The attitude of investors toward Chinese assets is changing, as the stable returns they recorded amidst the war with Iran and the global frenzy around artificial intelligence show that China has begun to follow a different path from the rest of the international markets, acting as a "buffer" against volatility. According to Reuters, this shift has led to capital inflows into the bond market, while encouraging investors to seek Chinese stocks whose growth factors differ from those affecting the rest of the markets.
Diversification becomes an investment advantage
"The role of China in investment portfolios is evolving from a simple position in an emerging growth market to a more complex source of diversification," said Christopher Hamilton, head of Client Investment Solutions for the Asia-Pacific region (excluding Japan) at Invesco, which manages assets of approximately 2.2 trillion dollars. As he noted, diversification is achieved by combining investments that react differently to economic and stock market conditions, and China is now increasingly evaluated through this prism.
Bonds and yuan buck international trends
Since the onset of the conflict in the Middle East in late February, the Chinese bond market has recorded the best performance globally, while the yuan is the only major currency that has strengthened against the dollar. The rise of the Chinese currency helped the Chinese blue chips index CSI 300 to note an increase of nearly 11% in dollar terms during the first half of the year. Although this performance falls short of the roughly 13% rise of the S&P 500 and the impressive 110% of the South Korean KOSPI, it was achieved without relying on enthusiasm for artificial intelligence or sensitivity toward changes in US interest rates, which drive other markets. "This means that when we take positions in Chinese assets or evaluate them, we are no longer defined by short-term valuations, investor sentiment, or changes in the interest rates of the Federal Reserve," said Liu Gongrun, executive deputy director of the CEIBS Lujiazui International Institute of Finance in Shanghai.
An economy moving at a different pace
The relative isolation of China from international financial developments reflects an economy that follows a different cycle from the rest of the world regarding inflation, but also a stock market dominated by retail investors, with different priorities from large international investment funds. At the same time, according to analysts, regulatory authorities, state banks, and state-backed investors have set the maintenance of market stability as a core objective, something that has supported the course of the yuan. The Chinese currency has strengthened by 5.4% against the dollar over the last twelve months, despite the generalized strength of the US currency and the exceptionally low yields of Chinese bonds. This development reflects both strong exports and the strategy of the Chinese authorities to allow a slow but steady appreciation of the currency. International banks have already revised their forecasts upward for the course of the yuan until the end of the year, estimating that it may even surpass the three-and-a-half-year high of June, at 6.7522 units per dollar. "The strength of the yuan has now decoupled from traditional long-term factors, such as the course of the economy," said Kelvin Lam, senior economist at Pantheon Macroeconomics. As he explained, the course of the currency is now mainly driven by the policy of the Chinese authorities, who seek to project an image of monetary stability in a period of international uncertainty.
Return of foreign investors
Based on this logic, large international fund managers have returned to the Chinese equity and bond markets, signaling a significant turnaround compared to previous years, when several characterized the Chinese market as "uninvestable". "Renewed demand was observed for Chinese bonds, which we believe is due to their relative safety and low volatility," said Wee Khoon Chong, macro strategist for the Asia-Pacific at BNY. The yield of the Chinese 10-year government bond has fallen by nearly 10 basis points, to 1.73%, since the start of the war with Iran, while conversely, the yield of the corresponding US bond increased by 51 basis points. In May, the Chinese bond market recorded net inflows of foreign capital for the first time in more than a year. At the same time, the positions of foreign investors in domestic A-type shares increased from 3.67 trillion yuan at the end of the previous year to more than 4 trillion yuan, according to the vice chairman of the Chinese regulatory authority, Liu Haoling. China no longer publishes regular data on foreign capital flows into stocks since 2024.
Reservations remain
Despite the improvement in investment sentiment, several fund managers still view the Chinese market with cautiousness. Manulife John Hancock Investments maintains a neutral to underweighted position in Chinese stocks in some of its strategies, as it believes they do not offer the same earnings growth rates as companies in South Korea or Taiwan, according to co-director of investment strategy Matthew Miskin. Other investors continue to be concerned by sluggish consumption in China and the long-standing crisis in the property market. "We do not consider China a safe haven," said Tom Graff, chief investment officer of Facet, based in Phoenix, Maryland. As he explained, the company's goal is to identify assets that have a lower correlation with US markets, mainly against risks related to the investment boom in artificial intelligence and the course of the dollar. He added that developed markets, as well as certain emerging economies outside China, can offer corresponding diversification.
China's "decoupling" attracts investors
Despite the reservations, many investors consider the uniqueness of the Chinese market to now be a significant advantage. "For a long time, we have viewed the Chinese market, particularly domestic A-type shares, as a rare source of diversification," said Phillip Wool, head of portfolio management at Rayliant Investment Research. "Now, beyond that, we are also observing a real economic decoupling that is already underway," he concluded.
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