China stocks see the biggest inflows in 14 weeks

Chinese stocks saw their biggest inflows in 14 weeks last week, when emerging market equity funds saw their first inflows in five weeks, the latest data show.

Flows into China equity funds were equivalent to 0.9% of assets under management in the week that ended on May 20, the data published by Bank of America Merrill Lynch show.

However, year to date Chinese equities have seen $21.6 billion worth of outflows, despite booking a gain of nearly 23% — some 15% above the index’s 200-day moving average.

An indicator tracking the progress of the Chinese economy calculated by researchers at Austrian bank Raiffeisen shows the economy may be past its worst.

The China Economic Indicator is a quantitative indicator based on data published monthly and aimed at giving a better assessment of the Chinese economy than the quarterly-published GDP figure.

The calculations rely on monetary policy indications (40%) and real economy figures (60%), and the index is scaled between +1 (above long-term trend) and -1 (below long-term trend). It showed a marked improvement to -0.84 in May from -0.98 in the previous month.

Both its components indicate an improvement, which is likely to reflect in GDP later.

ChinaEconomic Indicator

Chinese stocks could partly react to an improvement in the China Economic Indicator. Source: Raiffeisen.

But the surge in Chinese stocks this year has little to do with economic performance, having been mainly fuelled by margin lending – when brokers lend money to investors to buy stocks and investors guarantee the loans with the stocks – according to a report in the Financial Times.

This all works well as long as the market rises, but downward movements can be greatly exaggerated by this practice, as the shares used as collateral may have to be sold, triggering a spiral of selling.

In other capital flows news, Japanese equities saw their 13th straight week of inflows, the longest streak of inflows for the asset class in two years.

European equities are “back in vogue” in the words of analysts at Bank of America Merrill Lynch, with their first inflows in three weeks, worth $3.2 billion – the largest in six weeks.

US stocks remained a contrarian trade. US equity funds saw $8.5 billion in outflows in the week that ended on May 20. They saw outflows in 17 of the past 20 weeks, totalling $107 billion.

In fixed income, investment grade bond funds saw their 74th straight week of inflows, with another $2.1 billion going in.

High yield bond funds saw small inflows worth $300 million, the first inflow in five weeks.

Treasury Inflation Protected Securities (TIPS) funds saw their tenth week of inflows, with $200 million going in.

It was the ninth straight week of inflows to emerging market debt, with $200 billion going in.