Selloff shows China’s lack of investment traction

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Investors look at an electronic board showing stock information at a brokerage house in Shanghai, China June 20, 2018. REUTERS/Aly Song

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HONG KONG, May 6 (Reuters Breakingviews) – Global fund managers are picky when it comes to choosing assets for their core portfolios. For all Beijing’s work to boost foreign involvement in its securities, this week’s bloodbath in New York illustrates how far it has to go to convince investors it’s more than just another volatile emerging market. read more

Growth stocks typically get hit hardest when investors start fretting about interest rate hikes and inflation. The tech-heavy Nasdaq Composite fell 5% on Thursday on worries about the U.S. Federal Reserve Board’s stance, while the broader S&P 500 fell 3.6%. The Nasdaq Golden Dragon Index (.HXC), dominated by fast-growing Chinese companies, plunged nearly 8%.

It’s the latest sign of rapidly cooling international interest in the People’s Republic. Hong Kong’s channel for foreigners trading Chinese equities in Shanghai and Shenzhen witnessed $5.5 billion in outflows since February, per UBS analysts. Some $15 billion left China’s vast domestic bond market in February and again in March. That’s understandable: yields on benchmark U.S. 10-year bonds are higher than their Chinese equivalents for the first time in at least a decade.

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There are other factors. U.S.-listed Chinese companies face ejection from the Big Board in 2024 thanks to a new auditing law. Beijing’s crackdowns last summer on data security and for-profit education, among other issues, caught shareholders badly off-guard. Now harsh Covid-19 policies in mainland cities are suppressing domestic consumption – a popular investment theme among overseas traders.

China currently accounts for 31% of MSCI’s benchmark Emerging Markets index, twice the weighting of Taiwan at number two. That reflects years of successful work by officials to attract more sophisticated foreign institutional money, which can offset capital outflows and reduce domestic exchanges’ notorious volatility. The most popular U.S.-listed Chinese stocks have already lined up alternative listings in Hong Kong, so offshore investors won’t be stuck with untradeable shares. In March, Vice Premier Liu He said he would rein in chaotic crackdowns and promised to communicate better. read more Even so, the selloff suggests traders are unconvinced.

As the era of go-go equities supported by money-printing central banks winds down, overseas investors are slashing their emerging market exposure in general, and to China in particular. Beijing has its work cut out wooing them back.

Graphic: Fed hikes appear to be accelerating the selloff in China shares

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– Stocks slumped and U.S. Treasury yields shot up in New York on May 5 as investors worried that aggressive central bank action to curb inflation might choke economic growth. The sell-off sent the blue-chip S&P 500 index down 3.6% and wiped 5% from the growth-focused Nasdaq Composite. Yields on 10-year Treasuries jumped 12.2 basis points to 3.04%. The Nasdaq Golden Dragon Index, tracking the biggest Chinese stocks listed in New York, fell 7.7%.

– Markets had rallied the previous day after Federal Reserve Chair Jerome Powell appeared to rule out raising interest rates by 75 basis points in a single move. The U.S. central bank did hike rates by 50 basis points and flagged more rises to come in the coming months.

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Editing by Pete Sweeney and Katrina Hamlin

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