In July, net inflows from foreign funds further accelerated, and foreign interest in Chinese assets reached a recent high

Recently, the prices of Chinese assets both domestically and internationally have strengthened simultaneously. On August 14, the Shanghai Composite Index briefly broke through 3,700 points during trading, reaching a nearly four-year high. In the overnight U.S. stock market, popular Chinese concept stocks also followed the upward trend of A-shares, outperforming the broader market. The Nasdaq Golden Dragon China Index closed up 2.08% on August 13 local time, marking a significant increase for the second consecutive trading day; the Direxion FTSE China Bull 3X ETF surged nearly 9%, while the Direxion FTSE China Bear 3X ETF rose over 7%.

From the perspective of capital flows, foreign capital inflow into the Chinese stock market has accelerated recently. Morgan Stanley's Chief China Equity Strategist Wang Ying and her team reported that net foreign capital inflow into the Chinese stock market in July further accelerated, increasing from $1.2 billion in June to $2.7 billion. Among these, passive funds led this trend with an inflow of $3.9 billion (up from $2.7 billion in June); meanwhile, active funds experienced an outflow of $1.2 billion, significantly narrowing from the $5 billion outflow in June.

The inflow of passive funds in July was concentrated at the end of the month, coinciding with the introduction of several policies related to "anti-involution." Notably, U.S. passive funds have significantly accelerated their allocation to the Chinese stock market, while European passive funds have remained stable. As of July 31, the cumulative inflow of foreign passive funds this year has reached $11 billion, exceeding the $7 billion level for the entire year of 2024.

Data recently released by the State Administration of Foreign Exchange also indicates that foreign capital allocation to RMB assets has remained relatively stable this year. In the first half of the year, foreign capital net increased its holdings of domestic stocks and funds by $10.1 billion, reversing the overall net reduction trend of the past two years.

"China has returned to the sight of international investors. Feedback from clients during our global roadshows in June and July shows that investor interest in the Chinese stock market has reached a near-high point in recent years," Goldman Sachs mentioned in a recent research report. Emerging market and Asian benchmark mutual funds have moderately increased their allocation to China since the end of last year, but hedge funds and global active management institutions' allocations remain close to cyclical lows. Meanwhile, many investors have chosen to strategically rebalance through IPOs and additional issuances, as evidenced by the participation of foreign cornerstone investors in new Hong Kong stocks reaching a five-year high.

Goldman Sachs' Chief China Equity Strategist Liu Jinjing recently raised the 12-month target level for the MSCI China Index from 85 to 90, maintaining an "overweight" stance on the Chinese stock market within the Asia-Pacific region. He stated that the demand for diversified allocation in the U.S. market, the appreciation potential of the RMB against the USD, the rise of Chinese AI models and applications, and the deep valuation discount of the Chinese stock market compared to major global indices are the main driving factors.

Morgan Stanley also expects that after the summer, the trend of returning to the Chinese stock market will be "stronger." The profit correction trend in the Chinese stock market ranks relatively high among major global markets, and its valuations are lower than those of other markets, which is likely to continue attracting more capital inflow. As the market approaches the Federal Reserve's interest rate cut timeline and a broader consensus forms around a weaker dollar, global investors' willingness to allocate to non-U.S. markets will further increase Li Changfeng, head of market strategy at Lianbo Fund, also believes that the profit recovery of A-share companies is still progressing steadily. "With the recent upward movement in the market, some investors have developed a 'fear of heights' mentality, but from both a vertical and horizontal perspective, we believe that A-shares still possess investment cost-effectiveness," said Li Changfeng.

He further analyzed that, from a horizontal comparison, the increase of the CSI 300 Index is not particularly high among major global stock indices. In terms of valuation, as of the end of July, the dynamic price-to-earnings ratio of the CSI 300 Index is only slightly above the average level of the past 10 years. Especially considering that the profitability of A-shares is improving and monetary policy remains moderately accommodative, the current valuation of A-shares has not yet reached overheating levels.

Specifically regarding investment themes, Li Changfeng stated that he will focus on the investment value of long-duration assets: on one hand, high-dividend companies provide certain bond-like characteristics; on the other hand, AI+ applications are still expected to drive the overall improvement of China's production efficiency in the long term, or serve as a more advantageous choice on the offensive side.

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