Cash flows into China funds fuel fears of 2015 boom-bust repeat

LONDON (Reuters) - Investors poured the most cash into China funds since July 2015, BofA said on Friday, even as fears grew of a repeat of the 2015-16 bubble that saw the benchmark Shanghai index fall more than 40% from its peak in just a few weeks.

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This week’s $6.1 billion directed into China funds was the second largest ever, BofA added, citing data from EPFR global.

Chinese funds also led equity inflows, receiving inflows equal to 2.5% of assets under management, compared to just 0.1% globally, the bank said.

Shares in the blue-chip CSI300 index have risen to levels not seen since the 2015 bubble, supported by hopes of an economic recovery, a conducive regulatory environment and retail investor enthusiasm.

Chinese state-run media, previously encouraging the rally, warned on Thursday that investors should respect the market, manage risks and pursue rational investments, after regulators published a list of illegal margin lending platforms in an apparent move to calm markets.

That paused the stock rally on Friday, the session ending lower for the first time since June 29, after the country’s state funds announced stake cuts in companies.

“It’s not the first time we’ve seen moves of this magnitude and it doesn’t typically end well,” said Craig Erlam, senior market analyst at OANDA.

“If we continue to see these efforts to encourage participation, I would be surprised if we don’t continue to see inflows. People don’t like to miss out on rallies like these, which is one of the things that makes them so dangerous.”

BofA’s report also showed weekly flows of $29.4 billion into cash funds, $17.8 billion into bonds funds, $6.2 billion into equities funds and $2.4 billion into gold funds. Emerging markets bonds saw their first inflow in four weeks.

The bank sees “cross asset sentiment moving quickly away from ‘extreme bearish’”, citing its Bull & Bear indicator, that tracks positioning.

Reporting by Julien Ponthus and Yoruk Bahceli; Editing by Andrew Heavens