China's slowing stock market rally begins to regain investor confidence

Đà tăng chậm của chứng khoán Trung Quốc bắt đầu lấy lại niềm tin nhà đầu tư

China's blue-chip CSI 300 index is up about 16% year to date, matching the S&P 500's gain, while Hong Kong's Hang Seng has surged nearly 30%, heading for its strongest annual gain since 2017.

The current sentiment is a far cry from the euphoria sparked by last year's support measures, and the market is also more volatile, especially as pressure on property developer China Vanke reminds investors that the property downturn is not over yet.

However, investors and analysts say the bull market is just taking a “break”.

“We believe this is just the beginning of the reallocation of capital flows from foreign investors back to China,” said Laura Wang, China equity strategist at Morgan Stanley.

What investors have seen this year is enough to “gradually change their views,” she said, adding that she spends less time answering questions about US-China tensions.

Chinese stocks also overcame bilateral trade friction and rose on state support, improved corporate governance and a strong rally in AI-related groups following the impressive debut of chatbot DeepSeek.

A record HK$1.38 trillion ($177 billion) in capital flows from mainland China to Hong Kong also helped revive the market.

“The next leg of the bull market is likely to be led by improving fundamentals and profit growth,” said Xia Fengguang, fund manager at Shenzhen Rongzhi Investment.

Like many, he expects Beijing's campaign against overcapacity and price wars (anti-unfair competition) to improve corporate profit margins.

Industrial stocks attract cash flow

Fund managers say industrial stock valuations are attractive and helping to attract capital flows.

“Cyclical stocks are quite cheap, and you can start picking them up when prices are weak, while anti-competitive policies gradually take effect,” said fund manager Wang An.

Over the past three months, about 13.5 billion yuan (about $1.91 billion) of net capital flowed into ETFs tracking the CSI Battery Thematic Index, and 11.2 billion yuan into funds tracking the CSI chemical index, according to Datayes.

During the same period, funds tracking the STAR 50 - a technology-heavy group - saw net outflows of 31.1 billion yuan.

Xu Jie, fund manager at Yuanzi Investment Management in Shanghai, has bought solar, steel and coal stocks.

“There is no doubt” that this slow growth will continue into next year, Mr. Xu said, citing the possibility of continued capital inflows from foreign investors and domestic savers.

The Shanghai Composite and Hang Seng indexes are both trading at around 12 times earnings, compared with 28 times for the S&P 500, 21 times for the Nikkei 225 and 21 times for the FTSE 100, according to LSEG data.

“In terms of valuation and liquidity, we are only halfway through the bull market,” said Wang Wendi, head of distribution at Shanghai Intewise Capital, adding that the firm is increasing its holdings in steel, chemicals and express logistics stocks.

Another fund, Zenith & Xenium Capital, also bets on cyclical stocks such as photovoltaics, petrochemicals and new energy businesses.

AI and technology are the main drivers

Foreign investors have been wary of policy risks in China and kept their exposure low amid a surge in U.S. and global assets. But some investors said they were still “sitting between the lines,” as manufacturing activity contracted for an eighth straight month in October.

“With China, we are still hesitant,” said Vincenzo Vedda, global chief investment officer at DWS.

China no longer publishes real-time data on foreign capital flows, but the latest central bank figures show foreign ownership rose to 3.5 trillion yuan at the end of September, below the 2021 peak of 3.9 trillion but reflecting some improvement.

Florian Neto, head of Asia investments at Amundi, said he was neutral on the market but distinguished between “old China” – where exports and real estate are under pressure – and “new China” where AI and biotech have stronger earnings growth prospects.

“The reality is that the market is now largely driven by the new China, with its technology, innovation and advanced pharmaceuticals… We are very much looking forward to increasing the proportion,” he said.

When investors look at the full-year returns, they may come back to buy in 2026.

“Many other equity markets have outperformed the US this year,” said Kristina Hooper, chief market strategist at Man Group in New York, adding: “This is a paradigm shift that I think most investors will recognize in January… and that will encourage them to look outside the US, especially when US valuations are so high.”

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