China stocks fall; hopes of upside on record monthly foreign inflows cut losses

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China and Hong Kong stocks fell on Tuesday, as investors booked profits after a strong rally that was fueled by record monthly foreign inflows, although analysts predicting upside ahead on growing signs of a post-COVID economic recovery limited losses.

** The correction could also be triggered by signs of an escalating Sino-U.S. technology war, and risk-off sentiment ahead of this week’s U.S. interest rate decision, Morgan Stanley said, adding, it “would take the current opportunity to recommend buy-the-dip.”

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** China’s bluechip CSI300 Index closed down 1.1%, while the Shanghai Composite Index fell 0.4%. Hong Kong’s Hang Seng benchmark lost 1%.

** For the month, though, the CSI300 jumped 7.4%, while the Hang Seng surged 10.4%.

** The recent market rebound was fueled by strong foreign money inflows, as global funds bet on China recovery after Beijing dropped strict COVID curbs last month.

** Despite the week-long Spring Festival break, China’s onshore stock market witnessed 141.3 billion yuan ($20.92 billion) in net foreign buying via Stock Connect in January, the biggest monthly inflows on record. It also surpassed total inflows in 2022.

** Official data showed that China’s economic activity swung back to growth in January, confirming that the economy had bottomed in December.

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** “We expect economic momentum to improve further in Q1 and Q2 as the service sector recovers and consumption normalizes,” wrote Zhiwei Zhang, president of Pinpoint Asset Management.

** But most China stocks fell as caution reigned.

** China tech stocks dropped 1.7% on media reports that the Biden administration has stopped approving licenses for U.S. companies to export most items to China’s Huawei, signaling an escalation in the Sino-U.S. tech war.

** Hong Kong tech shares also fell, following an overnight slump in U.S.-listed China stocks.

** Morgan Stanley said it stays “Overweight” on Chinese equities, citing on-track economic recovery, signs of Sino-U.S. ties stabilization, low correlation with the U.S. market, and attractive valuation. ($1 = 6.7533 Chinese yuan) (Reporting by Shanghai Newsroom; editing by Uttaresh.V and Rashmi Aich)