Are you sure?

Foreign investors withdraw from China's markets fearing downturn

Foreign institutions are divesting their portfolios of yuan-denominated A shares in China's soaring stock markets in favor of cheaper stocks abroad, but domestic market observers are unfazed by the withdrawal.

Qualified Foreign Institutional Investors (QFIIs) had withdrawn a total of $574 million from the markets in the two months up to the second week of May, according to data from Emerging Portfolio Fund Research (EPFR), a US company that tracks stock and bond-fund flows. While the withdrawal is expected to have little impact on the bullish market, which saw its value totalling 16 trillion yuan ($2.1 trillion) by the end of April, it caused a short-term downturn of blue-chip stocks favored by QFIIs. It was the first net 'outflow' of overseas hot money from the Chinese market since mid January. The financial data and service provider Wind Info said QFIIs held 2.525 billion shares of 243 listed companies in the Q1 of this year, a drop of 11% from the previous quarter's 2.848 billion shares.

"The once much sought-after QFII quotas are becoming superfluous," said William Liu, chief analyst with CLSA in Hong Kong, a QFII with an investment standing between $75-100 million in the market. Another unnamed QFII said some foreign investors were taking profits and shifting to the Hong Kong or other markets where they could buy Chinese shares at lower prices. Lou Gang, an analyst with Morgan Stanley China, said in a report that the A share market had overheated and the regulatory and supervisory bodies should take action to avoid possible downturn. The Chinese mainland's stock markets saw 4.78 million accounts opened in the Q1 and another 4.5 million in April alone, giving them the world's highest proportion - 60 to 70% - of retail investors. "This is a sign of a bubble. The market is reaching a ceiling," said Liu.

More than 70 billion yuan ($9.1 billion) was transferred from savings accounts in Shanghai to stock trading accounts in the first four months of this year, building up a serious imbalance between capital inflow and outflow. Meanwhile, new fund companies raised 451 billion yuan ($58.6 billion) and initial public offerings 273 billion yuan ($35.5 billion) in the past 12 months. "The share prices were driven up by the imbalance," said Liu. Soaring prices made the Chinese market less attractive for international investors who worry about possible downturn in the future. The market would possibly see a 20 to 25% decline, said the CLSA analyst. An anonymous analyst with Guangzhou Wanlong Stock Consulting Co. Ltd. said by taking the move the QFIIs might want to discourage overseas capital from entering the Chinese market, which would further drive up the prices, but there was no evidence that this had affected the market sentiment. (