Foreign investments in Chinese equities have surged to their highest level in four years, signaling a shift in global investor sentiment towards a market that was previously deemed “uninvestable.” Between January and October of this year, foreign inflows into Chinese stocks reached $50.6 billion, a significant increase from $11.4 billion in the entirety of 2024, according to data from the Institute of International Finance (IIF), a prominent trade association for the global banking sector.
The revival in Chinese equity markets comes as stocks in mainland China and Hong Kong have rebounded impressively, fueled by excitement surrounding artificial intelligence developments, such as DeepSeek’s innovative model, along with a robust series of public listings in Asia’s financial epicenter. This rebound follows several years marked by disappointing returns, during which international investors reduced their holdings due to growing concerns over slowing economic growth and escalating tensions between the United States and China.
Jonathan Pines, head of Asia ex-Japan equity at Federated Hermes, noted that “China still trades at a record discount to the rest of the world” while possessing some of the leading companies in the tech sector, positioning it as a formidable competitor to the U.S. in several areas.
Despite this year’s foreign buying remaining below the peak of $73.6 billion achieved in 2021—when the CSI 300 index rallied strongly after the early pandemic shock—it represents a notable turnaround after a protracted period of declining foreign investment. Yan Wang, chief emerging markets and China strategist at Alpine Macro, emphasized that just two years ago, many investors deemed China uninvestable.
Investors have faced challenges in gauging foreign flows due to Beijing’s decision to cease daily reporting of equity investment data through Hong Kong since last year. The IIF measures changes in external portfolio liabilities while excluding Chinese firms listed in the U.S.
Recent developments indicate an evolving picture; following the U.S. implementation of “liberation day” tariffs in April, approximately 55% of trading activity from various client segments has been purchasing Chinese equities, compared to 45% selling, as reported by Citi. While foreign active managers have predominantly sold Chinese shares this year, these outflows have been counterbalanced by strong contributions from passive funds, according to EPFR Global data.
The significant uptick in Chinese stock performance has largely been driven by domestic investors, with retail participants contributing a record HK$1.3 trillion (approximately US$168.7 billion) to Hong Kong’s markets in 2023, translating to about 20% of turnover on the exchange. Previously, foreign investors exhibited hesitancy towards Chinese stocks, influenced by the property market’s downturn, a clampdown on private enterprise, and escalating trade tensions with the U.S., leading to a near 50% decline in stock values from their peak.
As Daniel Morris, chief market strategist at BNP Paribas Asset Management, pointed out, there was a phase where discussions about China had dwindled, but recent trends have revived interest. The government’s prior crackdown on private businesses, illustrated by the notable fall of Alibaba founder Jack Ma, has widely been perceived as undermining investor confidence. However, authorities have recently initiated reforms aimed at revitalizing the markets.
The current resurgence in foreign equity inflows occurs amidst a backdrop of state pension funds in the U.S., like those of Texas and Indiana, divesting from Chinese firms due to volatile relations with the U.S. Nevertheless, some investors are eager to tap into Chinese technology companies, seeking diversification away from U.S. markets, which are nearing record highs. Many Chinese stocks, including Alibaba, continue to trade at historical discounts relative to their U.S. counterparts, prompting analysts like Morris to recommend a balanced approach: “You don’t want to put 100 percent of your portfolio in Nasdaq.”
