Have equity flows gone back to China after the stimulus announcement?

Hi, my name is Gabriela Santos and I am a Chief Market Strategist for Americas at J.P. Morgan Asset Management. This is On the Minds of Investors and today's blog is "Have equity flows gone back to China after the stimulus announcement?" After Chinese policymakers’ long-awaited coordinated policy stimulus announcement on September 24^th, Chinese equities surged over 20% in five trading days. Since then, Chinese equities have corrected 12% as fiscal stimulus follow-on announcements have disappointed and as the National Day holiday spending data came in soft versus 2019 spending patterns. Have foreign investor flows returned to China? Since the announcement, the tide has turned – with net flows turning positive after outflows to start the year. In the short-term, we may continue to see this reversal of flows towards China and away from previous winners in Asia (Japan, India); however, the continuation of this trend will depend on additional fiscal stimulus and structural reforms in China.

Since Chinese equities peaked in early 2021, foreign flows into China have decreased. Up until the stimulus announcement on September 24^th, this pattern continued this year: cumulative net flows into Chinese equities (proxied by flows into ETFs domiciled in the U.S., Luxembourg, or Ireland as a measure of foreign flows) were negative to the tune of outflows of $5.3 billion. The combination of the stimulus announcement plus cheap valuations and underweight positions resulted in a surge in net flows into Chinese equities summing up to $12.7 billion from September 24^th to October 14^th. For now, these flows may be related to investors leaning into the tactical rebound in the market, like previous recent rallies (+60% October 2022-January 2023 and +33% January-May 2024). Whether these flows stick and whether this reversal continues will very much depend on domestic and foreign confidence, China’s cyclical growth momentum, and structural reforms to boost long-term economic growth and return on equity. Investors should focus on having the right exposure to Chinese companies, especially focused on the “new new economy” sectors of business technology, energy transition, and domestic consumption.

Investors should also focus on other opportunities in Asia, including emerging and developed markets. While Chinese equity performance has struggled since 2020, it has been strong elsewhere, especially India, Taiwan and Japan. As a result, foreign inflows into these markets have trended upwards. Recently, they have started to moderate in India (due to expensive valuations) and Taiwan (due to a pause in the AI trade) and reverse in Japan (since early August due to the unwind of the “Yen carry trade”). This is likely short-lived, as the tailwinds for these markets continue and as they gain a greater share in global equity portfolios.