Foreign funds binge on Chinese stocks on MSCI index lure as buying reveals new favourites

Zhang Shidong

Global fund managers loaded up on more Chinese stocks this week as the securities gained more weight in key global indexes at the same time tranquillity returned to Asia’s largest market.

They added 61.1 billion yuan (US$8.7 billion) worth in net purchases of mainland-listed companies over 17 consecutive days through Friday through a cross-border investment channel with Hong Kong, according to Bloomberg data. That is the longest sequence since an 18-day run that ended on February 22.

The latest round of optimism included a record 21.4 billion yuan of net buying on November 26, preceding the move by MSCI to raise the representation of Chinese stocks in its global gauges for a third time this year to better reflect the emergence of China as an economic powerhouse and advances made by Chinese companies on the global arena.

MSCI’s major emerging-market stock indices increase weight of China to new high

Along with the purchases, money managers also altered their stock picks by favouring low-valuation companies such as home appliances makers and developers while dumping expensive consumer shares such as fiery liquor distillers.

Haier Smart Home, China’s biggest fridge maker, China Vanke, Industrial Bank and Anhui Conch Cement were among the top buys in November, according to data compiled by the Hong Kong exchange. Fund managers took their money out of Kweichow Moutai and its smaller rival Jiangsu Yanghe Brewery Joint-Stock.

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Kweichow Moutai, the world’s most valuable liquor distiller, traded at 36 times price earnings, which is 44 per cent more expensive than its five-year average, Bloomberg data showed.

The buying frenzy was in contrast with fading interest from onshore traders, who had preferred to keep out of the market to sidestep potential fallout from the US-China trade war. The Shanghai Composite Index added 0.4 per cent to 2,912.01 on Friday, and the bourse’s daily price swings have been smaller than 1 per cent for almost four weeks.

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This week’s net purchases have also extended the net inflows seen in the past six months. The prospects in the coming weeks remain a wild card for now as MSCI has yet to make an announcement about adding more Chinese stocks to its key indexes. Some concerns highlighted by foreign investors include the lack of derivative tools and the differences of market holidays in the mainland and Hong Kong.

China’s yuan-denominated shares currently account for 4.1 per cent weighting in the MSCI Emerging Markets Index, compared with about 0.7 per cent last year. The index has 1,410 members with a combined market capitalisation of about US$5.79 trillion.

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