June 19, 2024

China Wants Domestic Investors to Stop Buying so Much Foreign Stock

  • Beijing is curbing access to overseas securities for Chinese retail investors, the Financial Times reports.
  • Domestic markets have suffered massive outflows as domestic traders flee to offshore securities.
  • About a third of funds that invest in foreign stocks and bonds either limited or suspended sales.

Beijing authorities are barring how much access domestic traders have to offshore markets, in an attempt to breathe life into China’s sputtering stocks.

Around 30% of funds that offer investments in foreign securities have either paused or limited sales to retail investors, as some brokerages received informal directives to do so from the Shanghai Stock Exchange, The Financial Times said. 

Participants include companies such as China Asset Management and Bosera Asset Management. The former suspended subscriptions into two mutual funds that track the US’ Nasdaq and S&P 500, Bloomberg also reported.

The curbs come as Chinese investors have been clamoring to join in the US stock frenzy, where key indices have topped all-time highs in recent days. Against this, Chinese markets are trading at five-year lows, with the benchmark CSI 300 already down 4% for the year.

The decline reflects investors’ flailing confidence in China’s ability to navigate its economy, as Beijing contends with slower growth, a property crisis, high unemployment, and disinflation. 

Outflows further accelerated due to how offshore retail investment is structured in the country, with traders only able to invest through China’s Qualified Domestic Institutional Investor scheme. 

As this puts a quota on how much brokerages are allowed to offer in foreign stocks and bonds, it has fueled a sense of scarcity that is spurring competition for ex-China securities, FT reported. Broadly, Chinese investors have increasingly shown preference for overseas markets in the past year, with a record 49 such funds established in 2023.

Apart from US-centric investing, retail traders in China have also been demonstrating massive appetite for exposure to Japan’s Nikkei index, while funds focused on India also gained. 

Aside from prodding funds to curb offshore investing, authorities are weighing a market support scheme equal to $280 billion, with finances taken from offshore accounts of state-owned firms.

The Chinese economy is also set for a liquidity boost worth $140 billion, as authorities are set to announce cuts to required bank cash reserves.

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