Mediating High Outflows in China’s Stock Connect

China’s Northbound Stock Connect — a major channel for Hong Kong and international investors to trade in China A shares — had a total net outflow of CNY 187 billion (USD 26 billion) from August to December 2023. These outbound flows were 9.5% of the channel’s cumulative net inflows since the launch of Stock Connect, in November 2014, through July 2023. Although the duration and absolute size of the outflows set a record, the monthly magnitude relative to cumulative net inflows was comparable to previous outflows. One such outflow was in May 2019, a time of rising trade concerns and shifting economic policies in China.

Our analysis shows that the latest round of northbound net selling was most concentrated in the financial, consumer-staples, industrial and materials sectors, which also were among the top-weighted sectors of the MSCI China A 50 Connect Index. These four sectors also underperformed in the five months ending December 2023. Measured by net flows as a percentage of the sector’s free-float market capitalization in the MSCI China A Onshore Investable Market Index (IMI), financials and consumer staples, under strong selling pressure, underperformed sectors facing less selling pressure, such as health care and utilities.

Over the August-December 2023 period, the MSCI China A 50 Connect Index closely tracked the broader MSCI China A Index with a correlation of 95% and beta of 1.04. The average selling pressure on the 50 companies in the MSCI China A 50 Connect Index was more than three times the average selling pressure across the large-cap universe, as measured by the MSCI China A Large Cap Index.

Some investors, concerned about sustained market outflows and fickle sentiment, may have managed these portfolio risks in the past with instruments such as index-linked futures and options or used index-linked ETFs to hedge outflow pressure.