How to go from ‘Anywhere but China’ to ‘Buy China’

Shuli Ren, Bloomberg

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 “ex-China” strategies has been booming, with index providers building new emerging-markets benchmarks excluding the world’s second-largest economy.

But as Shanghai and Shenzhen equities start to outperform, investors are asking if it’s time to chase the rally. Major markets from the US to Japan have hit record highs this year, so why not China? Money managers now accept that ample liquidity will drive equity gains for an extended period. With Chinese households deploying massive savings into domestic stocks, why not join the ride?

Of course, many things can go wrong. Plenty of asset managers lost heavily after Beijing’s regulatory crackdowns on tech and real estate in 2021. The spectacular boom and bust in 2015 also reminds how dangerous retail-driven investors can be.

How can the government regain foreigners’ trust? This matters because global asset managers are seen as smart money. Even mom-and-pop traders watch international inflows to decide whether Chinese stocks are worth buying.

Two steps could help. First, slow down the bull market. Convincing investment committees to redeploy money to Chinese equities takes time. A furious rally — such as one a year ago when stimulus hopes sent the CSI 300 soaring 30% in six days — leaves foreigners sidelined. By the time they are ready to purchase, stocks are too expensive.

The government has tools to temper rallies through the “national team,” institutional investors that buy index funds during routs. In April, when President Donald Trump’s “Liberation Day” tariffs led to selloffs, Central Huijin Investment Ltd., a unit of China Investment Corp., pledged to support markets. For the first time, it declared itself part of the national team, triggering this year’s rally. Investors now believe there’s a “Xi put,” akin to the “Fed put.”

The same Xi put can also tame volatility. Huijin buys index funds such as Huatai-Pinebridge CSI 300 ETF, whose flows are closely tracked. Selling holdings — Huijin owned 1.3 trillion yuan ($180 billion) at June’s end — when the market gets frothy will send a clear signal. This can also discourage momentum-driven traders.

Second, Beijing should reinforce the narrative that it values return on capital and won’t let tech ambitions override earnings. A catalyst to this year’s rally is the nation’s breakthrough in AI. The arrival of DeepSeek animated big tech from Tencent to Alibaba, which touted their own models. As Nvidia halted production of its H20 chips for China, local designers such as Cambricon Technologies became darlings.

Globally, concerns linger over big tech overspending on AI infrastructure. In China, these worries are sharper given a history of booms and busts — the 2021 bankruptcy of Tsinghua Unigroup, once seen as a Samsung equivalent, stands out.

As China shifts from building AI models to redrawing the supply chain, authorities must shape expectations carefully. Global investors doubt local firms can replace Nvidia in training chips but might back those aiming at inference chips, which are less advanced yet more cost-effective.

For now, Beijing seems on the right track. President Xi Jinping has said little about artificial general intelligence but is pushing the industry toward applications. Over time, companies like Cambricon could thrive and deliver strong earnings.

There remains a gap between foreign investors’ interest in Chinese stocks and their portfolio allocations. To attract global capital, officials must ensure China’s $13 trillion stock market is not a fool’s paradise.

[Abridged]

Courtesy Bloomberg/Shuli Ren