China's Stock Market Hit With Massive 87% Drop In Foreign Investment Amid Fears Of Slow Economic Growth, Says Report

China’s stock market recorded a staggering 87% fall in foreign investment in 2023, casting doubts on Beijing’s promise of rejuvenating the slow-paced growth.

What Happened: A recent report from the Financial Times on Thursday reveals a sharp plunge in net foreign investment in China-listed stocks from a high of 235 billion yuan ($33 billion) in August to a mere 30.7 billion yuan ($4.33 billion). This shift is attributed to global fund managers’ growing pessimism about the future of the world’s second-largest economy. Following a default on bond payments by a developer, Country Garden, in August, international investors began a net selling trend, underscoring the country’s acute liquidity crisis.

Despite encouraging economic indicators, improving U.S.-China relations, and efforts to fortify the financial system against decelerating growth, Chinese stocks remain lackluster on a global scale. In contrast to a 4.7% increase in the S&P 500 index, the CSI 300 index, China’s benchmark, fell by over 3% in December. The net foreign sales of China stocks during this period amounted to approximately 26 billion yuan ($3.66 billion).

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Chinese companies’ widespread share buybacks and large-scale purchases by domestic investment funds and state-run financial institutions have aided the exodus of offshore investors. Beijing has pressurized these entities to bolster falling valuations.

The sustained foreign sell-off may lead to a gloomy year-end for the Chinese market. As markets close on Friday, they are expected to register the smallest annual foreign inflow since 2015, marking the first complete year of the Stock Connect program.

Why It Matters: The Chinese economy is projected to face a sharper slowdown in 2024, with no sector poised to drive a comprehensive recovery, according to Shehzad Qazi, managing director of China’s Beige Book. This bleak outlook strengthens the apprehensions of global fund managers and underscores the possible continuation of the sell-off trend in 2024.

In 2023, financial leaders like Goldman Sachs expressed high expectations for China’s stock market, anticipating a robust rally spurred by the end of strict COVID-19 measures. However, the diverging economic indicators from China and other emerging markets present a pressing question of whether Chinese stocks and the broader emerging markets are attractive investment opportunities or a value trap.

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