No longer ‘uninvestable’! Shanghai index hits decade high; foreign investors eye China’s stock markets again as AI, tariff truce boost confidence
After years of scepticism and branding Chinese stock markets as “uninvestable”, foreign investors are once again turning their attention to Chinese equities, betting on the country’s resilience in artificial intelligence, semiconductors and biotech as well as a growing need for diversification beyond US assets.Progress in China’s AI adoption, its push in semiconductors, and breakthroughs in biotech this year have reassured investors that the Sino-US trade war and Washington’s export restrictions have not derailed innovation in the world’s second-largest economy, Reuters reported.Adding to the momentum, a US-China tariff truce and supportive domestic monetary policy have improved sentiment, helping the Shanghai Composite index touch a decade high last week, while Hong Kong’s benchmark hit a four-year peak.Hedge funds, allocators revisit ChinaForeign early movers have already started returning, lured by the 2025 bull run and seeking diversification away from crowded US assets. “China is interesting because it’s very uncorrelated to the rest of the world, at least the onshore A-share market,” Brett Barna told Reuters, a former hedge fund manager who now runs two New York-based single-family offices. He added that he plans to set up an investment platform allowing US and European capital to access Chinese markets.Data backs the shift. Morgan Stanley said August saw the largest monthly buying of China stocks by global hedge funds in six months. Meanwhile, Morningstar noted that new “emerging market ex-China” fund launches fell sharply to eight in 2025, compared to 21 in 2024 and 16 in 2023—reflecting cooling demand for EM products excluding China.“A year ago, people wanted to exclude China from indices. Now, China is seen as a standalone asset class (they cannot ignore),” said Zheng Yucheng, chief investment officer of the China unit of Allianz Global Investors.Asset managers ramp up allocationsLondon-based Polar Capital, which manages $20 billion, pivoted to a positive stance on China in late 2024, raising its allocation to over 30% from the low 20% range within its EM portfolio. “There is a revaluation of Chinese innovative assets,” said fund manager Jerry Wu, citing AI firm DeepSeek’s cost-efficient model rivaling ChatGPT.Wu added that interest has surged across AI, biotech, and robotics. Polar’s annual conference in February drew 55 clients for the China session—more than double 2023’s attendance.Benjamin Low, senior investment director at Cambridge Associates, said his team has handled about 30 client inquiries for China funds this year, a stark contrast to 2023’s near absence of interest. Many allocators from outside Asia are now planning trips to China and Hong Kong, some for the first time since COVID-19, to explore opportunities.Challenges persist despite optimismDespite the turnaround in sentiment, structural concerns remain. China’s economy continues to show weakness, with August factory output and retail sales data underscoring sluggish demand. Foreign direct investment fell 13.2% in the first five months of 2025, prompting Beijing to unveil new measures in July to stem the decline.CLSA chief equity strategist Alexander Redman cautioned that deflationary pressures are preventing him from overweighting the market. Wu of Polar Capital also warned that AI’s momentum must translate into wider economic benefits for the rally to last beyond 2025.Foreign investors, analysts said, are now in a “rerating” phase, reassessing China’s long-term competitiveness. “Foreign capital is standing at the door and watching. They haven’t stepped in yet — but are at least thinking about coming back,” said Cheng Yu, portfolio manager at Allianz China.The Chinese stock market, including Hong Kong, is valued at nearly $19 trillion. August’s surge in foreign interest suggests early signs of a broader revival, though the durability of inflows will depend on how Beijing balances innovation with broader economic stability.
