Uncertainty over Sino-U.S. trade talks have also played a part in shifting global appetite for Chinese equities, with the country's major indexes taking a beating this week after an unexpected escalation by Washington threw prospects for an agreement into doubt.
Net flows into the Shanghai and Shenzhen stock markets via the Stock Connect scheme totalled 4.4 billion yuan ($649.95 million) in March, down sharply from 60.4 billion yuan in February.
In April, there were outflows of 18 billion yuan, snapping a five-month streak of inflows since November, 2018.
The selling continued in May, with net outflows reaching about 11 billion yuan as of Wednesday, according to Refinitiv data.
"For large international institutional investors, the return had been pretty satisfactory for the year. Therefore it was reasonable to take profit after 30-plus-percent return while the corporate earnings didn't support a further rally," Louis Lu, a Hong Kong-based fund manager at CSOP Asset Management.
Chinese markets had rallied earlier in the year on expectations of more stimulus for the cooling economy, and on signs that Beijing and Washington were making progress in talks to end their trade war.
But investors began to temper their policy easing views after surprisingly upbeat March data, though weak April readings suggest the economy is still trying to find its footing.
(Shanghai stocks fall amid policy support, trade worries:
(Foreigners cut A-share holdings following robust rally:
(Foreigners cut stakes in China's leading consumer firms:
China's stocks fell the most in more than 3 years on the first trading session of May, as investors scrambled to dump stocks amid a fresh deterioration in Sino-U.S. trade relations.
U.S. President Donald Trump dramatically increased pressure on China on Sunday to reach a trade deal, saying he would hike U.S. tariffs on $200 billion worth of Chinese goods this week and target hundreds of billions more soon.
"We don't see it an opportunity to buy on the dip because the risk of trade dispute escalation significantly increased after the Trump’s threat", Lu added.
Zhang Gang, an analyst with China Central Securities, said it was natural for foreign investors to reduce holdings after the robust rally early in the year, given uncertainties including the Sino-U.S trade talks, U.S.-EU trade tensions and Brexit.
"Foreigners chose to lock in gains, partly as they worried China's monetary policy could turn marginally conservative after upbeat data pointing to signs of economic recovery," said Yan Kaiwen, analyst with China Fortune Securities.
Foreign capital inflows could return as China further opens up its capital markets, Yan said.
Global index provider MSCI is quadrupling the weighting of Chinese mainland shares in its global benchmarks later this year, a move it said might draw more than $80 billion of fresh foreign inflows to the world's second-biggest economy.
The index provider will increase the inclusion factor of Chinese large-cap stocks to 20 percent from the current 5 percent in three steps, with increments of 5 percent in May, August and November.
Among sectors most sold by foreign investors were liquor makers and home appliance makers that had drawn most of the inflows earlier in the year.
In particular, foreigners dumped China's leading liquor maker Wuliangye Yibin Co Ltd, even as the stock marched to a fresh high.
According to HKEX, investors via the Stock Connect linking Shenzhen and Hong Kong held a total of 291.7 million shares at end-April, down dramatically from 431.9 million shares at end-February.
(Reporting by Luoyan Liu and Noah Sin; Editing by Vidya Ranganathan and Kim Coghill)
By Luoyan Liu and Noah Sin