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Professional investors have stayed away from China’s stock markets despite several attempts by the country’s government to revive investment sentiment.
An analysis of fund data reveals portfolio managers have steadily lowered their allocation toward China equities since mid-2020 when Beijing intervened in its property sector with the “three red lines” rule to address concerns of a bubble.
Many blame Beijing’s repeated interventions — including the stimulus measures that abruptly boost stocks — as a major factor behind their decision to hold back from the world’s second-largest economy’s stock market.
Portfolio data from 34 actively managed funds, provided by Morningstar and examined by CNBC, shows that allocation towards China and Hong Kong-listed equities has fallen every year over the past five years.
For instance, the HSBC Managed Growth Fund had nearly a fifth of its assets invested in China and Hong Kong stocks in 2020. By late 2024, the fund’s allocation to China had dwindled to 3.4%. HSBC declined to comment.
CNBC analyzed only actively managed funds marketed in Hong Kong with geographically unconstrained mandates, such as pan-Asian equity or emerging market funds.
HSBC Managed Growth Fund cut its exposure towards China to negligible levels
Consider the Pando CMS Innovation ETF, which posted 80% returns in 2024. The fund closed out its positions in Chinese companies it previously had due to the investor’s frustrations with valuing a stock that trades in large part due to government policy over fundamentals.
“Let’s just say that predicting the policy of Chinese stocks market is really hard for us, even [though] we are [in] China,” Yili Yan, director of investor relations at Pando Finance told CNBC in January from Hong Kong.
“We understand, but we don’t know when the policy will hit the market,” Yili added. “We would like to embrace certainty over uncertainty.”
The ETF sold out of three Chinese companies it previously held, Tencent, Alibaba and Meituan, and instead bought U.S. stocks Tesla and AI chip darling Broadcom.
“We sold [them] in the second quarter of 2024 not because we don’t like them — they are very good companies — we just like the AI stock more,” said Beck Lee, chief investment officer at Pando.
Other investors in the region who sold out of China related investments recently said they regretted not having sold sooner.
“We reduced our exposure, although with the benefit of hindsight we should have sold everything,” Wong Kok Hoi, chief investment officer of APS Asset Management in Singapore told CNBC.
Will any stimulus measure work?
Beijing enacted a flurry of stimulus measures last September, among which included cutting a key short-term interest rate. Interest rates on existing mortgages were also lowered to shore up the country’s embattled property sector. The initial rally of the country’s benchmark CSI 300 following the announcement has largely sputtered by now.
As recent as January, China’s financial regulators rolled out a slew of initiatives encouraging major state-owned mutual funds and insurance companies to buy more stocks, as the government strives to strengthen the equities market.
Large state-owned insurance companies were instructed to expand both the amount and share of their investments in mainland-listed stocks, with 30% of their newly earned premiums earmarked for stock purchases.
Adam Coons, chief investment officer at U.S.-based Winthrop Capital Management welcomed the measures but suggested the firm is likely to have a cautious approach to future investment in China.
“Policy is absolutely driving stock prices rather than fundamentals. The economy is showing signs of deflation and economic growth is only occurring due to government stimulus,” Coons said. “We are okay being late to a recovery in Chinese equities to help us mitigate the risk of this recovery not being reality.”
Investors also believe the recent spate of announcements from Beijing is likely to have a bigger impact than previous half-hearted measures.
“I wouldn’t put a lot of stock in, ‘I’m not going to buy the Chinese equity market because the authorities want it to go up,’ because ultimately, I think it’s not going to work,” said U.S.-based Brian McCarthy, chief strategist at the hedge fund Emerging Sovereign Group, who is a regular traveler to China.
“You have authorities that are openly trying to fight the fundamentals, as authorities do everywhere, but in China, they’re particularly powerful,” said McCarthy.
Others have also pointed to investors’ lack of understanding and miscommunication of Chinese government policy.
“China’s policies undeniably play a significant role in influencing short-term share price movements, as seen by the recent uplift in market sentiment following aggressive interventions,” said Singapore-based Brian Arcese, fund manager at Foord Asset Management. “However, we also observe a disconnect between investor expectations and the approach of Chinese policymakers.”
“While the government tends to provide directional guidance, investors often seek quantifiable targets and detailed implementation plans, which can create uncertainty and impact market sentiment,” Arcese added.
“We believe corporate fundamentals remain the primary driver over the longer term, as sustained growth and performance ultimately depend on the strength of underlying businesses, and their ability to adapt to economic conditions.”
