Can foreign investors accurately operate and obtain excess returns? Evidence from China

ABSTRACT This study examines the influence of foreign investors’ trading strategies on the earnings of China’s A-shares based on trading data from Shanghai-Shenzhen Stock Exchanges during the period of 2017 to 2020. The findings indicate a positive association between the net inflow of foreign capital and A-share returns, with foreign investors showing a preference for high-quality stocks in China. Additionally, foreign investors demonstrate precision in their operations, by purchasing stocks at low prices and selling them at high prices. Moreover, A-shares held by foreign investors show an ability to generate excess earnings, which can further amplify over time. Additional analyses suggest that when the A-share index rises, foreign investors sell significantly, but the buying volume is not significant; when the A-share index falls, foreign investors buy significantly, but the selling volume is not significant. When Shanghai-Shenzhen Stock Connect is closed, foreign investors will choose to sell more on the previous trading day in order to reduce their losses. This article provides powerful enlightenment for stock investors.