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A record exit by overseas investors from mainland-China equities is putting a fresh focus on stocks with high foreign ownership.
Statistics on foreign ownership was the primary client query at Bank of America Corp (BofA) after a leadership reshuffle — which tightened President Xi Jinping’s grip over the country’s ruling party — spurred a historic market rout.
“The number one request we got from investors was about the foreign ownership data,†Winnie Wu, China equity strategist at the US bank said in a television interview on Bloomberg. “Investors are thinking that whatever stocks that are more well-owned especially by foreigners could be more vulnerable to the foreign sell-down.â€
The selloff indicates that Chinese stocks with high foreign ownership are perceived to be more vulnerable after Xi stacked his leadership ranks with allies. The Nasdaq Golden Dragon China Index sank by a record 14% on October 24, while the MSCI China Index dropped 8.2%, the most since November 2008. The CSI 300 benchmark of mainland stocks, on the other hand, only falls 2.9%.
“Large, liquid, index-heavy stocks with higher foreign ownership may see more selling pressure,†Wu and her team wrote in a note.
BofA’s views are echoed by a Morgan Stanley analysis of American depository receipts of Chinese companies. Hedge funds are back to building short positions in Chinese ADRs after unwinding them for most of the third quarter, quantitative strategists including Gilbert Wong wrote in a note.
Short interest has more than doubled this month in the ADRs of New Oriental Education and Technology Group Inc., Pinduoduo Inc., and TAL Education Group, Wong and her team wrote.
Overseas investors sold a record net $2.5 billion of mainland shares via trading links with Hong Kong on October 24, according to Bloomberg data, tipping the year-to-date level into a small net outflow. If that holds through year end, it would be the first annual decline since the stock connect program was launched in 2014.
—Bloomberg