Chinese industrial winners draw fund manager interest as markets match S&P 500

Fund managers are putting their money into China’s industrial companies while keeping their tech holdings, betting the two-year stock rally has legs despite rough economic conditions. Cheaper valuations and steady returns are pulling foreign investors back to Chinese markets.

China’s CSI300 benchmark has delivered gains of around 16% so far this year, matching returns from the S&P 500. Meanwhile, Hong Kong’s Hang Seng has climbed roughly 30%, putting it on track for the strongest yearly performance since 2017.

The current atmosphere differs sharply from last year’s excitement following government stimulus announcements. Recent turbulence, particularly trouble at property developer China Vanke, serves as a reminder that the extended real estate slump continues to create problems.

Foreign money returning to Chinese markets

Chinese equities have climbed despite trade friction with America, supported by government backing, better corporate management practices, and strong gains in stocks linked to artificial intelligence following DeepSeek’s chatbot release. A historic HK$1.38 trillion, equivalent to $177 billion, flowed from mainland China into Hong Kong, helping revive those capital markets.

Shenzhen Rongzhi Investment fund manager Xia Fengguang said the next phase of growth will likely come from basic business improvements and earnings expansion. He supports Beijing’s efforts to combat industrial overcapacity and damaging price competition, known as the anti-involution campaign, expecting it to boost company profit margins.

Industrial stocks draw investment interest

Industrial company valuations are appealing to fund managers and attracting investment.

Recent money flows show the trend. Over three months, 13.5 billion yuan, about $1.91 billion, moved into exchange-traded funds following the CSI Battery Thematic Index. Another 11.2 billion yuan went into funds tracking the CSI chemicals sub-industry index. Meanwhile, funds following the tech-heavy STAR 50 Index saw 31.1 billion yuan leave during the same timeframe.

Shanghai-based Yuanzi Investment Management fund manager Xu Jie has purchased solar energy, steel-making and coal companies. “There is no question” the gradual bull market will continue into next year, Xu said, pointing to potential money coming from foreign and local investors.

Right now, the Shanghai Composite Index and Hong Kong’s Hang Seng both trade at approximately 12 times earnings. This compares to 28 for the S&P 500, 21 for Japan’s Nikkei 225, and 21 for Europe’s FTSE 100 Index.

Some investors remain cautious

Foreign investors previously worried about policy uncertainty in China and maintained smaller positions there while American and global investments performed well. Some remain cautious, particularly as factory activity declined for eight consecutive months through October.

“When I say China, we’re on the fence,” said Vincenzo Vedda, global chief investment officer at DWS as mentioned in Reuters report.

China stopped publishing real-time foreign investment data. The latest central bank numbers showed foreign ownership reached 3.5 trillion yuan at September’s end, below the 2021 peak of 3.9 trillion yuan but showing some recovery.

Florian Neto, head of investment for Asia at Amundi, Europe’s largest asset manager, distinguishes between “old China” where exporters and developers face economic difficulties and “new China” where artificial intelligence and biotech companies can expect earnings growth. “The market, in fact, is actually driven mostly by new China, by the innovation, tech and innovative drugs … we are very, very much looking forward to adding further,” he said.

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