Global Funds Increase Exposure to Chinese Markets Amid Rally and Policy Support

Renewed Global Investment Inflows Into Chinese Markets

Global hedge funds and money managers are significantly increasing their exposure to Chinese assets, marking a notable reversal from a multi-year trend of reduced investment. This shift is underscored by a world-beating stock rally, advancements in high-tech industries, and supportive government policies aimed at attracting foreign capital. Goldman Sachs Group Inc. reported that global hedge funds were the most active in onshore equities in recent years during the last month, a stark contrast to previous sentiment that deemed the market "uninvestable."

Official data confirms a coordinated advance in foreign inflows across all asset classes, a phenomenon observed in only three of the past 10 years. Foreign long-only funds recorded $1 billion in inflows as of end-August, a significant reversal from the $17 billion in outflows experienced last year. Furthermore, inflows into Chinese equity funds reached their highest level in 20 weeks, supported by an index that hit a ten-year high, while offshore-registered Chinese funds saw inflows for three consecutive weeks.

Market Performance and Policy Shifts

China's domestic stock market has demonstrated impressive performance, with the CSI 300 Index, a benchmark for onshore shares, climbing 17% this quarter to reach a more than three-year high. The tech-focused ChiNext Index has rallied nearly 50% during the same period, marking one of the best performances globally. Despite these advances, both indices remain below their 2021 highs.

Simultaneously, China has broadened foreign investors' access to its bond market by facilitating bond repurchase (repo) transactions. This landmark move, announced jointly by the People's Bank of China (PBOC), the China Securities Regulatory Commission (CSRC), and the State Administration of Foreign Exchange (SAFE), allows foreign institutions to participate in bond repo transactions, aligning China's financial markets more closely with international practices. This policy aims to enhance liquidity management for foreign investors and further the internationalization of the yuan. As of the end of August, 1,170 overseas institutions from 80 countries and regions held approximately 4 trillion yuan ($561 billion) in Chinese bonds, representing about 3% of the nation's $21 trillion bond market.

To counteract a recent decline in foreign direct investment (FDI), Beijing has also introduced new incentives and regulatory reforms. The Foreign Investment Negative List (2024) removed all foreign equity caps in the manufacturing sector, and an Action Plan for High-Level Opening-Up pledges tax breaks and streamlined approvals. High-tech industries, in particular, are attracting significant foreign investment, with high-tech sectors drawing 127.87 billion yuan in foreign capital in the first half of 2025.

Analysis of Market Re-engagement

The shift in market sentiment from "uninvestable" to a "fear of missing out" (FOMO) is a key driver behind the renewed interest. Pacific Investment Management Co. (PIMCO) noted that investors have moved from worrying about risks to fearing missing out. This re-engagement is fueled by China's impressive stock market rally, significant advancements in high-tech industries, and the government's proactive measures to create a more attractive investment environment.

The current underweight positioning of global funds in China, at approximately 1.3 percentage points, suggests ample room for further investment, despite Asia ex-Japan managers having already turned overweight. Stronger capital inflows are also anticipated to buttress the yuan, supporting President Xi Jinping's ambition to elevate the currency's role in global finance. The expansion of bond market access effectively transforms China's fixed-income toolkit from a