In the post-pandemic era, one of the ABCs of investing has been “anywhere but China.”
Global investors have been steering clear as Beijing struggles with deflation and a prolonged property downturn. Demand for so-called “ex-China” strategies has been booming, as index providers built new emerging-markets benchmarks that exclude the world’s second-largest economy.
But as Shanghai and Shenzhen-listed equities start to outperform, investors are asking if it’s time to chase the rally. After all, major markets from the US to Japan have hit their record highs this year, so why not China? Plus, money managers have come to terms with ample liquidity driving global equity gains for an extended period of time. Now that the famously thrifty Chinese households start to deploy their massive savings into domestic stocks, why not join the ride there as well?
Of course, many things can go wrong. Plenty of asset managers lost their shirts after Beijing’s harsh regulatory crackdowns on big tech and real estate developers in 2021. The mainland market’s spectacular boom and bust in 2015 is also a reminder of how dangerous China’s retail-driven investors can be.
How can the government regain foreigners’ trust? This question matters because global asset managers are seen as smart money in the mainland. Even mom-and-pop traders look at international portfolio inflows to decide whether Chinese stocks are worth buying.
I have two suggestions that can make an immediate difference. First, try to slow down the bull market. Given this checkered history, convincing big asset managers’ investment committees to redeploy money to Chinese equities takes time. A furious rally, such as the one a year ago when hopes of a stimulus bazooka sent the CSI 300 soaring 30% in six trading days, inevitably results in foreigners sitting on the sidelines. By the time they are ready to purchase, stocks have become too expensive.
The government has explicit tools to tamper the rally, in the form of the “national team,” a group of institutional investors that tend to buy index funds during market routs. In early April, when President Donald Trump’s “Liberation Day” tariffs led to global selloffs, Central Huijin Investment Ltd., a domestic unit of the sovereign fund China Investment Corp., openly pledged to support markets. For the first time, it declared itself a member of the national team, an important trigger to this year’s rally. Investors now seem to believe there’s a “Xi put,” akin to the “Fed put,” in Chinese stocks.
The same Xi put can also tame volatility. Huijin buys index funds such as Huatai-Pinebridge CSI 300 ETF, whose daily flows and trading volumes are carefully tracked by domestic investors. Selling its holdings — Huijin owned 1.3 trillion yuan ($180 billion) as of the end of June — when the market gets frothy will send a clear signal of the state’s intent. This operation can also discourage momentum-driven traders who buy stocks based purely on trend lines.
Second, Beijing can establish the narrative that China cares about return on capital, that the government’s tech ambitions won’t get in the way of company earnings.
A major catalyst to this year’s rally is the nation’s breakthrough in AI. The arrival of DeepSeek on the world stage animated big tech from Tencent Holdings Ltd. to Alibaba Group Holding Ltd., which touted their own reasoning models. In recent weeks, as Nvidia Corp. halted production of its H20 chips tailor-made for China, designers such as Cambricon Technologies Corp. became market darlings.
Globally, one nagging issue is whether big tech is spending too much on AI infrastructure and how innovative the latest large-language models are. These concerns would be even more pronounced in China given its long track record of investment booms and busts. The bankruptcy of Tsinghua Unigroup Co., the closest the country had to Samsung Electronics Co., in 2021 offers a vivid case study.
As China evolves from building its own AI models to redrawing the supply chain, authorities need to be careful how they spell out their vision. To global investors, the odds are poor if local designers try to replace Nvidia in making chips for training models, simply because the American firm is so far ahead. On the other hand, they might be more intrigued if Chinese companies only want a shot at selling chips used for inference, which creates responses from pre-trained models and produces texts as well as images for people who use generative AI tools. These chips are less advanced but more cost-effective.
For now, Beijing seems to be on the right track. President Xi Jinping has recently said little about AI’s holy grail — achieving artificial general intelligence, or AGI — but is pushing the industry to be “strongly oriented toward applications.” So it’s not hard to imagine that over time companies like Cambricon can thrive and hand out stellar earnings.
Right now, there’s a wide gap between global investors’ interest in Chinese stocks and their portfolio allocations. People are still not sure whether to chase the rally. To get foreign money in again, top officials need to make sure China’s $13 trillion stock market is not a fool’s paradise.
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