Global passive funds are buying China’s domestically traded shares for the first time — and it is not going well.
Stocks in Shanghai have tumbled 11 percent in US dollar terms since MSCI Inc added so-called A-shares at the start of this month. Only equities in Argentina and Namibia have performed worse.
Worries about a slowing economy, tightening liquidity and a possible trade war are plaguing the world’s second-largest stock market, while a suddenly tumbling currency is only adding to foreign investor losses.
While MSCI’s decision to initially allocate a minuscule weighting to A-shares will limit the fallout, the US$2 trillion rout is evoking uncomfortable echoes of a Chinese market panic just three years ago.
A repeat of such turmoil, even on a lesser scale, is likely to undermine efforts in Beijing to encourage foreign inflows and stabilize a market still dominated by speculators.
While Chinese shares yesterday rose from a two-year low, following a pattern of gains on the final day of a quarter, there has been little sign that the outlook will improve any time soon.
The Shanghai Composite Index entered a bear market this week and a momentum indicator is near the lowest since 2013.
Average daily turnover on Chinese exchanges this month has fallen to the lowest since August 2014, suggesting buyers are thin on the ground.
That is bad news for the exchange-traded funds, international retirement plans and endowments that track an MSCI index.
The declines are also stinging foreign funds that took advantage of greater access to Chinese equities via links in Hong Kong.
Overseas investors bought a net US$13.5 billion of Chinese shares from the start of last month through the middle of this month. The purchases are almost equal to the total bought during the first four months of the year.
Foreigners have had better luck with the nation’s government bonds. The benchmark 10-year yield fell 16 basis points in a fifth monthly decline, the longest streak since 2015, as investors sought refuge from the stock market and bets increased that the central government would loosen liquidity.
However, easing would add to selling pressure on the yuan, already down 3 percent this month, making Chinese assets less attractive.
The currency yesterday rose 0.3 percent, while the exchange rate gained for the first time in 12 days in Hong Kong.
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