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SINGAPORE – As China seeks to seduce foreign capital amid a decline in inbound investment, global investors looking at the country’s opportunities continue to pay attention to more fundamental constraints.
For foreign investors, the message from the Milken Institute Asia Summit, held in Singapore this week, was clear. China was too big to ignore, but too controlled and opaque to completely trust.
“It’s a capital-controlled market. Everything is protected by denying depositors the freedom to keep money apart,” says Charles Li, founder and chairman of Hong Kong’s financial services company Micro Connect. Li is also the former CEO of the Hong Kong Stock Exchange.
Beijing’s priorities are to ensure the safety of its financial system, Li urged investors to focus on China to “really explain its environment.”
Capital Flight
China has seen record-breaking capital flights in the last two years, with foreign investors withdrawing from China at a rate that has not been seen for decades. The world’s second largest economy has struggled to shake off deflationary pressure amid long-term housing slump, domestic demand and sluggish tensions with the US.
Beijing has tried to reverse this year’s trends by pledging further opening up the economy to foreign investment. High-ranking officials, including Prime Minister Lee Chiang, held a roundtable to address foreign business concerns and foster a lucrative capital environment.
But it could be a difficult battle that has a vibe of anxiety that is prevalent among Milken speakers this week.
Song MA, a professor of finance and entrepreneurship at Yale University, said the biggest risk of examining investors’ sentiment is the lack of clarity about policy.
Foreign investors should navigate the system under extensive regulatory oversight and state involvement, with unclear rules regarding market access for certain key sectors and exit routes. “The state-backed funds still manage the vast amount of quality assets related to technology and defense security,” MA said.
That uncertainty doesn’t work for foreign institutional investors who pursue strategies built on long-term investments.
“When you’re undertaking a new private investment, you need to have a proper sense of what that environment will look like in 10 years,” says Partners Capital’s partner Adam Watson, a $60 billion asset manager working with family offices, donations, agencies and ultra-advanced individuals.
“The exit options are a little more limited based on the (currently) more complicated listing in the US,” Watson said, adding that there are concerns about the stability of the specific legal frameworks that offshore investors use to access onshore assets.
Partner Capital said it reduced its Chinese market exposure from around 8% of its portfolio allocation in 2018 to about 3% since 2021, citing “more aggressive government intervention in the private sector” and “lack of persuasive opportunities” in Chinese equities prior to the recent rally.
According to Chinese payment data balances, Chinese payment data balances plummeted from a peak inflow of $334 billion in 2021 to nearly $154 billion in 2024, according to Chinese data provider Wind. It has hit the lowest level in over 20 years, suggesting that foreign money has been invested elsewhere.
US dollar funds are also drained from global investors in China’s venture capital and private equity industry. The newly utilized FDI inflow measure announced by the Ministry of Commerce showed a 12.7% decline from the previous year until August this year.
Rebuilding confidence
That said, Guo Kai, executive president and senior fellow at the CF40 Institute of China’s economic think tank, said some global capital has returned to China after a period of “deep sleep” from the back of the pandemic and geopolitical tensions.
Once considered uninvestable by many, Chinese stocks have attracted foreign investors who have been fuelled by the rise of tech startup DeepSeek and the rise in surprising breakthroughs in the tech industry.
Morgan Stanley data shows that in August, Chinese stocks saw the biggest purchases by global hedge funds in six months.
Meanwhile, Hong Kong’s Hangsen index has grown by more than 35% so far this year, surgeting nearly 36%, the largest annual growth rate since 2017. The Hang Seng Tech index has risen 48% annually so far.
The mainland’s CSI 300 index has also risen, increasing by more than 21% this year, approaching its highest level in over three years.
It’s when investors shook the pessimistic economic situation and placed their faith in Beijing’s intentions to further support the stock market and valuation of Chinese stocks.
China called this year to encourage foreign investors to reinvest their domestic profits.
According to the MA, as more foreign investors recover capital in China, the government will have an opportunity to back up its policy pledge and rebuild its trust.
“What China does to open up more access to the market and improve its investment environment is important to maintain foreign investors in the long term,” he added.
