Foreign capital inflows into China's equity markets hit a record in 2021 with Kweichow Moutai and Contemporary Amperex among top stocks
Foreign capital flows into China's equity markets reached a record high in 2021, as the country further opened its financial markets and as regulatory changes directed offshore investors to turn to stocks listed in the mainland.
Net inflows of northbound capital into equities listed in Shanghai and Shenzhen, the major bourses on the mainland, reached a record of 417.5 billion yuan (US$65.5 billion) as of December 23, China International Capital Corporation (CICC) said in a report on Wednesday.
The net volume of capital flows almost doubled from last year's level, based on data from the investment bank.
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The record-high inflows are a sign of that foreign capital remains very interested in assets in China, after the world's second-largest economy bounced back from the impact of the pandemic and despite increased geopolitical tensions. Yet risks remain, with high valuations in several in-demand sectors and amid worries that tighter regulations could sap investor appetite, analysts say.
China's resilient growth makes its assets among the most promising in the world, said CICC analyst Li Qiusuo in a written reply to questions from the South China Morning Post.
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"As China's growth is expected to rise further, and with overseas growth facing downward pressure, the relative attractiveness of Chinese assets will be elevated," he said. A further deepening of China's capital market reforms and the potential for Chinese equities to take up a greater proportion in global investor portfolios, are also buoying this trend, added Li.
China's gross domestic product comprised 17.4 per cent of the world's total in 2020. The combined market cap of its stocks was 15.3 per cent of the total held in 2020 and its proportion in the flagship MSCI ACWI Index stood at 3.6 per cent of the total in 2021, according to CICC data.
China's manufacturing sector was increasingly favoured by offshore investors in 2021, with more than half of net inflows directed to companies in this area.
In the new energy sector, for example, foreign holdings accounted for 5.3 per cent of the total holdings of stocks in the sector, up from 1.9 per cent in 2019. New energy was the second-largest holding in 2021, with foreign investors snapping up around 367 billion yuan shares of companies in the supply chain.
Contemporary Amperex Technology, which specialises in the manufacturing of lithium-ion batteries for electric vehicles and energy storage systems, was the second top holding among all Chinese stocks for overseas investors, jumping from ninth place in 2020.
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The jump in total net inflows was partly driven by a switch in investment preferences, with some foreign investors switching out of new economy and technology firms due to Beijing's sweeping regulatory crackdown on Big Tech and related sectors this year.
"Investors were searching for Chinese stocks which are in sectors supported by policies, such as new energy vehicles and upstream electricity device related companies, which seem to be unique assets on the mainland," said Alan Li, portfolio manager at Atta Capital in Hong Kong.
Consumer stocks were still the largest holding among foreign investors, standing at close to 400 billion yuan and accounting for 14.5 per cent of total foreign holdings. Liquor producer Kweichow Moutai maintained its top seat as the favourite stock among overseas investors. Peer Wuliangye Yibin Company and Luzhou Laojiao also featured in the list of the most actively traded stocks in 2021, according to CICC.
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Sinolink Securities has forecast that foreign capital will continue to flow into China A shares over the long term. However, Atta Capital's Li said some risks remain in the short term. He said 2022 inflows may not exceed the level seen in 2021, as Beijing's recent crackdown on "fake foreign investment" through stock connect schemes linking Hong Kong with Shanghai and Shenzhen could put pressure on some capital in Chinese equities.
The high valuations for foreign investor darlings such as Kweichow Moutai and Contemporary Amperex, and any fall-off for favoured sectors such as food and health care amid increased regulation, could harm sentiment, said Li.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.
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