Global investors’ exposure to Chinese assets surges to $800bn

Global holdings of Chinese stocks and bonds have surged to more than $800bn as investors bought assets in the country at a record pace in spite of souring relations between Beijing and the international community.

The drive into China’s markets by global investors has come despite tensions between Beijing and Washington over issues from corporate audits to Beijing’s repression of Uyghurs in Xinjiang, which the US has labelled genocide.

It has also coincided with a crackdown by Beijing on Chinese listings in US capital markets, including a probe into data security at ride-hailing group Didi Chuxing announced just days after its $4.4bn New York listing.

Offshore investors have bought a net $35.3bn of Chinese stocks in the year to date via trading platforms that link Hong Kong with exchanges in Shanghai and Shenzhen, according to Financial Times calculations based on Bloomberg data. That was about 49 per cent higher compared with a year earlier.

Foreign investors have also bought more than $75bn in Chinese Treasuries in the year to date, according to figures from Crédit Agricole, representing a 50 per cent rise from a year earlier.

Foreign buying of Chinese stocks and Treasuries has risen at the fastest rate ever compared with corresponding periods in previous years. Enthusiasm for Chinese assets has been fuelled by the country’s swift rebound from the Covid-19 pandemic but concerns are surfacing that its economic growth is slowing.

“Contrary to the geopolitical rhetoric, from an asset management point of view you cannot avoid looking at the Chinese market,” said Andy Maynard, a trader at investment bank China Renaissance.

Inflows to Chinese markets have surged in recent years, partly because of the inclusion of renminbi assets in global stock and bond indices that are tracked by trillions of dollars worth of assets.

In March, FTSE Russell became the latest indices provider to confirm plans to include Chinese government debt in its global bond index, a move that Nomura has forecast will funnel more than $130bn into China.

Bond inflows this year have taken total foreign holdings to about Rmb3.7tn ($578bn), according to FT calculations based on figures from Crédit Agricole and Hong Kong’s Bond Connect programme, a conduit for offshore investors to trade debt issued in the mainland.

Foreign investors held more than Rmb1.4tn of onshore equities as of Wednesday via market link-ups with Hong Kong, excluding other foreign investment programmes.

A global shift this year away from richly valued tech shares has also benefited mainland China’s markets. Analysts said China’s onshore equities offered better exposure to sectors other than tech, such as industrial groups.

“As tech loses favour, people want other sectors, and most of those sectors are better represented onshore,” said Thomas Gatley, analyst at Gavekal Dragonomics.

Analysts said mainland stocks had also found favour with global investors as Chinese shares listed in the US faced domestic regulatory crackdowns.

Shares in Didi, the New York-listed Chinese ride-hailing group, tumbled last week after Beijing opened a cyber security probe into the company.

In debt markets, Mansoor Mohi-uddin, chief economist at the Bank of Singapore, pointed out that China’s government bonds offered attractive returns compared with their US counterparts.

“There’s a marked difference between Chinese bond yields and US Treasuries,” he said, pointing to a gap of 1.5 percentage points between the two.

The inflows into China’s bond market have also accompanied a rally in the renminbi, which hit a three-year high against the dollar in May.

“We’d expect that interest rate differential to continue to support the [renminbi],” said Mohi-uddin, helping boost inflows into Chinese equities and bonds in the second half of the year.

The Chinese central bank’s decision on Friday to cut lenders’ reserve requirement ratio further fuelled offshore purchases of the country’s bonds this week.

The move, which reduced the amount of capital that banks have to hold in reserve, is expected to free up about Rmb1tn in liquidity and mark an end to months of tighter monetary policy in China.

But the RRR cut also signalled to markets that Beijing may be concerned that growth is slowing, and came despite signs of rising inflation.

Patrick Wu, head of Asia emerging markets trading at Crédit Agricole, said the cut surprised many international bond investors, who had recently slowed purchases of renminbi debt.

“People were quite bearish and underweight on Chinese bonds,” Wu said, adding that the offshore buying of renminbi debt through Hong Kong had surged following the RRR reduction.