BEIJING — Investors turned increasingly cautious on Chinese stocks, especially those listed overseas, in the first quarter of the year that was rocked by geopolitical tensions and worries about growth.
That’s according to data from research firm EPFR Global.
While the period ended with more than $20 billion in net inflows to mainland Chinese stocks, the bulk occurred in January, and the pace of buying dropped sharply as the quarter progressed, the data showed.
The first three months of the year saw the U.S. and Europe sanction Russia over its invasion of Ukraine, while China pursued a more neutral position. The quarter also saw growing worries about forced delisting of Chinese stocks from U.S. markets amid a flurry of announcements from both countries’ securities regulators.
“Anything that relates to China we can find in causality and reasoning from either Russia or [the] U.S. right now,” said Steven Shen, manager of quantitative strategies at EPFR. The firm says it tracks fund flows across $52 trillion in assets worldwide.
ESG investment flows
Chinese stock funds focused on ESG — environmental, social and governance factors — saw inflows until mid-February, when they began seeing outflows instead, Shen said.
In contrast, global ESG stock funds saw “very consistent” inflows over the first three months of the year, he said.
The firm did not share specific reasons for the divergence.
ESG-related concerns drove other investment allocation changes.
Among the headlines of the first quarter, Norges Bank Investment Management — an investment arm of Norway’s central bank which manages the world’s largest sovereign wealth fund — announced it will exclude shares of Chinese sportswear company Li Ning “due to unacceptable risk that the company contributes to serious human rights violations.”
When contacted by CNBC in late March, the fund declined to elaborate further, but noted the Norwegian government asked the fund to freeze investments in Russia and prepare a plan for divesting from the country. The fund had a market value of more than $1.2 trillion as of Monday.
Li Ning did not respond to a CNBC request for comment.
Swapping U.S. shares for Hong Kong ones
While mainland Chinese stock funds held onto inflows, European stock funds saw billions of dollars in net outflows in the first quarter, according to EPFR.
Japanese stock funds saw declines as well, the data showed. It also showed U.S. stock funds retained strong net inflows, for a total of more than $100 billion in the first quarter.
For Chinese stocks listed in Hong Kong and the U.S., Shen noted a “consistent decrease” in funds’ exposure.
Beginning late 2021, fund managers began to sell U.S.-listed shares of a Chinese company for those traded in Hong Kong, which has contributed to declines in those share 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 U.S. and China increased the risk of a New York delisting.
“Moves by the US regulator on ADRs and the Russia-Ukraine conflicts have further complicated the situations and caused substantive market swings this year,” Max Luo, director of China asset allocation at UBS Asset Management, said in a statement. “We noted sizeable outflows from China equities since last year, reflecting a notable de-risking on China.”
ADRs are American Depositary Receipts, which refer to shares of non-U.S. companies that are traded on U.S. exchanges.
“We have turned more conservative toward equity overall as the Russia-Ukraine conflicts flare up amid an uncomfortably high inflation level,” Luo said. However, he said his firm has “become more constructive on Chinese equities” due to government policy support.
Worries about growth
Mainland Chinese stocks saw a surge of buying at a level not seen since January 2019, Shen said.
He pointed out that it took place when index company MSCI added the mainland Chinese shares to a benchmark, which forced fund managers tracking the index to buy the mainland shares.
But the Shanghai composite remains more than 12% lower for the year so far.
That’s despite a mid-March lift to stocks after state media reports of comments from Vice Premier Liu He eased worries about Beijing’s crackdown on tech and real estate, and overseas IPOs.
Many investment banks had turned positive on mainland Chinese stocks as 2022 kicked off, despite poor domestic market sentiment.
“The macroeconomic backdrop appeared to improve at the end of last year,” David Chao, global market strategist, Asia Pacific (ex-Japan) at Invesco, told CNBC in early April.
“But I think expectations have gotten ahead of themselves” especially since the property market hasn’t found a bottom yet, he said. “Market sentiment seems to be impacted by a property market downturn.”
Real estate and related industries account for about 25% of China’s GDP, according to Moody’s.
On Monday, China reported first quarter GDP rose 4.8% compared to the previous year, topping expectations of a 4.4% increase.
While economic data for January and February beat expectations, those released so far for March have started to show the impact of Covid-related lockdowns in major economic centers like Shanghai.
“Heading into the second quarter there continues to be many uncertainties about China’s Covid response,” Invesco’s Chao said. “And that will be the most significant variable for the current quarter, whether their pandemic policies evolve or not.”