Foreign Capital in Chinese Stock Market Hits 4-Year High... Retail Investors Lead the Surge

AI Boom Sparked by DeepSeek and Hong Kong IPO Surge
Authorities Signal Change with Reform Packages
Retail Investors Pour Record 243 Trillion Won into Market

"Foreign investors have returned."

The 'DeepSeek' application page displayed on a smartphone screen. Photo by AP Yonhap News

The Financial Times (FT) reported on the 16th (local time), citing statistics from the Institute of International Finance (IIF), that the scale of foreign purchases of Chinese stocks reached its highest level in four years from January to October this year.

According to the IIF, foreign capital inflows into the Chinese stock market from January to October this year totaled $50.6 billion (approximately 73.64 trillion won). This is more than four times higher than the $11.4 billion (about 16.59 trillion won) recorded during the same period last year.

FT noted that while the scale of foreign buying has not yet reached the 2021 level of $73.6 billion, when the market rebounded from the pandemic shock, it is significant in that it marks a clear reversal of the recent trend of foreign investors reducing their exposure to China. This is seen as a signal that global investors’ perception of China, which until recently was considered an “uninvestable” market, is changing.

Since 2021, foreign capital has exited the Chinese market en masse due to a combination of factors: a slump in the real estate sector, intensified regulations on private companies, and escalating US-China tensions. These factors collectively led to a near 50% plunge in the Chinese stock market from its peak. The crackdown on private companies, epitomized by the ousting of Alibaba founder Jack Ma, has also been cited as a reason for undermining market confidence. Yan Wang, Emerging Markets Strategist at Alpine Macro, said, "Just two years ago, many investors considered China an uninvestable market."

Since then, Chinese regulators have rolled out a series of reform packages to restore the market, which have been interpreted as measures demonstrating the Chinese government's commitment to supporting the capital markets.

What reversed this trend was the artificial intelligence (AI) boom within China and a surge of IPOs in the Hong Kong market. The AI investment fever, sparked by the release of a generative AI model by Chinese startup DeepSeek, combined with large-scale IPOs on the Hong Kong Stock Exchange, helped revive investor sentiment.

Jonathan Pines, Head of Asia (excluding Japan) Equities at Federated Hermes, stated, "China is still trading at historically deep discounts compared to global markets, but it boasts some of the world’s leading companies in the technology sector," adding, "In some areas, it is virtually the only country capable of competing with the United States."

With the US stock market trading near all-time highs, the strategic choice by some global investors to reduce reliance on the US market has also contributed to increased capital inflows into Chinese equities. Daniel Morris, Chief Market Strategist at BNP Paribas Asset Management, commented, "No one wants to put 100% of their portfolio in the Nasdaq." However, FT also reported that some US state pension funds, such as those in Texas and Indiana, are withdrawing investments from Chinese companies due to worsening US-China relations.

The main driving force behind this year's rebound in the Chinese stock market was retail investors. Mainland Chinese investors poured 1.3 trillion Hong Kong dollars (approximately 243.43 trillion won) into the Hong Kong market, marking an all-time high. This accounts for about 20% of the total trading volume on the Hong Kong Stock Exchange.

Stewart Rumble, Head of Investments, Asia Pacific at Fidelity International, diagnosed, "This year’s strength in the Chinese stock market has been driven more by massive inflows from Chinese individual investors than by foreign investors."