Foreign investors snap up Chinese equities, bonds on promising long-term prospects

Foreign investors continued to increase their investments in Chinese equities and bonds, casting a vote of confidence in the country's long-term development.

By June 10, the Chinese A-share market had seen net inflows of foreign capital for the last ten consecutive trading days, the longest period of net inflows so far this year, according to market tracker Wind.

Last week, overseas investors cast a net 36.83 billion yuan (about $5.48 billion) on certain Chinese shares through the Stock Connect program's northbound leg, making it the biggest weekly increase since the beginning of the year, Wind data showed.

The number was in sharp contrast to a net outflow of 45.1 billion yuan in March, when the resurgences of COVID-19 battered the country's economy.

"Foreign investment in the Chinese financial market experienced quite a few fluctuations this year," said Monica Li, equities director with Fidelity International. The company now holds around $6 billion in A-shares.

She attributed the outflows to a range of factors, including the Russia-Ukraine conflict, US Fed rate hikes and the sporadic resurgences of COVID cases in China.

But as the world's second-largest economy adjusted COVID restrictions in late May and took incremental efforts to shore up the economy, the financial market gradually warmed up.

China unveiled 33 detailed measures to stabilize its economy last month and the State Council ordered government departments to introduce practical measures.

Sensitive foreign funds have rushed to the Chinese financial market since then. On May 20, the inflow of foreign capital to the Chinese A-share market hit 14.24 billion yuan, and on May 31, the number reached 13.87 billion yuan, the biggest two inflows of the year.

"Within only two weeks in June, we have seen foreign investors pile up their purchasing of Chinese A-shares, with the inflow surpassing the total in May," said Li. "That showed a sharp and swift shift of market sentiment."

Li believes China's financial market will continue to remain attractive for foreign capital in the long run, considering the country's sound economic fundamentals. Furthermore, the country offers much attractive risk reward against the backdrop of increasing global uncertainties.

Christiaan Tuntono, senior economist with Allianz Global Investors, said the outlook on China's macro condition is contingent upon the success of the government's ambitious plan.

"The government vowed to bolster growth through stronger infrastructure investment and greater policy support," he said, adding that he believed China is capable of achieving the "around 5.5-percent" growth target by bolstering infrastructure investment.

In the bond market, China was also a shining point among the emerging economies. Data released by the Institute of International Finance showed that $2 billion flowed into the Chinese bond market in May, bucking the trend of outflows of foreign capital in most emerging markets last month.

The major driver of investment to the Chinese bond market lies in demand for medium- to long-term asset allocation, with the major holders being central banks, sovereign wealth funds and passive funds that track indices, said Matt Simpson, an analyst with Gain Capital.

Given that the FTSE Russell had included Chinese government bonds in its World Government Bond Index, a total of $10 billion will flow into China's bond market every quarter through the end of 2024, he added.

There is still much room for foreign investors to increase their holdings of RMB assets further, Wang Chunying, deputy head of China's forex regulator, has said.

RMB assets remain highly attractive in many ways as it has stable investment returns and could diversify portfolio risks, Wang said.