China has regained global funds in a standout year for stocks, with investors expecting more gains thanks to the country's superiority in artificial intelligence and its resilience amid tensions with the United States.
Managers of global funds Amundi SA, BNP Paribas Asset Management, Fidelity International, and Man Group all expect Chinese stocks to continue rising in 2026.
JPMorgan Chase & Co. recently raised its market rating to 'overweight', while Gary Tan of Allspring Global Investments says this asset class has become 'essential' for foreign investors.
Investor sentiment towards China has shifted from skepticism to recognition that the market can offer unique value through its technological advancements.
The MSCI China index jumped about 30% this year, outperforming the S&P 500 by the largest margin since 2017 and adding 2.4 trillion dollars to its value. With most inflows driven by passive funds, there is hope that the return of active fund managers can guide the next phase of recovery.
Long-only foreign funds bought about 10 billion dollars worth of stocks in mainland China and Hong Kong up to November of this year, according to Morgan Stanley data, a shift from a net outflow of 17 billion dollars in 2024.
The inflow was entirely driven by passive investors tracking indices, while active fund managers withdrew about 15 billion dollars.
This is partly due to the fact that many active investors, who rely on stock selection, are still unable to shake off years of anxiety about economic slowdowns and the sudden crackdown campaign launched by Beijing in the private sector.
While authorities have adopted a more business-friendly stance this year, economic stimulus has not met investors' expectations.
Investors also point out that Chinese stocks are still cheap compared to their global counterparts. The MSCI China index, which tracks stocks listed in mainland China and Hong Kong, is trading at 12 times forward earnings, compared to 15 for MSCI Asia and 22 for S&P 500.