Global holdings of Chinese stocks and bonds have jumped by around $ 120 billion in 2021 as international investors seek returns in the country’s markets despite recent volatility and Beijing’s regulatory crackdown.

International investors held 7.5 billion Rmb ($ 1.1 billion) of renminbi-denominated stocks and fixed income securities at the end of September, up about 760 billion Rmb from the end of 2020, according to Financial Times calculations.

The rise shows how investors are accessing mainland Chinese markets directly, rather than through financial instruments listed in global financial centers such as New York and Hong Kong. It comes at a time when some analysts and investors fear that strong developed market returns may be exhausted, causing them to look elsewhere for opportunities.

China’s offshore listings have had a tumultuous year, with a succession of regulatory crackdowns shaking investor confidence in sectors ranging from technology to education. Meanwhile, a liquidity crisis at real estate developer Evergrande sparked a series of massive sell-offs of high-yield dollar bonds traded internationally by Chinese issuers.

But global capital has become increasingly intertwined with Chinese domestic finance in the pursuit of greater diversification and higher returns.

Investors have long relied heavily on New York and Hong Kong listed companies such as Alibaba and Tencent for exposure to China, in part thanks to the greater regulatory certainty offered by offshore markets.

But since July, large overseas-listed Chinese tech groups have been hit by a barrage of regulatory restrictions from Beijing, resulting in substantial losses for major shareholders, including SoftBank’s Vision Fund and Baillie Gifford.

“Now the regulations are upside down. [US-listed stocks] are not as investable because of excess policy, ”said a fund manager of a large global asset manager in Hong Kong. Investors were looking for interesting stories about the so-called A shares listed in Shanghai and Shenzhen, the manager added.

Michelle Lam, a top Chinese economist at Societe Generale, said the purchase in China’s onshore bond market was supported by FTSE Russell’s decision last year to add Chinese government debt to its influential index global government bonds, paving the way for more than $ 140 billion primarily in liabilities. influx.

She added that the resilience of the Chinese currency despite recent economic turmoil had “boosted people’s confidence in buying renminbi assets.”

The widespread buying of Chinese assets has drawn criticism from leading investors, including George Soros, who in September called on the US Congress to pass legislation allowing the Securities and Exchange Commission to limit the flow of funds to them. Chinese stocks.

But the huge demand means these calls to action have had limited impact. According to central bank figures, foreign capital inflows brought foreign holdings of renminbi-denominated bonds to over Rmb 3.9 billion, while foreign holdings climbed to nearly Rmb 3.6 billion, both reflecting an increase of about 30 percent a year ago.

The increase in foreign holdings in 2021 did not match the outsized increase in 2020, in part because a recent slowdown in the real estate sector and disruptions in energy supply weighed on growth. Yet stock purchases through Hong Kong’s Stock Connect program, in particular, have been intense, with record net purchases of over $ 50 billion this year.

Chinese authorities have welcomed foreign investment in hopes of countering volatility fueled by fast-trading retail investors, particularly in equities. Over the past decade, the share of amateur investors in the stock market float has increased from 66% to around 30%, while foreign holdings have risen to 6%, according to estimates by investment bank China Renaissance. .

Analysts said foreign traders are already setting trends in onshore stocks. “People are getting more signals from foreign investors,” said Bruce Pang, research manager at China Renaissance.

Line chart of cumulative net purchases of Chinese equities through Stock Connect (in billions of dollars) showing Stock Connect purchases climbing at a record pace

Foreign trade in onshore stocks and bonds increased as Western banks including Goldman Sachs and JPMorgan pushed to acquire licenses and wholly owned subsidiaries in mainland China, which led to a research effort increased on Chinese companies. HSBC and Fidelity recently turned positive on Chinese assets for the first time since the regulatory crackdown began in July.

But foreign fund managers face unique challenges when trading stocks onshore, including a 30% foreign ownership limit on Chinese companies. At least nine large-cap companies listed in Shanghai have almost reached foreign ownership limits, according to brokers and stock data.

Bulk corporate buying can also backfire on foreign investors when local traders get started. “When domestic investors find out that foreigners are buying it, they lead it,” the Hong Kong-based fund manager said. “Foreigners will always be late for partying in China. “

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