(Bloomberg) — Global passive funds are putting added strain on the world’s worst-performing stock market as they join actively-managed peers in the January selloff of Chinese and Hong Kong equities.
Managers of benchmark-tracking funds have sold a net $300 million of shares traded in mainland China and Hong Kong this month, according to a Morgan Stanley analysis. That’s a reversal from the last half of 2023 when they bought $700 million on a net basis even as stock indexes declined.
“Their recent selling did amplify the downside pressure,” analysts led by Gilbert Wong and Laura Wang wrote in a note Thursday.
The rout in Chinese stocks deepened this year after a slew of disappointing economic data reinforced bearish sentiment. Hong Kong’s Hang Seng Index has slumped nearly 10% this month, making it the worst performer among major global benchmarks.
Meantime, the CSI 300 benchmark for mainland shares, which has slumped about 4.6% in January, saw the biggest outflow in more than a year on Wednesday as global funds sold a net 13 billion yuan ($1.8 billion) of stocks. The index rose on Thursday, with a jump in turnover in some major exchange-traded funds raising speculation that buying by state funds may be behind the reversal.
The bounce in Chinese shares Thursday was accompanied by a surge in ETF trading volumes, prompting speculation that state funds may have intervened to prop up the flagging market. Historically, however, support from the government-backed funds, known as the National Team, rarely stops the bleeding.
Read more: China’s Sudden Stock Rally Points to ETF Buying by State Funds
The Chinese stock market has fallen almost every day of the new year, and the opening bell Thursday seemed to signal yet another miserable session, with the CSI 300 Index dropping to a five-year low. But a sharp afternoon rebound helped the benchmark close the day up 1.4%, after slumping as much as 1.8%. Since 2005, these types of sharp reversals have only occurred on seven occasions, three of which came during the 2008 financial crisis.
Hong Kong’s stock slide on Wednesday was probably exacerbated by the triggering of automatic sell orders on structured products, according to several traders and analysts.
The Hang Seng Index slid from Wednesday’s open following worse-than-expected Chinese economic data, before the breaching of technical levels triggered knock-outs on a number of retail structured products, they said, with some requesting anonymity to discuss sensitive market matters. The benchmark gauge at one stage tumbled 4.2%.
“As soon as the market opened, Hong Kong stocks fell below the 15,800-point support level, causing many products in the derivatives market to be withdrawn,” said Edmond Hui, chief executive officer of brokerage Bright Smart Securities in Hong Kong. “The spot market triggered liquidation orders and stop-loss orders, thus intensifying the decline.”
US- and EU-based active funds have now sold $560 million of Chinese and Hong Kong equities this month, according to Morgan Stanley citing EPFR data. Still, that’s a slower pace than December’s $920 million drop.
Chinese growth and tech stocks took a particularly hard thrashing. Tech giants Tencent Holdings Ltd., Alibaba Group Holding Ltd., Baidu Inc., Meituan bore the brunt of the $2.3 billion in net sales this month, the Morgan Stanley analysts said.
At the same time, hedge funds are positioning for further declines in the growth and tech segment, according to the bank. A total of $1.7 billion of short positions have been added this month, mainly in Alibaba, BYD Co., Nio Inc. and JD.com Inc., the analysts estimated.