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China Tightens the Reins on Domestic Investors’ Foreign Stock Purchases

In a strategic move to stabilize its domestic stock market, Beijing has begun limiting domestic traders’ access to offshore markets. This decision aims to reinvigorate China’s flagging stock market, which has been underperforming compared to its international counterparts.

According to The Financial Times, approximately 30% of funds offering investments in foreign securities have either halted or restricted sales to retail investors. This development follows informal directives from the Shanghai Stock Exchange to some brokerages. Major players like China Asset Management and Bosera Asset Management are among those affected, with the former suspending subscriptions to mutual funds that track key US indices like Nasdaq and S&P 500.

This shift in policy comes at a time when Chinese investors are showing increased interest in the buoyant US stock market, which has been hitting all-time highs. In stark contrast, Chinese markets are languishing at five-year lows, with the benchmark CSI 300 index already down by 4% this year.

The downturn in Chinese stocks reflects waning investor confidence amidst multiple economic challenges, including slow growth, a housing crisis, high unemployment, and disinflation. The structure of offshore retail investment in China, primarily through the Qualified Domestic Institutional Investor scheme, has contributed to this scenario. This scheme caps the amount that brokerages can offer in foreign stocks and bonds, creating a sense of scarcity and intensifying competition for securities outside of China.

In 2023 alone, Chinese investors’ preference for international markets led to the establishment of a record 49 funds focused on foreign investments. Beyond the US market, there’s been a notable surge in interest among Chinese retail traders for exposure to Japan’s Nikkei index and funds focused on India.

In addition to urging funds to limit offshore investing, Chinese authorities are considering a market support scheme worth $280 billion, funded by offshore accounts of state-owned firms. Additionally, a liquidity boost of $140 billion is on the horizon, following impending cuts to required bank cash reserves.

For investors and market observers, these developments in China highlight the complex interplay between domestic economic policies and global investment trends. As China navigates through its economic challenges, the impact of these measures on both domestic and global markets will be closely scrutinized. Investors are keen to see how these restrictions will affect global market dynamics and whether China’s efforts to bolster its domestic market will yield the desired stabilizing effect.