China's stock market is urging foreign investors to participate
In the dynamic world of global finance, China is experiencing a surge of interest from foreign investors. The creator of the AI model DeepSeek, a rival to ChatGPT, has sparked a 'revaluation of Chinese innovative assets,' according to industry experts.
This renewed interest is evident in the figures. Foreign direct investment in the first five months of 2025 slumped 13.2% from the year-earlier period. However, data shows a growing enthusiasm for China's $19 trillion stock market, including Hong Kong. August marked the biggest monthly buying of China stocks by global hedge funds in six months.
The demand for emerging market investments that do not include China has cooled substantially this year, with fewer new launches compared to previous years. This shift in focus towards China is evident in the strategies of asset managers like Polar Capital, a London-based firm. Polar Capital has pivoted to a positive stance on China and increased the China allocation to over 30% from the low 20% range within its emerging market portfolio this year.
Progress in China's adoption of artificial intelligence, semiconductors, and innovative drugs this year has given comfort to global investors. These advancements, coupled with the success of Chinese companies like DeepSeek, have encouraged renewed investor interest.
Notably, foreign investment firms like Allianz Global Investors and Morgan Stanley are re-evaluating China as a distinct asset class. Zheng Yucheng, chief investment officer of the China fund unit of Allianz Global Investors, stated that China is now seen as a standalone asset class.
Foreign investors are in a 'rerating' phase, focusing on China's long-term competitiveness. Brett Barna, a former hedge fund manager, plans to set up an investment platform that would allow US and European capital to access China's capital markets.
The return of foreign investors is encouraged by the tech opportunities and growing demand for diversification beyond US assets. However, the fragile economy is one of the main reasons that long-term capital inflows have not yet materialized, despite early movers coming in.
The attendance at Polar Capital's annual conference China session in February this year was more than double the attendance in 2023. Many non-Asia-based allocators are planning trips to China and Hong Kong later this year to explore investment opportunities, some for the first time since Covid.
Cheng Yu, a portfolio manager at the Allianz China fund unit, states that foreign capital is standing at the door and watching, but has not yet stepped in. Alexander Redman, CLSA chief equity strategist, is prevented from overweighting the entire market due to deflationary pressure in the economy.
However, Wu of Polar Capital states that the AI boom has to benefit the broader economy to sustain the rally beyond 2025. Benjamin Low, senior investment director at investment firm Cambridge Associates, has received 30 client inquiries about China funds this year, a sharp contrast to 2023.
Lastly, the Shanghai Composite Index touched a decade high last week, and Hong Kong stocks hit a four-year high due to the US-China tariff truce and domestic monetary easing. These positive market indicators further strengthen the case for foreign investors to reconsider China as a promising investment destination.
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