Time to Pull Out of China As Investors Lose Trust in Beijing

Kristian Rouz – Despite Beijing’s recent promises of immense infrastructure investment and money-printing policies, international investors started a reverse rally, selling mainland stocks before they reach the pinnacle point of their valuation. In a very atypical move, hundreds millions of dollars have left mainland China during the last week via the Shanghai – Hong Kong Stock Connect scheme, while, rather unexpectedly and against all the odds of political turmoil, depreciated Greek assets have attracted an equitable amount of foreign investment.

In the lead up to March 30, international investors sold a total 1.7 billion renminbi ($274 million) worth of mainland China’s equities via the Stock Connect, effectively pulling  money out of mainland into the open market of Hong Kong, only to reinvest the money far from the Communist-governed Middle Kingdom’s shores.

This is only the tip of the iceberg, as the two biggest Hong Kong exchange-traded funds (ETFs), namely the iShares FTSE A50 China Index and the CSOP FTSE China A50 reported money withdrawals from mainland stocks amounting at as much as $622 million. To add more pessimism, money flight from the mainland resumed at an accelerated pace during Tuesday’s trades, despite stocks in Shanghai and Shenzhen advanced, presumably supported by domestic demand.

Despite Beijing’s efforts to improve the investment appeal of the staggering mainland economy, its half-hearted attempts at monetary easing and economic liberalization have so far proven insufficient against the decline in business activity in manufacturing. While domestic investors are buying out stocks on Shanghai and Shenzhen in hopes to make solid profits on the looming full-scale money-printing, foreign investors are fleeing, believing Beijing is helpless to prevent the economic slump.

Meanwhile, in Greece, stocks are likely to suffer a fourth consecutive quarter of losses, with equities losing their value dramatically. Another issue for the Greek financials is frequent, unpredictable and significant outbursts of market volatility. Besides, Athens are heading for a fiscal collapse, running out of cash on April 20 (unless Germany bails it out once again, and it will).

But, through thick and thin. The Greek market has been experiencing a surge in buying bets since early 2015. Greek ETFs have reported an influx of international capital every single week this year, reaching some $167 million, a large sum of money compared to the size (and the debt-fueled nature) of the Greek economy.

Now, Greek equities are a good investment asset due to one simple reason – they seem to be ultimately guaranteed by Berlin. After Germany opted not to push for a Grexit earlier this year, many investors developed a confidence that Berlin will eventually impose a reform agenda on Athens, no matter the resistance, as Greece’s desperate financial situation leaves the lefty government of Alexis Tsipras little choice despite all the populist rhetoric they boasted during the election.

Another reason is that with Greece still a member of the Eurozone and the rest of the common market experiencing an economic boom, driven by robust German exports and the European Central Bank’s (ECB) $1.1 trillion bond-buying, overall European optimism is attracting investors to any kind of assets as long as they are in the Eurozone. With Greek stocks at their cheapest, no wonder there will be more buying bets in the short-to-mid-term – at the expense of other markets, mainland China one of them.