Money is About to Flow Into China, Just as It Pours Out of Tencent

By Steven Russolillo 

Asian stocks rose Monday as weekend diplomacy between Washington and Pyongyang revived the potential for a summit between President Donald Trump and North Korean leader Kim Jong Un. Japan's Nikkei 225 index rose 0.1%, the Korea KOSPI index gained 0.8% and Hong Kong's Hang Seng index rose 0.6%.

Monday's Big Theme

Mainland Chinese investors are yanking money out of Tencent Holdings Ltd. --one of the country's biggest and most high-profile companies--just as billions of dollars from around the world are expected to flow into China's markets this week.

What's Happening

An odd phenomenon is taking place this month: Investors on the mainland have pulled funds from Tencent, the tech titan behind the popular Chinese messaging app WeChat.

Mainland money has poured into Tencent for years through the trading vehicles that link China and Hong Kong--known as Stock Connect--and been a key pillar of support for the stock. Mainland investors were net buyers of Tencent stock every month from November 2016 through March, before turning slightly net sellers in April.

May has been different.

Those Mainland investors are on track this month to be heavy net sellers of Tencent, a rare occurrence since the Shanghai and Shenzhen Stock Connect programs were both open in late 2016, according to data from Wind Info. On Friday, Tencent experienced its second biggest daily outflow ever through these trading links.

Market Reaction

There are multiple theories at play here. One is fundamental: Concerns have mounted for months about the company's slowing growth and shrinking margins. Tencent's strong earnings report earlier this month was supposed to put those fears to bed. But the stock is still 15% below its record high in January, trading closer to this year's low than its high.

Another theory is related to a major upcoming event from MSCI Inc. The global index provider is on Friday set to include more than 200 mainland-listed Chinese stocks in its key indexes, giving global investors exposure to those stocks.

Mainland investors could be trying to front run the event, loading up on mainland-listed companies now and selling their Hong Kong stocks--think Tencent--in order to do so.

So far, that approach appears to be working. The Shanghai Composite, a benchmark index of mainland-listed stocks, is up 2.1% this month, whereas the MSCI China index--a separate gauge that includes Chinese stocks listed in Hong Kong and New York such as Tencent, Alibaba Group Holding Ltd. and Baidu Inc.--is up 1.6%.

Tencent holds the biggest weighting in MSCI China at 17%. Together with Alibaba and Baidu, those three stocks make up roughly a third of the index. None of them are in the Shanghai Composite.

If the trend holds, May would be only the third time in the past 18 months that the Shanghai would have outperformed MSCI China.

Elsewhere

The euro gained against the U.S. dollar after Italy's president rejected the formation of a new government supported by two anti-establishment parties. Crude-oil prices sank over 2%. Stock markets in the U.S. and the U.K. are closed Monday for public holidays.

Write to Steven Russolillo at [e-mail]

(END) Dow Jones Newswires

May 28, 2018 01:28 ET (05:28 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.