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Investors turn cautious on Chinese stocks amid growth concerns

While mainland Chinese stock fund held onto inflows, European stock funds saw billions of dollars in net outflows in the first quarter, with declines in Japanese stock funds as well, according to EPFR.

Marc Fernandes | Nurphoto | Getty Images

BEIJING — Investors turned increasingly cautious on Chinese stocks, especially those listed overseas, in the first quarter of the year that was rocked by geopolitical tensions and worries about growth.

That’s according to data from research firm EPFR Global.

While the period ended with more than $20 billion in net inflows to mainland Chinese stocks, the bulk occurred in January, and the pace of buying dropped sharply as the quarter progressed, the data showed.

The first three months of the year saw the U.S. and Europe sanction Russia over its invasion of Ukraine, while China pursued a more neutral position. The quarter also saw growing worries about forced delisting of Chinese stocks from U.S. markets amid a flurry of announcements from both countries’ securities regulators.

“Anything that relates to China we can find in causality and reasoning from either Russia or [the] U.S. right now,” said Steven Shen, manager of quantitative strategies at EPFR. The firm says it tracks fund flows across $52 trillion in assets worldwide.

ESG investment flows

ESG-related concerns drove other investment allocation changes.

Among the headlines of the first quarter, Norges Bank Investment Management — an investment arm of Norway’s central bank which manages the world’s largest sovereign wealth fund — announced it will exclude shares of Chinese sportswear company Li Ning “due to unacceptable risk that the company contributes to serious human rights violations.”

When contacted by CNBC in late March, the fund declined to elaborate further, but noted the Norwegian government asked the fund to freeze investments in Russia and prepare a plan for divesting from the country. The fund had a market value of more than $1.2 trillion as of Monday.

Li Ning did not respond to a CNBC request for comment.

Swapping U.S. shares for Hong Kong ones

Worries about growth

Mainland Chinese stocks saw a surge of buying at a level not seen since January 2019, Shen said.

He pointed out that it took place when index company MSCI added the mainland Chinese shares to a benchmark, which forced fund managers tracking the index to buy the mainland shares.

But the Shanghai composite remains more than 12% lower for the year so far.

That’s despite a mid-March lift to stocks after state media reports of comments from Vice Premier Liu He eased worries about Beijing’s crackdown on tech and real estate, and overseas IPOs.

Many investment banks had turned positive on mainland Chinese stocks as 2022 kicked off, despite poor domestic market sentiment.

“The macroeconomic backdrop appeared to improve at the end of last year,” David Chao, global market strategist, Asia Pacific (ex-Japan) at Invesco, told CNBC in early April.

“But I think expectations have gotten ahead of themselves” especially since the property market hasn’t found a bottom yet, he said. “Market sentiment seems to be impacted by a property market downturn.”

Real estate and related industries account for about 25% of China’s GDP, according to Moody’s.

Read more about China from CNBC Pro

On Monday, China reported first quarter GDP rose 4.8% compared to the previous year, topping expectations of a 4.4% increase.

While economic data for January and February beat expectations, those released so far for March have started to show the impact of Covid-related lockdowns in major economic centers like Shanghai.

“Heading into the second quarter there continues to be many uncertainties about China’s Covid response,” Invesco’s Chao said. “And that will be the most significant variable for the current quarter, whether their pandemic policies evolve or not.”

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