Investors Bought Chinese Stocks In The Last Week, Despite Regulatory Concerns

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Investors bought into Chinese stocks in the last week, despite mounting concerns about harsh regulation, according to fund research firm EPFR Global.

A slew of new Chinese regulation in the month since domestic ride-hailing giant Didi listed in the U.S. have sent Hong Kong, mainland Chinese and U.S.-listed Chinese stocks tumbling. The sell-off accelerated in the last week after a policy on after-school tutoring companies specifically prohibited them from having foreign investors.

But investors, particularly institutions, have taken the opportunity to buy Chinese stocks, according to Cameron Brandt, director of research at EPFR.

Funds focused on Chinese stocks saw net inflows of $3.6 billion in the week ended Wednesday, of which $300 million went into China tech funds, Brandt said in an interview Friday.

EPFR is a subsidiary of Informa Financial Intelligence and claims to track over 134,000 traditional and alternative funds with more than $49.5 trillion in total assets.

Chinese authorities have sought to calm markets. Late Wednesday, the securities regulator said at a virtual meeting with major investment banks that China would not ban its companies from listing in the U.S. as long as there were no national security concerns, a source familiar with the matter told CNBC.

China vs. U.S. flows

In another sign of continued investor interest in China, the stocks saw far more inflows than U.S. ones, relative to the overall amount of money invested in the two categories of stocks, EPFR data showed.

Flows into U.S. stock funds were about 0.1% of assets under management at the beginning of the week, versus a little over 1% for China ones, Brandt said.

“Basically in relative terms, flows to U.S. equity funds were basically a tenth of what went into China funds,” he said.

But one week does not make a trend, and Brandt noted that markets are increasingly driven by multiple ideas, rather than a single narrative.

The Hang Seng Index and Shanghai composite have fallen more than 4% over the last five trading days. A U.S.-listed exchange-traded fund for tracking Chinese tech stocks, KraneShares CSI Index China ETF (KWEB), is down about 14.5% over that time.

“While we still expect the overall regulatory environment to remain tight this year, we believe the recent sell-off provides a good entry point for long-term investors,” Nomura analysts Jialong Shi and Thomas Shen said in a report Thursday.

“We believe the internet industry is resilient and adaptable enough to navigate through the current regulatory storm, safe and sound,” they said, noting, however, that they don’t expect the sector to gain significantly in the near term due to “mediocre” second quarter earnings results.

The analysts’ top picks within the China internet sector are NetEase, Weibo, JD, Joyy, Alibaba and Tencent.
-CNBC

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