Foreigners head for exits after Chinese stocks surge

International investors are cashing out of China's world-beating equity rally.

Foreigners sold a net 1.7 billion yuan ($274 million) of Chinese shares via the Shanghai-Hong Kong exchange link in the week through Monday, while the two biggest Hong Kong exchange- traded funds tracking mainland stocks had withdrawals of $622 million. Money flowed out of the link again on Tuesday as the Shanghai Composite Index dropped from a seven-year high.

Global investors are losing faith in the rally even as mainland traders open up stock accounts at the fastest pace on record and authorities endorse gains that have doubled China's market capitalisation over the past year to a record $6.5 trillion. While locals are focused on prospects for monetary stimulus, UBS Group AG says foreigners are concerned it hasn't done enough to revive the world's second-largest economy.

"The A-share market is in a bubble stage," said Wenjie Lu, a strategist at UBS in Shanghai. "It makes sense for foreign investors to take profits."

Overseas investors sold a net 1.3 billion yuan of mainland shares through the exchange link at the local close. The Shanghai Composite fell 1 per cent, after earlier gaining as much as 1.3 per cent. It traded at 14.5 times estimated earnings for the next 12 months on Monday, the most expensive level since November 2010.

ETF outflows
The $9-billion iShares FTSE A50 China Index ETF has recorded outflows of $226 million during the past week, while the CSOP FTSE China A50 ETF had withdrawals of about $396 million, according to data compiled by Bloomberg.

The Shanghai Composite's relative strength index reached 81 on Tuesday, the highest among major markets worldwide. Readings above 70 are a signal to some traders that shares have climbed too far, too fast.

Hao Hong, a strategist at Bocom International Holdings Co in Hong Kong, said last week that while shares may be in bubble territory, they have further to climb as China's government maintains its support for the rally and keeps borrowing costs low. His target of about 4,000 for the Shanghai Composite implies a gain of 5.6 per cent from Monday's close.

Mainland traders opened about 1.7 million new stock accounts in the week ended March 27, the most on record and a 47 per cent jump from the previous week, China Securities Depository and Clearing Co said on Tuesday.

Investors will get another read on economic growth Wednesday as China releases official manufacturing data. The Purchasing Managers' Index probably declined to 49.7 in March from 49.9 in February, according to a Bloomberg survey of economists.

A preliminary PMI from HSBC Holdings Plc and Markit Economics came in at 49.2 on March 24, missing the median estimate of 50.5. Industrial output and investment trailed projections in the first two months of 2015.

"If you look at all the macro numbers, they are just deteriorating," Lu said. "Foreign investors look at the China market more from a top-down approach. It is natural for them to be more cautious."