By Jan. 30, year-to-date net inflows to mainland Chinese stock exchanges through the Stock Connect scheme had reached 131.1 billion yuan ($19.6 billion), surpassing net inflows for the whole of 2022 of 90 billion yuan, according to data from the Stock Exchange of Hong Kong Ltd.
The CSI 300 index and Hang Seng index have risen 6.9% and 8.4%, respectively, year-to-date as of Jan. 31 — a big difference vs. performances of -22% for the CSI 300 and -15% for the Hang Seng index in 2022.
On Jan. 8, China lifted its strict zero-COVID policies, allowing quarantine-free arrivals and removing mandatory testing and lockdown requirements.
Asset managers said they have seen a sharp rise in interest into the Chinese stock market from institutional investors since then, with money beginning to flow in January. In November and December, investors were covering short positions on Chinese exposures, said Ricky Tang, managing director and co-head of client portfolio management at Hong Kong-based Value Partners Group Ltd.
However, there has been a large increase in the number of conversations with institutional investors since November, but they are "unsure about the timing, as the markets have rallied quite substantially since end October 2022," he said.
"Hence, a key question is if there is still upside, or will there be a pullback. Many are also still a little concerned about the execution and continuity of the policy direction given what happened over the last two years, as well as the pandemic situation with the reopening as the infection rate has skyrocketed," he added.
"A lot of folks are renting this rally rather than being committed to it," Michael Edwards, New York-based deputy CIO at Weiss Multi-Strategy Advisers LLC, agreed in a video interview on Jan. 17. "We are 11 trading days into the year, and Hong Kong, Europe and Mexico are up by enormous numbers. If investors are missing this performance, you're feeling it and it's hurting."
The recent rally came as rumors swirled in November that China was considering lifting its COVID-19 policies. On Dec. 7, Chinese authorities announced that it would lift its strict lockdown policies in areas with COVID-19 infections and reduce the scale of mandatory PCR testing, prompting more investor confidence as the benchmark CSI 300 rose further.
This came in sharp contrast to the stock market's performance during China's three years of aggressively maintaining its zero-COVID policy. Chinese markets were volatile; the benchmark CSI 300 fell 39.6% from its all-time high in February 2021 to its two-year low in October 2022.
However, money managers generally agreed that it's not too late to get in on the action and reallocate to Chinese equities, as valuations are still relatively low and there could be a compelling entry point to come, with the expectation of a pullback as companies report their fourth-quarter earnings, which are expected to be weak.
"While a large part of the rally thus far has been driven by (price-earnings) multiples expansion, we believe there is further upside from earnings upward re-rating in the next couple of months as the recovery takes further momentum," Value Partners' Mr. Tang said in written comments.
"With that said, it is also likely for us to see some volatility as companies start report their earnings for Q4 2022, which are expected to be quite weak given the challenging operating environment last year. We believe that the short-term pullback, if any, could actually present a good entry point for investors who have yet to rebuild their positions in China," he added.
Value Partners had $6.1 billion assets under management as of Dec. 31.
Still, some long-term investors are opting for a wait-and-see approach.