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Overseas fund flow peaks in second quarter

By Bi Xiaoning (China Daily)
Updated: 2009-07-24 08:04

Overseas funds quickened their inflows into China during the second quarter after the economy and stock market have started showing signs of recovery.

According to Massachusetts-based research firm EPFR Global, qualified foreign institutional investors (QFII) injected about $3.6 billion capital in the equity markets in the second quarter.

Currently, China's total quota for QFII is about $30 billion. EPFR's research covered all the QFII products of fund managers, with their total quota reaching $26 billion.

"There are three main reasons for the record high overseas capital inflow on the stock market," said Gao Zijian, chief analyst, financial derivatives, Orient Securities.

According to Gao, overseas investors are optimistic about China's market and believe that the nation could be one of the first to recover. Chinese stock markets have been the one bright spot amongst the languishing global stock markets. In addition, more quotas were approved in the past three years, making the enlarged QFII market more attractive.

The EPFR figures also showed that there were capital outflows in the last week of June and first two weeks of July. In addition, in the first quarter, about $400 million of overseas capital flew out of China's stock market.

Related readings:  FDI is still flowing despite downturn   China's FDI falls 17.9% in H1  Outbound investment unlikely to outstrip FDI  China still top destination for FDI

"This phenomenon doesn't mean that overseas investors have changed their attitude to China's stock market," said Gao.

According to Gao, the US, Canada and South America also experienced capital outflows recently, as the US released worse-than-expected economic data at the end of June as investors preferred to hold greenbacks.

"Housing activity has started to pick up in the US. Large capital flows to the market are expected once again," said Gao.

Industry experts feel that the increasing inflows indicate that more overseas capital has trickled into China's capital market.

According to United Securities, about $120 billion worth of hot money found its way into the Chinese markets during the second quarter, surpassing the $73.2 billion in the first quarter of 2007.

"Foreign exchange reserves have begun to rise since March, but China's foreign trade surplus and foreign direct investment (FDI) have not shown much activity, indicating large inflows of hot money," said Zhu Junchun, analyst, United Securities.

Industry analysts said the inflows would most likely flow into China's property and equity markets.

"The hot money is very sensitive to the market. Capital inflow figures which were in the red during the first quarter have moved into the black in the second quarter. The flow of hot money mainly depends on the country's recovery speed and interest rate," said Liu Xiangning, analyst, United Securities.