How foreign investors missed on Chinese stock rally

With the Chinese stock market rallying in the third quarter of 2024, it has emerged that foreign investors might have lost hope in the equities following a lackluster performance for most of the year.

In particular, during the second quarter of 2024, foreign investors pulled a record $15 billion from Chinese equities, marking one of the largest exoduses of capital from the country, according to data from China’s State Administration of Foreign Exchange.

As per the data, inbound foreign direct investment has sharply declined to levels not seen in over a decade, reflecting increasing investor pessimism toward the country’s economic prospects.

This withdrawal is particularly striking because it occurred just before one of the greatest stock market rallies in China’s recent history. Just months after divesting, Chinese stocks experienced a significant rebound, fueled by the government’s rollout of a stimulus package to rescue the economy. 

Indeed, the markets reacted positively, gaining almost 30% in the last three weeks, with technology equities rallying, as highlighted by portfolio returns for key industry players, including ‘Big Short’ investor Michael Burry.

Reports indicate that, amid the recent rally, some Chinese assets witnessed renewed inflows from foreign investors. For instance, data showed that foreign investors channeled $1.8 billion into Chinese equity assets between September 19 and 25.

The market rally followed Beijing’s stimulus measures, including interest rate cuts and a $114 billion equity market boost. Previously, the market had been weighed down by a slowing economy, a property crisis, weak consumption, and rising geopolitical tensions. The People’s Bank of China (PBOC) also introduced a swap program to ease funding access for stock purchases.

Chinese stock market shows weakness 

However, the momentum seems short-lived, as stocks have shown weakness in the latest trading session. For instance, Hong Kong’s Hang Seng Index crashed 9.4% during the October 8 session, its largest drop since 2008 and the second-most significant drop since 2000.

The latest downturn appears to be a market reaction to the government’s failure to implement new stimulus packages as highly anticipated following a week-long break. However, Chinese mainland stocks surged 5.93%.

Chinese stock’s exiting ‘extreme exaggeration’ phase 

On the other hand, technical analyst Lars Hattwig, in an X post on October 8, acknowledged that the recent surge in Chinese stocks can be equated to ‘extreme exaggeration.’ He noted that the market is now correcting this rise, with key technical indicators suggesting pivotal moves ahead.

The analyst stated that the FTSE China A50 Index correction is currently testing critical Fibonacci retracement levels. If the pullback extends beyond 62% of the recent rise, dropping below the 13,000 level, it would signal that the recent highs may not be revisited in the near future. 

A breach below this level could indicate a shift in market sentiment to bearish, prompting investors to adjust their outlook on Chinese stocks accordingly.

In summary, the next trajectory for the Chinese stock market largely depends on whether the government will likely implement new stimulus packages and if the rally is sustainable enough to attract more foreign investors.