Foreign Investors Eye Major Return to China Stock Markets Amid Innovation Surge

Foreign investors are preparing to make a substantial comeback to China’s stock markets, three years after largely withdrawing amid concerns over investability. Renewed enthusiasm stems from China’s impressive advancements in artificial intelligence, semiconductors, and innovative pharmaceuticals, which have bolstered confidence that ongoing Sino-U.S. trade frictions and technology export restrictions have not stifled the country’s growth potential.

The recent U.S.-China tariff truce, coupled with supportive domestic monetary easing measures, has further improved market sentiment. Reflecting this optimism, the Shanghai Composite index recently reached its highest level in a decade, while the Hong Kong stock market recorded a four-year peak.

Market experts suggest that foreign investors re-entering China could accelerate the ongoing rally, which has so far been largely driven by domestic participants. Brett Barna, a former hedge fund manager now overseeing two New York-based single-family offices, noted, "China is interesting because it’s very uncorrelated to the rest of the world, at least the onshore A-share market." Barna revealed plans to establish an investment platform facilitating access to China’s markets for U.S. and European investors.

Data points to heightened interest: August saw the biggest monthly purchases of Chinese shares by global hedge funds in six months, according to Morgan Stanley. Meanwhile, emerging market funds excluding China experienced a decline in new launches this year, underscoring shifting investor priorities. Zheng Yucheng, chief investment officer of Allianz Global Investors’ China fund unit, emphasized the trend, stating, "A year ago, people wanted to exclude China from indices. Now, China is seen as a standalone asset class they cannot ignore."

Additional signs of confidence come from asset management firms like London-based Polar Capital, which transitioned from an underweight to a positive stance on China in late 2024. The firm has since increased China allocations from the low 20% range to over 30% within its emerging markets portfolio. Jerry Wu, Polar Capital’s fund manager, attributed the shift to "a revaluation of Chinese innovative assets," sparked by breakthroughs such as the AI model developed by DeepSeek.

Investment interest is also evident in client demand and planned visits. Benjamin Low from Cambridge Associates reported a surge in inquiries for China-focused funds, with many international investors scheduling trips to China and Hong Kong for the first time since the COVID-19 pandemic.

Despite these positive signals, challenges remain. China’s broader economy continues to face headwinds, with recent data showing subdued factory output and retail sales. Foreign direct investment in the first five months of 2025 declined by 13.2%, prompting new government measures to stimulate inward investment.

Alexander Redman, chief equity strategist at CLSA, highlighted ongoing deflationary pressures as a reason for cautious positioning, while Wu from Polar Capital stressed that the AI-driven market rally will need to translate into wider economic gains to sustain momentum beyond 2025.

Cheng Yu, portfolio manager at Allianz’s China fund unit, characterized the current environment as a "rerating" phase, with foreign capital on the sidelines weighing China’s long-term competitive strengths. "Foreign capital is standing at the door and watching. They haven’t stepped in yet — but are at least thinking about coming back," he said.

As global investors reassess China’s prospects, the $19 trillion market, including Hong Kong, looks poised for renewed international participation in the near future.

($1 = 7.1232 Chinese yuan renminbi)