FII PILING INTO CHINA MARKET AMID HAWKISH FED AND RISING INFLATION
Foreign investors are piling into China at the start of 2022, seeing it as a haven from the inflation, growth and pandemic problems plaguing most other markets.
The Shanghai Composite advanced 0.66% to close at 3,456 while the Shenzhen Component rose 0.7% to 13,780 on Wednesday, as investors scooped up battered Chinese shares after heavy selling in the previous session. Markets saw an accelerated selling in mainland stocks on Tuesday as investors deemed that recent policy rate cuts were not enough to boost the Chinese economy. The People’s Bank of China already slashed a slew of key short- and medium-term interest rates to shore up growth, but analysts expect more easing measures including a reduction to the reserve requirement ratio to have a material effect. High growth new energy and electronic technology firms led the rebound, with notable gains from Contemporary Amper (3.87%), BYD Company (3.82%), Longi Green Energy (3.84%), Jiangsu Zhongtian (10%) and Tianjin Zhonghua (4.15%), among others.
Despite seeing returns last year eroded by Beijing's regulatory and policy purge, global fund managers are pumping money into mainland equities and bonds, betting China's stability pledges, monetary and fiscal easing and subdued inflation could shield them against volatility in other markets. That's in stark contrast to conditions elsewhere. Major central banks are preparing to withdraw the excess stimulus measures of the past couple of years, and the Federal Reserve is hastening monetary tightening to tame runaway inflation, potentially undermining stock values and earnings. For David Dali, head of portfolio strategy at Matthews Asia, China is the "single favorite country" in 2022 among the roughly 30 investible emerging equity markets. We believe Chinese valuations are some of the least risky and most attractive of all major markets," Dali said. He cited factors including lesser regulatory headwinds, government readiness to stimulate the economy, and a political mandate to maintain stability in a year widely expected to confirm President Xi Jinping's unprecedented third term.
Fidelity International also sees China stocks as attractive from a global perspective. China's policy shift is very clear. And recent data offers signs that the economy has stabilized," Fidelity's Shanghai-based fund manager Zhou Wenqun said. Evidence of that bullishness is in foreign net inflows into Chinese stocks via the Stock Connect scheme, which hit a record-high daily average of $413 million during the first three weeks of 2022, according to Morgan Stanley. Flows were strong in 2021, with a record $67 billion invested through the Connect channel in onshore equities. But the mainland blue-chip index (.CSI300) lost 5.2%, in contrast to a near 27% rise in the U.S. S&P 500 (.SPX) and double-digit gains in most European indices.
Bond investors, too, are drawn toward China, against the backdrop of a widening Sino-U.S. monetary policy divergence. Bond markets typically perform badly in a rate hike cycle, but in China, "we see that the monetary policy easing cycle is only at the start," said Paula Chan, senior portfolio manager at Manulife Investment Management, who expects more rate cuts. China's "inflation concern is not as alarming as in other countries", and its bonds are a good hedge, she said. Robust foreign inflows have helped push the Chinese yuan to its highest level against the dollar in nearly four years this week, despite a slew of cuts in key interest rates to support the economy. In contrast, foreign money inflows into emerging markets outside China has "come to an abrupt standstill", the Institute of International Finance (IIF) said.
In December, emerging markets (EM) outside China suffered an outflow of $9.6 billion, compared with an inflow of $10.1 billion for China. Chinese equities saw an inflow of $12.5 billion, contributing to most of the EM inflows. For non-China EM "we believe that the outlook is worsened by the Omicron variant and expectations of a stronger dollar and higher U.S. interest rates," IIF said, in its latest capital flows tracker report.
