China’s stock market was hit by the biggest outflow of foreign capital on record in April and May as the trade war with the US and concerns over the stability of the renminbi darkened investors’ view of the country.

A total of about $12bn left the market during April and May, according to data from CEIC and Morgan Stanley, the largest exodus since the launch five years ago of a “stock connect” programme that provides global investors with access to Chinese shares, via Hong Kong.

Despite the outflow, China still has a net inflow of about $8bn this year thanks to a strong market performance in the first three months of 2019.

But the sudden reversal of capital flows over the past two months has sparked speculation that the trade war and concerns about the stability of China’s currency are spooking global fund managers.

“Domestic investors [in China] are concerned about whether foreign investors are quitting the market,” said Laura Wang, China equity strategist at Morgan Stanley.

Except for a few small dips in the volume of inbound foreign capital, China has notched continuous inflows from global investors since late 2014. Even in 2018, one of the country’s worst-performing years on record, about $55bn flowed into China’s equity market.

China’s benchmark CSI 300 stock index fell 25 per cent in 2018. The index is up about 20 per cent this year but has pulled back significantly from a peak hit in mid-April.

The shift in sentiment has been driven primarily by the intensification of the China-US trade war, which escalated sharply in early May.

China and the US have increased tariffs on hundreds of billions of dollars worth of each other’s goods, and have stepped up other provocative measures that have put investors increasingly on edge.

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The Trump administration, for example, has sought to cut off Huawei from US suppliers, putting it on a blacklist that essentially bars companies from selling US technology to the Chinese telecoms group.

In retaliation, Beijing has said it would create a list of “non-reliable” foreign companies, and announced an investigation into US logistics group FedEx.

John Zhou, managing director at Shanghai-based asset manager MQ Investment, said the trade war and concerns that China’s currency could weaken beyond Rmb7 to the US dollar were factors driving the foreign outflows.

The exit of foreign investors has been so pronounced over the past two months that the trend is driving even more outflows, Mr Zhou added. “Their withdrawal exacerbated the volatility of the index which, in turn, triggered further withdrawal of funds,” he said.

Chinese markets are on track for several events this year that could help bring investment back into the market, strategists said. The MSCI, for example, is in the process of increasing the weighting for Chinese stocks in its emerging markets index, which is expected to generate inflows because foreign investors that track the index will be obliged to allocate more to the country.

“This should provide some support from a flow perspective later this year,” Ms Wang said.

Via Financial Times