Foreign investors are planning a significant comeback to China’s stock markets, three years after stepping back and labeling them uninvestable. The allure comes from tech opportunities and a growing need for diversification beyond US assets.
China’s advancements in artificial intelligence (AI), semiconductor development, and innovative pharmaceuticals this year have reassured global investors. Despite the Sino-US trade tensions and Washington’s tech export bans, innovation in the world’s second-largest economy continues unabated.
The truce in US-China tariffs and China’s domestic monetary easing have further lifted investor sentiment. Consequently, the Shanghai Composite Index reached a decade high last week, while Hong Kong’s stocks hit a four-year peak.
The shifting perspective of foreign investors could potentially amplify the market rally, which has largely been driven by domestic participants so far.
Foreign investors are already returning to China, attracted by this year’s bull market and their quest to diversify away from overcrowded US assets, according to Brett Barna, a former hedge fund manager now overseeing two New York-based single-family offices.
“China is intriguing due to its lack of correlation with the global market, at least the onshore A-share market,” Barna noted, mentioning his plans to create an investment platform for US and European capital to access China’s markets.
Data on fund launches and flows highlight the growing enthusiasm for China’s $19 trillion (Dh69 trillion) stock market, including Hong Kong.
August witnessed the largest monthly purchase of Chinese stocks by global hedge funds in six months, as reported by Morgan Stanley, without specific figures.
Morningstar data revealed that new emerging market ex-China equity fund launches dropped to eight in 2025 from 21 in 2024 and 16 in 2023. This indicates a cooled demand for emerging market investments excluding China this year. “A year ago, people were excluding China from indices. Now, China is viewed as a standalone asset class,” remarked Zheng Yucheng, chief investment officer of Allianz Global Investors’ China fund unit.
Anecdotal evidence is also mounting. Polar Capital, a London-based asset manager with $20 billion (Dh73 billion), shifted to a positive outlook on China in late 2024 from an underweight stance and has increased its China allocation to over 30% from the low 20% range within its emerging market portfolio this year, according to fund manager Jerry Wu.
Polar Capital’s annual conference in February this year drew a full house of 55 clients for the China session, more than double the attendance in 2023, Wu added.
Momentum
“There is a revaluation of Chinese innovative assets,” triggered by DeepSeek’s breakthrough, said Wu, referring to the creator of a cost-efficient AI model rivaling ChatGPT. He noted that momentum has surged across AI, biotech, and robotics.
Benjamin Low, senior investment director at Cambridge Associates, mentioned his team received around 30 inquiries about China funds this year, a stark contrast to the minimal queries in 2023.
Many non-Asia investors are planning trips to China and Hong Kong later this year to explore investment opportunities, some for the first time since COVID-19, he noted.
However, some of China’s long-standing challenges persist. The broad economy remains weak, as shown by August’s factory output, retail sales data, and other indicators.
Foreign direct investment in the first five months of 2025 slumped 13.2% from the previous year, prompting China to announce new measures in July to counter the decline.
The fragile economy is a key reason why early entrants have not yet led to significant long-term capital inflows.
CLSA chief equity strategist Alexander Redman stated that deflationary pressures prevent him from overweighting the entire market. Wu of Polar Capital added that the AI boom must benefit the broader economy to sustain the rally beyond 2025.
Foreign investors are in a “rerating” phase, focusing on China’s long-term competitiveness, according to Cheng Yu, a portfolio manager at Allianz China fund unit.
“Foreign capital is observing from the sidelines. They haven’t stepped in yet, but they are considering a return.”
