Foreign capital flows rise via stock connects

Billion yuan

Net capital inflow into China’s A-share market through stock connects hit a record high in January, indicating that foreign investors are upping their involvement in the market this year.

In January, a net total of 60.69 billion yuan ($8.97 billion) flowed into the A-share market through northbound trading under the connect mechanism between the mainland and Hong Kong bourses.

This marked the first time that the monthly net inflow topped 60 billion yuan since the mechanism debuted in 2014.

Foreign capital inflow accelerated further in February as of Wednesday, with the net inflow through the stock connects hitting 25.59 billion yuan in total, according to financial information provider eastmoney.com.

Foreign capital poured into the A-share market as global investors’ risk appetite lifted, following the United States Federal Reserve’s announcement that it would be patient in raising interest rates, and amid signs of lessening trade tensions, said Zhang Xia, chief strategy analyst at Shenzhen, Guangdong province-based China Merchants Securities.

“Expectations of a recovery in China’s credit expansion figures for January, which indicate improved economic fundamentals, also raised foreign investors’ interest in Chinese stocks,” Zhang added.

“Looking ahead, we estimate the increasing presence of the A-share market in major global stock indexes will usher in foreign capital totaling about 450 billion yuan into the market this year.”

The stock indexes Zhang mentioned refer to those provided by MSCI, FTSE Russell and S&P Dow Jones Indices. Portfolios worth trillions of US dollars worldwide track components of the indexes or are benchmarked to them.

Analysts said they expect MSCI to approve the proposal to increase A shares’ weighting in its indexes, and to announce the decision by the end of February.

FTSE Russell and S&P Dow Jones have also released their plans to include A shares in their indexes in 2019.

The mainland’s A-share market will also attract a large amount of foreign capital that do not follow the indexes this year, given the market’s current low valuation and supportive monetary policies, said Wang Ying, China strategist at Morgan Stanley, in an interview with China News Service.

“China’s continuous efforts to open up the A-share market will also help,” Wang added.

Estimates from Morgan Stanley forecast the total amount of foreign capital inflow into the A-share market in 2019 will fall between $70 billion and $125 billion, far above the past three years’ average of $35 billion.

Foreign capital is playing an increasingly larger role in the A-share market, with its proportion in free float market capitalization rising to 3.27 percent by the end of 2018, according to estimates from China Merchants Securities.

According to Jiangxi provincebased Guosheng Securities, foreign capital has become an important driver of mainland’s market performance, with the speed of inflows showing a strong positive correlation with the performance of consumer stocks in 2018.

The large scale of foreign capital inflow has also supported this year’s market uptrend, with the benchmark Shanghai Composite Index up 9.1 percent as of Wednesday.

The A-share market ended on an upbeat note for the third straight day on Wednesday. The Shanghai Composite Index closed 1.84 percent up at 2721.07 points, and the smaller Shenzhen index rose 2.01 percent to 8171.21 points.