statement. “We’ve noticed significant outflows from Chinese equities since last year, reflecting a remarkable reduction in risk in China.”
ADRs are American Depositary Receipts, which refer to shares of non-US companies traded on US exchanges.
“We have generally become more conservative towards equality as conflicts between Russia and Ukraine flare up amid uncomfortably high inflation,” Luo said. However, he said his company has “became more constructive on Chinese equities” thanks to government policy support.
Concerns about growth
Mainland Chinese stocks saw a surge in buying at levels not seen since January 2019, Shen said.
He pointed out that it happened when index company MSCI added mainland Chinese stocks to a benchmark, forcing fund managers tracking the index to buy mainland stocks.
But the Shanghai composite remains down more than 12% for the year so far.
That’s despite stocks rallying in mid-March following state media reports of comments from Deputy Prime Minister Liu He. He was concerned about Beijing’s crackdown on technology and real estate, and foreign IPOs.
Many investment banks were positive about mainland Chinese equities at the start of 2022, despite poor domestic market sentiment.
“The macroeconomic backdrop appeared to be improving late last year,” David Chao, global market strategist, Asia-Pacific (ex-Japan) at Invesco told CNBC in early April.
“But I think expectations have gotten the better of me,” especially as the real estate market hasn’t bottomed yet, he said. “Market sentiment seems to be affected by a downturn in the real estate market.”
Real estate and related sectors account for about 25% of China’s GDP, Moody’s said.
On Monday, China reported that its GDP in the first quarter is up 4.8% compared to the previous year, beating expectations of a 4.4% increase.
While economic data for January and February beat expectations, data released so far for March is beginning to show the impact of Covid-related lockdowns in major economic centers such as Shanghai.
“Leading into the second quarter, there are still many uncertainties about China’s response to Covid,” said Invesco’s Chao. “And that’s going to be the key variable for the current quarter, whether their pandemic policies evolve or not.”