A-share rally draws global investors

While the A-share market has recently hit multiple new records, foreign investors remain optimistic about its performance in the coming months, increasing their exposure to Chinese equities in anticipation of further capital inflows and structural opportunities.

The benchmark Shanghai Composite Index gained 1.45 percent on Friday to close at 3,825.76 points, its highest level in 10 years. The combined trading value on the Shanghai and Shenzhen exchanges approached 2.55 trillion yuan ($360 billion), surpassing the 2-trillion-yuan mark for the eighth consecutive trading day, and setting a new record for sustained high trading volume in the A-share market.

Analysts from US investment bank Goldman Sachs said the rally is backed by more driving forces, as a significant amount of idle capital has yet to enter the market.

Only 22 percent of Chinese household financial assets have been directed to funds and stocks, while over 10 trillion yuan is estimated to flow into the stock market, especially favoring small and mid-cap stocks, they said.

The latest data from the People's Bank of China, the nation's central bank, showed that the balance of Chinese household savings declined significantly by 1.1 trillion yuan in July, while non-bank deposits surged by a record 2.14 trillion yuan. This suggests that residents have shifted their savings into securities accounts, or used them to purchase funds and wealth management products, industry experts said.

Hong Hao, chief investment officer of the multi-asset offshore US dollar hedge fund Lotus Asset Management, said that many more stocks are participating in the current uptrend, ranging from mega caps such as traditional financial companies to small- and micro-cap stocks. As a result, the current rally is not driven by speculation and is likely to be more sustainable than previous ones, he said.

International investors have acted quickly. According to data from Goldman Sachs' Prime Brokerage for hedge funds, China was the market receiving the largest net buying from global hedge funds in August, with 90 percent of them holding long positions in Chinese equities.

Similarly, a Nomura report released on Wednesday showed that reducing exposure to Indian shares while reallocating capital to stocks listed in the Chinese mainland and Hong Kong has become a mainstream strategy among emerging market investors.

As of Wednesday, South Korean investors had directed $5.8 billion toward trading Hong Kong stocks, according to the Korea Securities Depository. This amount has already surpassed the full-year total in 2024.

Foreign investors' net increased holdings in Chinese onshore stocks and funds reached $18.8 billion in May and June, according to analysts from Soochow Securities. Foreign capital may continue to flow into the A-share market amid a weaker US dollar, they added.

According to Johnny Yu, macro strategist at the US-based global investment firm Wellington Management, China delivered better-than-expected growth in the first half of this year, but investor sentiment has yet to catch up. He noted that investors have not paid sufficient attention to structural changes in areas such as new consumption and services, AI, robotics, automation, renewables, electrification, biotechnology, and high-end, high-value-added manufacturing.

Major shifts have been taking place in China, including declining reliance on property, greater self-sufficiency and course corrections in industrial policy. Investors may be underestimating a still-positive growth story in China, Yu said.