Middle East ups play in China shares

Sovereign funds' interest in select sectors shows confidence in economy

Sovereign funds in the Middle East have increased their investments in Chinese stocks as the region's appetite for renminbi-denominated assets grows amid its reducing reliance on the U.S. dollar, experts said.

That the sovereign funds are increasing investments despite recent market corrections also indicates the robust appeal of renminbi-denominated assets to long-term investors, especially as the Chinese economy has shown signs of stabilization and may pick up soon, they said.

Abu Dhabi Investment Authority, the Middle Eastern sovereign wealth fund with the most managed assets, is in the process of purchasing 156.7 million shares of Hong Kong-listed Shandong Fengxiang Co Ltd via its arm at HK$1.51(19 cents) per share.

After the transaction, ADIA will hold an indirect stake of about 9.9 percent in the Chinese chicken product producer, according to Fengxiang's recent announcement.

Media reports indicated that Abu Dhabi sovereign investor Mubadala Investment Co opened its Beijing office last week.

In the second quarter, ADIA became a new major shareholder of 10 A-share companies, including Zijin Mining Group Co Ltd, one of China's biggest gold producers, while Kuwait Investment Authority bought shares of 11 A-share companies.

According to data compiled by financial news provider STCN, sovereign wealth funds now rank among the top 10 free-float shareholders of 89 A-share companies as of the end of June.

"The increased holdings reflect the confidence of Middle Eastern countries in China's economy," said Calvin Fu, chairman of the China Innovation Finance Institute.

The trend is set to continue as Middle Eastern funds gain a deeper understanding of China's economy and financial market against a backdrop of the country's deepening bilateral cooperation with the Middle East for production capacity, investment and innovation, Fu said.

Yang Fan, an analyst with CITIC Securities, said about 20 billion yuan ($2.74 billion) from Middle Eastern investors is expected to flow into Chinese A shares each year, with focus on sectors like manufacturing and utilities, as countries in the Middle East receive more renminbi payments from China for oil transactions.

Some other long-term investors have also beefed up their A-share investments. Meng Lei, China equity strategist at UBS Securities, said stock exchange-traded funds have seen a net increase of 99.8 billion units in August, suggesting that some long-term investors accelerated adding positions via ETFs on dips.

This happened despite recent market drops, which have triggered some short-term capital outflows via the northbound trading of the stock connects between the exchanges on the Chinese mainland and Hong Kong.

"Although northbound flow could temporarily deviate from the trendline in the short term on slowing economic activities and disruptions from geopolitical risks, in the medium term, northbound flow should return to the long-term net inflow trendline as China's economic activities stabilize and rebound," Meng said.

Adding to signs that China's economy is bottoming out, the country's increment in aggregate social financing — the total amount of financing to the real economy — came in at 3.12 trillion yuan in August, up by 631.6 billion yuan year-on-year and compared with 528.2 billion yuan in July, according to the People's Bank of China, the country's central bank.

The rebound was attributable to seasonal factors as well as ramped-up local government bond issuances, experts said, with net bond financing by the government rising 871.4 billion yuan year-on-year to 1.18 trillion yuan.

China's A-share market strengthened on recovering financing data, with the benchmark Shanghai Composite Index up 0.84 percent at 3142.78 points on Monday, led by sectors like computer hardware and medicine.