SHANGHAI, Jan 22 (Reuters) - Hong Kong shares slumped 2% to a 14-month low on Monday and Chinese stocks were struggling, despite signs of support from state-backed funds, as foreign outflows continued over concerns about the region's deepening economic woes.
Faced with weak domestic markets, mainland Chinese investors are rushing into funds that invest in overseas markets, such as Japan and India, triggering warnings from money managers to be cautious and restrictions on outflows.
Hong Kong's Hang Seng Index tumbled 2% to the lowest level since November 2022, led by property and tech shares.
China's bluechip CSI300 Index fell as much as 0.6% to hover just above a five-year low before levelling off, while the Shanghai Composite Index fell 0.9% by the lunch break, a whisker from 2,800 points, seen as a psychological support level.
"Investors confidence remains weak toward domestic economic policies," Minsheng Royal Fund Management Co said in a note to clients.
Data last week showed China's economy grew slightly more than the government's official target, but the recovery was far shakier than many analysts and investors had expected.
Market sentiment was also dampened by Donald Trump's victory in the Iowa Republican caucus, Minsheng said, given the former U.S. president "proposes tough stance on China." Polls point to Trump securing the Republican nomination for November's presidential election.
Morgan Stanley said that overseas funds have sold roughly $1.6 billion in Chinese equities collectively so far this year, driven mainly by European active funds and Hong Kong passive money.
Citing "significant" downward revision pressure on corporate earnings, the investment bank estimates that EU investors could sell another $1.8 billion in Chinese stocks, while Hong Kong passive funds could sell an additional $250 million.
After a long slide in Chinese stock values, Zhou Zhishuo, fund manager at CCB Principal Asset Management, says any potential recovery will take time.
"Just as the economy won't recover overnight, the path of stock market recovery would also zigzag," Zhou said in a quarterly report of this fund..
In Hong Kong, stocks fell across the board with property and consumer stocks tumbling.
"The negative wealth effect, caused by the sagging equity and housing market, will likely dent local consumer sentiment in periods ahead," said OCBC's head of Greater China research Tommy Xie.
Reflecting Chinese demand for overseas stocks, mainland exchange-traded funds (ETFs) tracking Japanese stocks trade at a premium to their net asset values, prompting warnings from money managers to investors.
Meanwhile, a Chinese fund targeting India stocks has restricted subscriptions, joining a growing number of outbound funds that are curbing investment, partly owing to capital controls on overseas investment. (Reporting by Shanghai Newsroom: Editing by Neil Fullick)
