Skip to content
More from
Bloomberg
Opinion
relates to Getting Real About Electric Cars,  Batteries and Hype
relates to Should America Boycott China’s 2022 Olympics? relates to Malaysia's Political Jockeying Is a Distraction relates to This Post-Election Scenario Should Worry Wall Street relates to Is Covid-19 Airborne? The CDC Can't Say Yet relates to Don’t Blame the Pipeline for Your White Male Workforce relates to Trump’s Threat to Democracy Threatens the Economy relates to A ‘Color Revolution’? Democrats Are Not Planning One relates to Trump May Be Losing His Grip on Farm Country relates to This $3.4 Billion Suez Crisis Looked Avoidable relates to Getting Real About Electric Cars,  Batteries and Hype
relates to Should America Boycott China’s 2022 Olympics? relates to Malaysia's Political Jockeying Is a Distraction relates to This Post-Election Scenario Should Worry Wall Street relates to Is Covid-19 Airborne? The CDC Can't Say Yet relates to Don’t Blame the Pipeline for Your White Male Workforce relates to Trump’s Threat to Democracy Threatens the Economy relates to A ‘Color Revolution’? Democrats Are Not Planning One relates to Trump May Be Losing His Grip on Farm Country relates to This $3.4 Billion Suez Crisis Looked Avoidable relates to Getting Real About Electric Cars,  Batteries and Hype
relates to Should America Boycott China’s 2022 Olympics? relates to Malaysia's Political Jockeying Is a Distraction relates to This Post-Election Scenario Should Worry Wall Street relates to Is Covid-19 Airborne? The CDC Can't Say Yet relates to Don’t Blame the Pipeline for Your White Male Workforce relates to Trump’s Threat to Democracy Threatens the Economy relates to A ‘Color Revolution’? Democrats Are Not Planning One relates to Trump May Be Losing His Grip on Farm Country relates to This $3.4 Billion Suez Crisis Looked Avoidable
Markets

Watch China Inc.’s Insider Selling

Billions in cash from abroad won’t move the needle. Look instead at what company management is doing.

Updated on

Watch China Inc.’s Insider Selling

Billions in cash from abroad won’t move the needle. Look instead at what company management is doing.

Making sense of it all.

Making sense of it all.

Photographer: Qilai Shen/Bloomberg

Making sense of it all.

Photographer: Qilai Shen/Bloomberg

Foreigners are finally warming to China. 

It’s no surprise: In just two months, the country’s stock market has done a 180. Investors from abroad were net buyers of more than 120 billion yuan ($18 billion) of shares this year through Hong Kong’s Stock Connect. In hindsight, MSCI Inc.’s decision to include mainland stocks in its benchmark indexes last May seems like a wise one. 

Late Thursday in New York, MSCI said it will increase the weighting of A shares in its China indexes and related benchmarks by raising the so-called inclusion factor – the ratio of mainland stocks' market cap that's included in the index – to 20 percent from 5 percent. As a result, China’s stock market can expect another $60 billion of buying, estimates Goldman Sachs Group Inc.

This flood of foreign money is a bullish sign for Chinese stocks, enthusiasts say. 

Not so fast. 

Take a look at who owns China’s $6.4 trillion stock market. At 2.2 percent, foreigners’ sway is tiny. And while local retail investors are blamed for the 2015 stock-market frenzy, they hold only 20 percent. The majority of shares are still controlled by insiders: founders, management and parent holding companies. 

Who's the Boss?

Business insiders -- founders, management and parent holding companies -- are the majority shareholders in China's $6.4 trillion stock market

Source: Banxia Fund

As early as May 2017, China’s securities watchdog tightened regulation on stock sales by majority shareholders. The move was intended to protect retail investors and strengthen corporate governance. 

But that hasn’t stopped insiders from selling, even at the risk of facing the regulator’s ire. In the three weeks ended Feb. 23, such investors – concentrated among firms listed on the private-sector ChiNext board – were net sellers of more than 4 billion yuan of shares, according to data compiled by Sinolink Securities Co. On Monday and Tuesday, when daily trading volume exceeded 1 trillion yuan, close to 80 companies filed insider-selling disclosures with the Shanghai and Shenzhen exchanges.

Sell on High

In the first three weeks of February, company insiders were net sellers of 4.4 billion yuan of stocks

Source: Sinolink Securities

It’s not hard to see why. China’s private sector is battling a crisis of confidence. Entrepreneurs are fleeing the country and curtailing their spending on equipment and machinery. The central bank’s credit disproportionately benefits state-backed firms. Nowadays, local government financing vehicles can issue bonds more cheaply than their private-sector peers. High-yield enterprises – real estate developers, for instance – still can’t raise new notes onshore. 

When Fortune Strikes

Local government financing vehicles are the bigger beneficiaries of China's liquidity easing. They can now issue bonds more cheaply than their corporate peers

Source: Bloomberg

Note: Because of severe credit-ratings inflation, AA bonds are often perceived as high-yield.

If you were a lucky entrepreneur at a ChiNext-listed company, wouldn’t you maximize this rare bull window and sell, too? 

Those betting on foreign money to stabilize China’s stock market are simply delusional. As developing countries from Indonesia to Argentina have discovered, a nation that relies on hot money from abroad is an unstable one. Will these investors stay in China’s stock market if Beijing can’t reach a trade agreement with the U.S., or the Federal Reserve continues to taper its balance sheet?

MSCI’s indexes are just guidelines – portfolio managers can always go “off the benchmark.” If Beijing really wants a slow bull, forget about lobbying index providers and massaging trading volumes. Lift private entrepreneurs’ spirits instead. 

    This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Shuli Ren at sren38@bloomberg.net

    To contact the editor responsible for this story:
    Rachel Rosenthal at rrosenthal21@bloomberg.net