Lujiazui Business Districk in Pudong, Shanghai, China.
Liqun Liu | Construction Photography | Hulton Archive | Getty Images
SINGAPORE — As China seeks to entice back foreign capital amid dwindling inbound investment, global investors eyeing opportunities in the country remain wary of more fundamental constraints: Beijing’s iron grip on capital flows and lack of policy clarity.
For foreign investors, the message from the Milken Institute Asia Summit in Singapore this week was clear: China remains too big to ignore, but too controlled and opaque to fully trust.
“It’s a capital-controlled market. Everything is protected by denying depositors the freedom to move their money away,” said Charles Li, founder and chairman of Micro Connect, a financial services firm in Hong Kong. Li is also the former chief executive of the Hong Kong Stock Exchange.
Beijing’s priority is to guarantee safety of its financial system, Li said at a panel at the Milken event on Thursday, urging investors eyeing China to “really take full account of that environment.”
Capital flight
China has seen record capital flight over the past two years, with foreign investors pulling out of China at a speed not seen in decades. The world’s second-largest economy has struggled to shake off deflationary pressures amid a prolonged housing downturn, sluggish domestic demand and simmering tensions with the U.S.
Beijing sought to reverse the trend this year by pledging further opening of the economy to foreign investment, with top officials, including Premier Li Qiang, holding roundtable meetings to address foreign business’ concerns and foster a favourable capital environment.
It could be an uphill battle, however, with an atmosphere of apprehension prevalent among speakers at Milken this week.
The biggest risk weighing on investor sentiment is the lack of clarity over policy, Song Ma, professor of finance and entrepreneurship at Yale University, said on the event sidelines.
Foreign investors still have to navigate a system under extensive regulatory oversight and state involvement, with unclear rules on market access of certain critical sectors and exit routes. “State-backed funds still control a vast amount of quality assets that are linked to technology and defense security,” Ma noted.
That uncertainty does not sit well with foreign institutional investors who pursue strategies built on long-term investments.
“When you’re underwriting new private investments, you need to have a good sense of what that environment will look like in 10 years,” said Adam Watson, partner at Partners Capital, a $60-billion asset manager that works with family offices, endowments, institutions and ultra-high-net-worth individuals.
“The exit options are 1759491079 a bit more limited on the basis that listing in the U.S. has become more complicated,” Watson said, adding that there are also concerns over the stability of certain legal frameworks used by offshore investors to gain access to onshore assets.
Partners Capital has reduced its exposure to Chinese markets from around 8% of its portfolio allocations in 2018 to around 3% since 2021, Watson noted, citing “more aggressive government intervention into the private sector” and “a lack of compelling opportunities” in Chinese equities before the recent rally.
According to China’s balance of payment data, net foreign direct investment plummeted from peak inflows of $334 billion in 2021 to outflows of nearly $154 billion in 2024, according to Chinese data provider Wind. It marked the lowest level in more than two decades, suggesting foreign money was invested elsewhere.
U.S. dollar funding from global investors in China’s venture capital and private equity industry is also drying up. A measure of newly-utilized FDI inflows released by the Ministry of Commerce showed a 12.7% year-on-year decline through August this year.
Rebuilding confidence
That said, some global capital is trickling back into China following a period of “deep sleep” off the back of the pandemic and geopolitical tensions, according to Guo Kai, executive president and senior fellow at Chinese economic think-tank CF40 Institute.
Chinese stocks, once seen as uninvestable by many, have lured back some foreign investors, spurred by the rise of tech startup DeepSeek and a series of surprising breakthroughs in high-tech industries.
Data from Morgan Stanley indicated that August saw the biggest buying of Chinese stocks by global hedge funds in six months.
The Hong Kong’s Hang Seng index, meanwhile, is up over 35% so far this year, on pace for its biggest annual growth since 2017, when it soared nearly 36%. The Hang Seng Tech Index has climbed 48% over the year to date.
The mainland CSI 300 index has also climbed — up over 21% this year — and is hovering near its highest level in more than three years.
It comes as investors shake off a gloomy economic picture and put their faith in Beijing’s intention to further support stock market and valuations of Chinese equities.
China has ramped up calls this year to encourage overseas investors to reinvest their profits within the country, and introduced tax incentives to encourage them to do so.
As more foreign investors weigh returning capital to China, the government has an opportunity to back up its policy pledges and rebuild confidence, according to Ma.
“What China does next to further open up market access and improve its investment environment will be critical to keeping foreign investors in the country for the long term,” he added.
