China assets gain ground

CHINA’s markets are increasingly being viewed as a source of diversification rather than simply a high-growth emerging market bet.

This comes as investors reassess portfolio strategies amid persistent geopolitical uncertainty, volatile global markets and shifting macroeconomic trends.

According to an analysis by Reuters, the shift marks a significant change in how global investors are positioning Chinese assets within their portfolios.

The changing perception marks a notable departure from the past few years, when concerns over China’s slowing economy, prolonged property downturn and regulatory tightening prompted many global investors to reduce their exposure to the world’s second-largest economy, the newswire reports.

Reuters further reports that investors are now looking beyond China’s traditional growth narrative, instead focusing on the country’s ability to provide returns that are increasingly detached from the factors driving most global markets.

Rather than moving in lockstep with developments such as the artificial intelligence (AI) boom or expectations surrounding US Federal Reserve (Fed) policy, Chinese assets are beginning to chart their own course, making them an attractive diversification tool for portfolio managers seeking to reduce overall market risk.

Evolving role

Christopher Hamilton, head of client investment solutions for Asia Pacific ex-Japan at Invesco, which manages about US$2.2 trillion in global assets, says China’s role in investment portfolios is evolving.

“The role of China in portfolios is evolving from a simple emerging-market growth allocation toward a more nuanced source of diversification,” he tells Reuters.

“Diversification is ultimately about combining exposures that respond differently to economic and market conditions, and China is increasingly being assessed through that lens,” he adds.

Reuters notes that China’s market resilience through recent bouts of global volatility, including heightened tensions surrounding the Iran conflict and rapid swings driven by AI-related stocks, has reinforced the view that the country offers a different set of return drivers compared with other major markets.

Analysts say China’s economy is increasingly out of sync with the inflation and interest-rate cycles affecting many developed economies, helping insulate its financial markets from the policy shifts that have dominated investor thinking elsewhere.

Liu Gongrun, executive deputy director at the CEIBS Lujiazui International Institute of Finance, says Chinese assets are no longer being judged primarily on short-term market sentiment or the Fed decisions.

“It means that when we allocate to, and assess, Chinese assets, it is no longer determined by short-term valuations, trading sentiment or changes in the Fed’s interest rates,” he explains.

Reuters reports that several structural factors have contributed to this divergence.

Domestic influence

Unlike many developed markets, China’s stock market remains heavily influenced by domestic retail investors, whose trading behaviour often differs from that of large institutional fund managers overseas.

At the same time, regulators, state-owned banks and state-backed investors have actively supported market stability as part of broader economic policy.

One of the clearest examples has been the performance of the yuan.

Despite broad strength in the US dollar and relatively low domestic bond yields, China’s currency has appreciated about 5% against the greenback over the past year.

Reuters says the gains reflect resilient exports as well as policymakers’ preference for a gradual and orderly appreciation of the currency.

Several global investment banks have subsequently revised higher their forecasts for the yuan, expecting further gains after it reached a three-and-a-half-year high against the US dollar in June.

Kelvin Lam, senior economist at Pantheon Macroeconomics, believes policy has become a more important driver of the currency than traditional economic fundamentals.

“Yuan strength is sort of detached from traditional bog-standard long-run drivers like how the economy is doing.”

“Instead, it is policy driven – the intention from the authorities to project currency stability at a time of global chaos.”

The renewed confidence has also begun attracting overseas capital back into China’s financial markets after several years of outflows.

Net buyers

According to Reuters, foreign investors returned as net buyers of China’s bond market in May, marking the first month of net inflows in more than a year.

Wee Khoon Chong, Asia-Pacific macro strategist at BNY, says investors have increasingly viewed Chinese government bonds as a relatively stable investment.

“There has been renewed demand for China bonds, which we believe is driven by relative safety and low volatility.”

Reuters also cites comments from Liu Haoling, vice-chairman of China’s securities regulator, who says foreign holdings of mainland A-shares had risen from 3.67 trillion yuan at the end of last year to more than four trillion yuan by late May.

While official equity capital flow data are no longer published regularly, the increase points to renewed overseas participation in China’s domestic stock market.

Nevertheless, Reuters reports that investor opinion remains divided.

Some global fund managers continue to favour other Asian markets that offer stronger earnings momentum.

Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments, says some of the firm’s investment strategies remain “neutral” to “underweight” on Chinese equities, preferring markets such as South Korea and Taiwan, where corporate earnings growth has been more robust.

Others remain cautious because of China’s weak consumer spending, subdued domestic demand and lingering property sector challenges.

Tom Graff, chief investment officer at Facet, says his firm does not regard China as a traditional safe-haven investment despite recognising the benefits of diversification.

“We aren’t thinking of it as a safe haven,” he points out.

“We certainly want to find assets that are less correlated to US markets, but in doing so we’re primarily thinking about risks around the AI trade and the US dollar,” he explains, adding that developed markets and some non-China emerging markets “can serve that purpose just fine”.

Even so, Reuters reports that many investors continue to see China’s unique market dynamics as increasingly valuable in a world where geopolitical uncertainty and macroeconomic divergence are expected to remain elevated.

Phillip Wool, head of portfolio management at Rayliant Investment Research, says China’s domestic market continues to offer diversification benefits that are difficult to replicate elsewhere.

“We’ve long seen China’s market, especially onshore-listed China A-shares, as a rare source of diversification.”

“Now, in addition, you’ve got an actual economic decoupling that’s happening.”

Undoubtedly, as global investors continue searching for assets capable of cushioning portfolios against external shocks, China’s growing detachment from traditional market drivers may just position its equities, bonds and currency as an alternative source of stability.