Everyone's fleeing China stocks as foreigners dump $1.4bn

Chinese stocks’ worst October start in a decade has scared off the last remaining bulls.

Foreigners dumped ¥9.7bn ($1.4bn) of A shares through exchange links with Hong Kong on Monday, just short of a record hit eight months ago, as mainland markets reopened after a week-long break. The FTSE China A50 Index of large caps, which includes stocks most favored by overseas investors, sank almost 5% for its biggest selloff since January 2016.

The yuan slumped 0.73% onshore to 6.9222/$ amid speculation the central bank will give up defending the 6.9/$ level, further hurting the outlook for A shares.

Some traders said the apparent absence of the national team, as China’s state-backed funds are known, helped accelerate declines in the afternoon. Supportive measures from the People’s Bank of China didn’t ease the pain, following a recent barrage of negative news, including weak manufacturing data and accusations of election meddling. The slump followed losses of a similar magnitude by Chinese shares in Hong Kong over last week.

“Foreign investors turned bearish, unlike their previous optimistic buying of Chinese A shares,” said Steven Leung, executive director at Uob Kay Hian (Hong Kong) Ltd. “The massive northbound selling is a sign of growing concern over the relationship between the US and China.”

Testing Demand

International investors had started to load up on Chinese shares as global index compilers increased weightings of yuan-denominated shares on their benchmarks and a slump made valuations more compelling relative to global peers. The nation’s equity market had already lost $2.4trn in value since January before Monday amid signs that deleveraging and a trade spat with the US is hurting economic growth.

Foreign demand for another type of Chinese assets will be tested later this week, when the nation markets a sale of dollar bonds.

Bulls Turn

Brokerages are giving up their bullish calls on China’s equities. JPMorgan Chase & Co's cautious turn last week followed similar moves by Morgan Stanley, Nomura Holdings Inc and Jefferies Group earlier in the year. Contrarians include HSBC Holdings Plc, whose strategists are sticking to the overweight rating they’ve had on China throughout 2018. It’s been a “painful” call though, they said in a note on Monday.

The selloff has spread to stocks in Hong Kong, among the world’s worst performers.

Mainland markets may struggle to find a floor if foreigners continue fleeing, as domestic investors are unlikely to jump back in after being battered in this year’s selloff. Policy makers’ previous attempts this year to stem declines in stocks haven’t lasted.

“The reserve requirement cut was within expectations and far from sufficient to counter the negatives on all fronts during the China holiday,” said Zhang Gang, Shanghai-based strategist with Central China Securities Co. “Even China’s state funds won’t be able to prop up the market until the systemic risks are all factored in.”

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