Foreign investors eye China one again — but capital controls and policy risks keep them on edge

SINGAPORE — As China seeks to entice backmost overseas superior amid dwindling inbound investment, planetary investors eyeing opportunities successful the state stay wary of much cardinal constraints: Beijing's robust grip connected superior flows and deficiency of argumentation clarity.

For overseas investors, the connection from the Milken Institute Asia Summit successful Singapore this week was clear: China remains excessively large to ignore, but excessively controlled and opaque to afloat trust.

"It's a capital-controlled market. Everything is protected by denying depositors the state to determination their wealth away," said Charles Li, laminitis and president of Micro Connect, a fiscal services steadfast successful Hong Kong. Li is besides the erstwhile main enforcement of the Hong Kong Stock Exchange.

Beijing's precedence is to warrant information of its fiscal system, Li said astatine a sheet astatine the Milken lawsuit connected Thursday, urging investors eyeing China to "really take afloat relationship of that environment."

China has seen grounds superior formation implicit the past 2 years, with overseas investors pulling retired of China astatine a velocity not seen successful decades. The world's second-largest system has struggled to shingle disconnected deflationary pressures amid a prolonged lodging downturn, sluggish home request and simmering tensions with the U.S.

Beijing sought to reverse the trend this twelvemonth by pledging further opening of the system to overseas investment, with apical officials, including Premier Li Qiang, holding roundtable meetings to address overseas business' concerns and foster a favourable superior environment.

It could beryllium an uphill battle, however, with an ambiance of apprehension prevalent among speakers astatine Milken this week.

The biggest hazard weighing connected capitalist sentiment is the deficiency of clarity implicit policy, Song Ma, prof of concern and entrepreneurship astatine Yale University, said connected the lawsuit sidelines.

Foreign investors inactive person to navigate a strategy nether extended regulatory oversight and authorities involvement, with unclear rules connected marketplace entree of definite captious sectors and exit routes. "State-backed funds inactive power a immense magnitude of prime assets that are linked to exertion and defence security," Ma noted.

That uncertainty does not beryllium good with overseas organization investors who prosecute strategies built connected semipermanent investments. 

"When you're underwriting caller backstage investments, you request to person a bully consciousness of what that situation volition look similar successful 10 years," said Adam Watson, spouse astatine Partners Capital, a $60-billion plus manager that works with household offices, endowments, institutions and ultra-high-net-worth individuals.

"The exit options are [now] a spot much constricted connected the ground that listing successful the U.S. has go much complicated," Watson said, adding that determination are besides concerns implicit the stableness of definite ineligible frameworks utilized by offshore investors to summation entree to onshore assets.

Partners Capital has reduced its vulnerability to Chinese markets from astir 8% of its portfolio allocations successful 2018 to astir 3% since 2021, Watson noted, citing "more assertive authorities involution into the backstage sector" and "a deficiency of compelling opportunities" successful Chinese equities earlier the caller rally.

According to China's equilibrium of outgo data, nett overseas nonstop concern plummeted from peak inflows of $334 cardinal successful 2021 to outflows of astir $154 cardinal successful 2024, according to Chinese information supplier Wind. It marked the lowest level successful much than 2 decades, suggesting overseas wealth was invested elsewhere.

U.S. dollar backing from planetary investors successful China's task superior and backstage equity manufacture is besides drying up. A measurement of newly-utilized FDI inflows released by the Ministry of Commerce showed a 12.7% year-on-year diminution done August this year.

That said, immoderate planetary superior is trickling backmost into China pursuing a play of "deep sleep" disconnected the backmost of the pandemic and geopolitical tensions, according to Guo Kai, enforcement president and elder chap astatine Chinese economical think-tank CF40 Institute.

Chinese stocks, once seen arsenic uninvestable by many, person lured backmost immoderate overseas investors, spurred by the emergence of tech startup DeepSeek and a bid of astonishing breakthroughs successful high-tech industries.

Data from Morgan Stanley indicated that August saw the biggest buying of Chinese stocks by planetary hedge funds successful six months. 

The Hong Kong's Hang Seng index, meanwhile, is up implicit 35% truthful acold this year, connected gait for its biggest yearly maturation since 2017, erstwhile it soared astir 36%. The Hang Seng Tech Index has climbed 48% implicit the twelvemonth to date.

The mainland CSI 300 scale has besides climbed — up implicit 21% this twelvemonth — and is hovering adjacent its highest level successful much than 3 years.

It comes arsenic investors shingle disconnected a gloomy economical picture and enactment their religion successful Beijing's volition to further enactment banal marketplace and valuations of Chinese equities.

China has ramped up calls this twelvemonth to encourage overseas investors to reinvest their profits wrong the country, and introduced taxation incentives to promote them to bash so.

As much overseas investors measurement returning superior to China, the authorities has an accidental to backmost up its argumentation pledges and rebuild confidence, according to Ma.

"What China does adjacent to further unfastened up marketplace entree and amended its concern situation volition beryllium captious to keeping overseas investors successful the state for the agelong term," helium added.