China’s A-share market has plummeted over 10% in the week since the opening of the Olympic Games, and many investors are wondering if hot money is short selling A-shares. Since the middle of October last year, the A-share market has dropped by 60%.
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Hot Money Scapegoated for A-share Market Nosedive
China’s A-share market has plummeted over 10% in the week since the opening of the Olympic Games, and many investors are wondering if hot money is short selling A-shares. Since the middle of October last year, the A-share market has dropped by 60%.
Meanwhile, the RMB has fallen back a bit and the USD has rebounded. And according to the People’s Bank of China’s latest figures, the foreign exchange deposit increase was only $5.6 billion in July, smaller than the sum of FDI and trade surplus, indicating an apparent capital outflow.
There are worries that for China, with an estimated $1 trillion of hot money circulating within its borders, the current withdrawal is only the beginning. Further large-scale hot money withdrawals will lead to drastic RMB depreciation, it is said, and slump, that is, further slump, of stock and real estate markets.
Infected with this thought, the A-share market saw a panic selling. A number of analysts say foreign capital withdrawal is the cause of the Shanghai Composite Index crashing down through the 2500 barrier. According to them, the dollar rebound is attracting overseas capital back to the US market. Where the US financial market was recently the scene of heavy losses, overseas capital now chooses to flow back at a time when dollar assets are “cheap”.
But as so much market “theory,” this one is Swiss cheese. There is no particular flow of foreign capital out from the A-share market. According to Lipper’s latest report, total capital of 19 QFII funds actually rose from $6.619 billion to $7.373 billion. Among those sums, Shanghai-Shenzhen 300 Index Fund saw a biggest increase at 46.44%.
Some overseas hot money may flow back to parent countries due to fluctuations in overseas markets, but the Chinese economy is vast and continues to grow mightily, and withdrawal of some overseas funds will not seriously affect China’s markets.
A general consensus on the basic reason for the slump is that since August 8 there has been a the lack of confidence in both the macro-economy and future corporate growth, not to mention any clear and substantial government policies to maintain economic growth. Government dithering does not breed faith in investors.
Another reason for bleeding confidence is fear of the looming sale of formerly non-tradable shares diluting the market. Latest statistics show funds flowing back into banks from the stock market. In July, resident deposits increased by 246.5 billion yuan, compared with 9.1 billion yuan decrease in the same month last year. Figures from the Shanghai headquarter of the People’s Bank of China also suggest willingness to invest dropped significantly due to the stock market slump. In Shanghai, RMB deposit amounts have grown rapidly since February. Compared with the funds flowing back to banks, the net sale of QFII funds is really very small.
Some hot money did flow out in June, and this trend was expected to continue in July. But these funds will not much affect the economy, as hot money outflow, or decrease in capital inflow, will only reduce the issue of central bank notes, and will not affect the market’s fund sufficiency. The recent two months’ decrease in the issue of central bank notes resulted from the relief of sterilizing pressure on the central bank because hot money flowed out.
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