In a significant shift, US investors are showing their highest level of interest in Chinese equities since early 2021, according to Laura Wang, equity strategist at Morgan Stanley Asia, following a 1.5-week marketing trip across the United States. ​

Wang reveals in a report that over 90% of US investors she met during the trip expressed willingness to increase their exposure to Chinese equities. ​ This marks the highest level of positive sentiment since the peak of China’s equity market in early 2021. ​

Their interest spans both broad index-level investments and specific thematic opportunities, particularly in high-growth sectors such as artificial intelligence ( AI ), humanoid robotics, biotech, and new consumption trends. ​

This renewed enthusiasm is a stark contrast to the cautious sentiment observed between 2021 and 2024, signalling a potential turning point in US-China investment dynamics. ​“… The worst is likely over,” she says.

Positive developments

Several factors contribute to the shift. China’s dominance in cutting-edge technologies, such as humanoid robotics, AI, and biotech, has made its market increasingly attractive to global investors. ​ These sectors are seen as critical to the future of innovation, and China’s leadership in these areas is compelling investors to engage with its equity market. ​

In turn, incremental steps by Chinese policymakers to stabilize the economy and nurture the equity market have also reassured investors. ​ While these steps are small, she notes, they indicate a clear intention to support market growth, leading many to believe that the worst may be over. ​

The liquidity situation in China’s equity market has also improved significantly, which is expected to sustain the ongoing rally and provide a more stable environment for investors. ​

With US-centric portfolios dominating many investment strategies, there is a growing demand for diversification. ​ China’s market presents an opportunity to mitigate concentration risk and capitalize on a high-growth economy.

Beyond ADRs​

Historically, US investors have focused on American depositary receipts ( ADRs ) due to time-zone and trading-hour constraints. ​ However, Wang notes a growing interest in the Hong Kong and onshore A-share markets. ​ These markets offer exposure to themes like AI, semiconductors, robotics, and new consumption, which are not as accessible through ADRs. ​

Quant and macro funds, in particular, are leveraging A-share ETFs and index futures for quick market participation. ​ While ADRs remain the preferred trading vehicle, this shift indicates a broader recognition of the opportunities available in China’s equity market. ​

Risk factors

Despite the optimism, several challenges and risks remain. China’s real estate market continues to face challenges, with excess inventory expected to take 10-12 months to digest. ​ A steady pace of inventory reduction is critical to stabilizing the market and maintaining investor confidence, she believes.

While recent policy moves have been positive, investors are closely monitoring the upcoming 4th Plenary Session for signals on medium- to long-term goals. ​ These include economic rebalancing and advancing China’s technological edge. ​

US-China relations remain a key risk. ​ Upcoming events, such as the APEC summit and the deadline for US-China negotiations, could introduce market volatility. ​ Recent reports about potential US restrictions on Chinese medicines have also added to investor caution. ​On the other hand, potential market volatility, driven by geopolitical tensions or macroeconomic risks, could present attractive entry points for long-term investors. ​

For macro and quant funds, the availability of hedging tools will also be important in increasing participation in the A-share market. Greater access to capital market activities, such as IPOs, would also be welcomed by investors. ​

While interest in Chinese equities is high, actual inflows from US investors are only just beginning. ​ Many investors, particularly those managing global and emerging-market mandates, are still conducting due diligence on individual stocks. ​ Asia ex-Japan mandates have already reduced their underweight positions, signalling a potential shift in allocations. ​

Wang believes that allocations from global and EM mandates are likely to increase meaningfully in the near future, driven by the compelling opportunities in China’s market. ​