Hot money is cold comfort for China shares

HONG KONG, May 2 (Reuters Breakingviews) - Money flowing into the People's Republic is getting uncomfortably hot. Chinese equities enjoyed renewed foreign interest since the start of 2023. Yet recent reversals in New York, Hong Kong and Shanghai suggest that is driven by fickle short-term funds - exactly what Beijing doesn't want.

Global fund managers dumped "uninvestable" China holdings en masse last year, but some have reconsidered. Foreign institutions have snapped up $28 billion worth of onshore A-shares traded via the Hong Kong Stock Connect scheme year-to-date, nearly three times more than the rest of Asian emerging markets combined, per Goldman Sachs research in April. The Nasdaq Golden Dragon (.HXC) and Hong Kong's Hang Seng China Enterprises (.HSCE) indexes saw double-digit rallies earlier this year as investors bet that the country's reopening from harsh lockdowns would prompt a consumption rebound.

The enthusiasm is proving short-lived. A selloff in Chinese stocks, onshore and off, has already wiped out most, if not all, of this year's gains. The outlook for initial public offerings is darkening: KKR-backed (KKR.N) liquor-maker ZJLD (6979.HK), which IFR says raised $676 million in Hong Kong's largest initial public offering in 2023 with support from global and Chinese long-only investors, closed down 18% from its offer price last week - a disastrous debut despite pricing towards the bottom of the range.

The rapid rise and fall highlights the presence of short-term funds eyeing quick profits by betting on themes like Alibaba's (9988.HK), restructuring, China's push into artificial intelligence or semiconductor self-sufficiency. Serious money managers are waiting on the sidelines if not actively reducing China exposure. The Canadian Ontario Teachers' Pension Plan, for instance, recently shuttered its China equity investment team in Hong Kong, Reuters reported; Warren Buffett's Berkshire Hathaway (BRKa.N) has reduced stakes in Taiwan Semiconductor Manufacturing (2330.TW) and auto giant BYD (002594.SZ), (1211.HK).

Geopolitical tensions are partly to blame. The White House is planning an executive order that would ban investments into certain sectors in China and increase scrutiny of others. That may be denting fundraising activity: private equity outfits PAG and Carlyle (CG.O) have struggled to close their respective new Asia funds, Bloomberg reported last month, and the latter told investors that it will cut its China exposure. Policymakers in Beijing have been trying to pull in stable foreign funds to offset volatility in its retail-driven stock markets for decades, but these overseas traders look more like part of the problem than the solution.

Chinese spirit maker ZJLD shares closed down 18% lower than their initial public offering price on their trading debut April 27.

The KKR-backed company raised $676 million in what was the biggest offering in Hong Kong since October 2022.

Separately, the Ontario Teachers' Pension Plan, Canada's third largest pension fund, closed down its China equity investment team based in Hong Kong, Reuters reported on April 25, citing sources.

In a statement to Reuters, OTPP spokesperson Dan Madge confirmed the firm will "no longer have country-focused stock-picking teams based in Asia", resulting in the departure of five of their staff in its Hong Kong office.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)