During a recent media interview in Shanghai, a local journalist asked me why foreign investors were piling into the Chinese domestic market. It was a pertinent question. In the first eight weeks of the year, Chinese mainland equity markets saw a nearly US$17bn inflow through the “stock connect” corridor with Hong Kong — the largest consecutive inflow since the launch of the programme in November 2014.
Chinese domestic investors have been surprised by the strength of these inflows. In a market that is notoriously short term, they are probably as pessimistic about China’s near-term prospects as any western China-bear. Why would anyone be bullish on a market dogged by declining growth, corporate defaults and an impaired relationship with the US that threatens overseas prospects for Chinese companies?
The answer is simple: foreign investors do not look at China in a vacuum, as domestic investors do, but in relative terms. Also, many take a longer term view. The MSCI China A International Index, a proxy for the portion of the Chinese onshore equity market that is accessible to foreign investors, underperformed the MSCI World index by just over 30 per cent in 2018, reaching a price/earnings ratio of 10 times, close to its historical low. Arguably, it was discounting all the potential ills and no positive news ahead. Such an underperformance is a good cushion for international investors.