Foreign investors are receiving invitations from China's stock market
China's tech sector is experiencing a resurgence, with foreign investors showing renewed interest in the country's stock markets. This revival has been triggered by the development of a highly cost-efficient AI model, DeepSeek, which rivals ChatGPT.
The return of foreign capital is evident in the significant increase in attendance at the China session at Polar Capital's annual conference this year. The session attracted more than double the attendance compared to 2023. Brett Barna, a former hedge fund manager, is planning to set up an investment platform to allow US and European capital access to China's capital markets.
Polar Capital, a London-based asset manager, has also increased the China allocation in its emerging market portfolio to over 30% this year. This move reflects the growing confidence in China's economic recovery and its long-term competitiveness.
However, the broad economy remains mired in weakness, as suggested by August factory output, retail sales data, and other indicators. Despite this, foreign investors are currently in a 'rerating' phase, focusing on China's long-term potential rather than short-term economic fluctuations.
China is increasingly being seen as a standalone asset class that cannot be ignored. Increasing investments in the Chinese stock market in recent months have been driven mainly by domestic capital, state funds, and private wealth, supported by the People's Bank of China’s liquidity measures and growth sectors like AI and electric mobility. Institutional investors such as Aberdeen Investments have highlighted capital flows from mainland China into Hong Kong stocks, especially in internet firms and new economy sectors.
Despite the positive momentum, foreign investors remain cautious. The fragile economy is one of the main reasons that while early movers are coming in, it has not yet translated into meaningful long-term capital inflows. The deflationary pressure in the economy is preventing some foreign investors from overweighting the entire market.
Foreign capital is standing at the door and watching, they haven't stepped in yet – but are at least thinking about coming back. 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.
The Sino-US trade war and Washington's tech export bans have not hindered China's progress in AI, semiconductors, and innovative drugs. August marked the biggest monthly buying of China stocks by global hedge funds in six months. Last week, the Shanghai Composite Index touched a decade high, and Hong Kong stocks hit a four-year high.
However, the demand for emerging market investments that do not include China has cooled substantially this year. The AI boom has to benefit the broader economy to sustain the rally beyond 2025, according to Wu of Polar Capital.
In July, China unveiled new measures to reverse the decline in foreign direct investment, which slumped 13.2% in the first five months of 2025. Benjamin Low, senior investment director at Cambridge Associates, has received 30 client inquiries about searching for China funds this year, a sharp contrast to the trough in 2023.
The AI revolution and economic recovery in China are attracting foreign investors back to its stock markets, but the fragile economy and deflationary pressure are causing caution. As China continues to innovate and recover, it remains to be seen whether foreign investors will step in with meaningful long-term capital inflows.
