Key facts
- Citigroup upgraded Chinese equities to overweight and downgraded South Korean stocks.
- Foreign investment in China's securities market saw net inflows of approximately $33 billion in the first five months of the year.
- Foreign investors increased their holdings of onshore Chinese stocks and funds by $10.1 billion in the first half.
- UBS reiterated its overweight stance on Chinese equities, citing stronger revenue and earnings growth compared to India.
- Recent China-US trade frictions are expected to cause short-term market fluctuations but not change the medium-term outlook for Chinese stocks.
Citigroup has upgraded Chinese equities to an overweight rating and downgraded South Korean stocks, aligning with a growing number of global financial institutions that are becoming more optimistic about China. This shift indicates a broader reallocation of global capital as investors look beyond saturated technology trades in other Asian markets to find more affordable shares and new artificial-intelligence opportunities within China.
Foreign investment in China's capital markets has surged in the first half of the year, with net inflows into securities markets totaling approximately $33 billion in the first five months, reversing outflows from the latter half of the previous year. This renewed confidence is particularly notable in the stock market, where foreign investors increased their holdings of onshore stocks and funds by $10.1 billion in the first half, ending a two-year trend of net outflows. The State Administration of Foreign Exchange (SAFE) reported that this net increase accelerated to $18.8 billion during May and June.
Jia Ning, head of SAFE's Balance of Payments Department, attributed the expected continued, gradual increase in foreign allocations to renminbi assets to China's sound economic fundamentals, large financial markets, improved market access, and investor demand for diversification. Heightened global financial market volatility has prompted investors to seek more diversified portfolios, with renminbi-denominated assets offering currency stability and an independent return profile for risk diversification. A survey by the Official Monetary and Financial Institutions Forum indicated that 30% of central banks globally plan to increase their renminbi asset allocations, and several international investment banks have upgraded their outlooks on Chinese assets from neutral to overweight.
Thomas Fang, head of China global markets at UBS, confirmed rising investor confidence in both A and H shares, driven by China's economic prospects, which aids diversification away from U.S. dollar-denominated assets. UBS has raised its full-year GDP growth forecast for China to 4.7%, following a 5.3% growth in the first half. Fang emphasized that the previous underweight position in Chinese assets was unsustainable and that recent opening-up policies provide overseas investors with more instruments for risk management and larger positions.
Li Bin, deputy head of SAFE, stated that China's steady opening-up, high-quality economic development, and resilient foreign exchange market will support a stable renminbi exchange rate. China's foreign exchange market has shown strong resilience this year, with the renminbi strengthening by 1.9% against the dollar in the first half without clear one-way expectations.
Despite short-term volatility, UBS Group and other major foreign financial institutions maintain a positive outlook on Chinese stocks. UBS reiterated its overweight stance, citing superior operating revenue and earnings per share growth in China compared to India. Meng Lei, China equities strategist at UBS Securities, noted that while China-US trade frictions may cause short-term impacts, the medium-term outlook for Chinese stocks remains unchanged. AllianceBernstein also believes the medium-term outlook is stable despite trade tensions. Invesco highlighted China's resilient and diversified exports as a support for its economy and market sentiment. Industry leaders such as Kweichow Moutai, Wuliangye Group, and Ping An Insurance Group were among the most favored stocks by foreign investors in the third quarter, with bank stocks also featuring prominently in foreign holdings.