As China’s economy continues to decline and geopolitical risks increase, there has been a surge in foreign capital outflows in recent years. The Chinese government officially announced that starting from August 19, the real-time trading data representing foreign capital flow known as the Northbound Funds in the Shanghai and Shenzhen stock exchanges will no longer be disclosed through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect. This decision has added difficulty to observing the situation of foreign capital withdrawal from China. Experts indicated that this move by the Chinese Communist Party (CCP) aims to gloss over the situation, but it brings about many negative impacts, and such restrictive measures may further worsen the situation.
According to the official notification, adjustments have been made to the disclosure mechanism of trading information in the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connects. Beginning on August 19, only the total trading volume and total number of transactions will be disclosed after the close of each trading day.
Under the new mechanism, investors can still access information about the net buying and selling data of Northbound Funds and the top ten most active stocks for the day on the Shanghai and Shenzhen stock exchanges. The Hong Kong Stock Connect has also been adjusted so that the remaining quota of Northbound Funds will only be disclosed in real-time when it falls below 30%, and if it remains above 30%, only the message “quota sufficient” will be displayed without revealing the remaining quota.
The Shanghai-Hong Kong Stock Connect allows Hong Kong investors (usually referring to foreign capital) to trade Shanghai-listed stocks in Hong Kong, while Shanghai investors can trade Hong Kong-listed stocks in Shanghai. Similarly, the Shenzhen-Hong Kong Stock Connect allows Hong Kong investors to trade Shenzhen-listed stocks in Hong Kong, and Shenzhen investors can trade Hong Kong-listed stocks in Shenzhen.
Northbound Funds, also known as “smart money,” have been increasingly influential in the market. With the real-time trading data of the Shanghai and Shenzhen stock connects no longer being disclosed, the flow of foreign capital investing in A-shares through Hong Kong has been effectively cut off, making it impossible to calculate the inflow and outflow of foreign capital in China and causing Chinese investors to lose a quick way of tracking the “smart money.”
Professor Wanjun Qiu from the Finance and Economics Department of Northeastern University in Boston, USA, expressed to the media that all investments require comprehensive information to evaluate returns and risks accurately. With relevant information being withheld, investments become more speculative, leading investors to perceive this official action as a negative signal. They would speculate on what might have happened behind this policy and consequently lose trust in the CCP government.
Xi Jinping and the highest-ranking official in the CCP propaganda system, Cai Qi, have continuously emphasized the “bright economic theory.”
Qiu Wanjun believes that the authorities’ actions may be based on the need to maintain a facade of stability. The CCP has been trying to prop up the stock market without much success, and seeing foreign capital starting to exit could undermine confidence among investors.
“The lack of transparency in Chinese information and data has been an issue in the past. Many statistical data points have ceased publication without proper explanations, or they have been re-released with new methods to gloss over the truth and mask the real situation. This hinders the development of the Chinese economy and impairs investors’ ability to evaluate the health of the Chinese economy.”
Data released by the Chinese Ministry of Commerce on August 16 also showed a continued departure of foreign capital from China. In the first seven months of this year, foreign direct investment (FDI) in China decreased significantly by 29.6% compared to the previous year. In 2023, total FDI into China was $33 billion, an 82% decrease from 2022, marking the lowest record since 1993.
In mid-July, a week after the third plenum of the CCP, the stock market fell below 2,900 points again. On the first day after the implementation of the adjusted Shanghai-Hong Kong and Shenzhen-Hong Kong stock connect trading information disclosure mechanism on August 19, there was a slight rebound in the Shanghai and Shenzhen stock markets, with the Shanghai Composite Index briefly surpassing the 2,900-point mark. However, on August 20, the Shanghai Composite Index fell again.
American economist David Huang, currently residing in the United States, stated that the authorities’ change in the trading information disclosure mechanism of the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connects has a significant impact on foreign capital investors.
“Foreign investors mainly invest through funds and corporations. For short-to-medium-term foreign investors, they will reduce trading frequency because there is no reliable real-time data to reference. As for medium-to-long-term investors, they have always relied on real-time data and intraday data for statistical analysis, comparing them with aggregate data to verify accuracy. Without real-time data now, the accuracy of the final data cannot be verified. Therefore, medium-to-long-term investors will be more cautious, possibly reducing their trading frequency and even relocating part of their investments.”
He believes that overall, the CCP’s restriction on real-time trading data has considerably negative impacts on foreign capital involvement in investing in Chinese securities, and this mechanism might further deteriorate in the future.
“The non-disclosure of data is a way of deceiving oneself. People are even more concerned that in the future, not only will data be published belatedly, but it may also be falsified, and the data might be completely contrary to the actual situation, which is a more worrying scenario for foreign capital. In the medium to long term, this is a very negative move for foreign capital entry into China, especially in the financial market.”
Qiu Wanjun believes that this action by the CCP will not directly accelerate the withdrawal of foreign capital from China.
“There are many reasons for foreign capital leaving and withdrawing from China, which may not necessarily be directly related to the cessation of data publication. Withholding real-time data increases market uncertainty and diminishes market transparency. However, what truly determines the inflow and outflow of foreign capital still depends on how promising the investment prospects in China are. The main reason for the outflow of foreign capital is the forecasted economic growth situation in China.”
The recent emphasis by the CCP on further opening up to the outside world was reflected in the State Council executive meeting chaired by Premier Li Keqiang on August 19, where the opinions on promoting the high-quality development of service trade through high-level openness and the Special Management Measures for Foreign Investment Access (Negative List) in 2024 were deliberated and approved.
However, the tightening of political and economic information by the authorities has become increasingly frequent in recent years. Data related to the economy, such as land sales, foreign exchange reserves, bond transactions, and more, have been banned. The decision to withhold the real-time trading data representing foreign capital flows underscores a political motive behind the authorities, drawing attention to it.
David Huang pointed out that while it may seem contradictory for the CCP to open up while also closing off information, in reality, it aligns with the same political goal of serving the stability of the regime. The CCP’s openness is motivated by the necessity of maintaining the orders from foreign enterprises and foreign capital to sustain the authority, while simultaneously fearing that foreign businesses and capital may bring in cultural influences that challenge the CCP’s control over society.
Qiu Wanjun mentioned that the primary focus of the CCP’s third plenum has always been to map out the blueprint for future economic development. However, the conference held last month served to repeat past themes with few concrete policies announced—more slogans than specifics. Although speaking about reform and opening up, the emphasis remains on the CCP’s leadership. The authorities have consistently tied socialism and market economy together, despite being fundamentally opposite, which leads to many contradictions in the CCP’s economic policies.