Foreign investors are gearing up to return to China's stock markets three years after considering them too risky to trade in and pulling out. Their return is encouraged by the opportunities China has created in emerging technologies and the growing demand for diversification of investment portfolio beyond the United States.

China's achievements in artificial intelligence, semiconductors, and innovative drugs this year have made international investors confident that the Sino-US trade war and Washington's tech export bans haven't stifled innovation in the world's second-largest economy.

Progress in Sino-US trade negotiations, too, has helped raise confidence in China's stock exchanges. Although Sino-US frictions remain, the US' tariffs have not resulted in the widespread disruption of global trade that some had feared. A temporary truce on tariffs between the United States and China, along with domestic monetary easing, has further boosted investor sentiment.

A shift in foreign investor sentiment could potentially fuel a market rally that has so far been driven largely by domestic players. Foreign investors have started returning to China, drawn by the market's gains this year and seeking to diversify away from overcrowded US assets. Data on fund launches and flows illustrate the growing interest in China's $19 trillion stock market, which includes Hong Kong.

The change in investor behavior reflects both policy adjustments and evolving market conditions. The People's Bank of China, the country's central bank, has continued to reduce key interest rates to support steady economic growth. As a result, yields on government bonds and bank deposits have declined to historically low levels, with 10-year government bonds offering about 1.85 percent on Sept 18.

Simultaneously, the reinstatement of taxation on bond coupons has further reduced the attractiveness of fixed-income products. Under such circumstances, equities have become a more appealing destination for capital.

Valuations, too, play an important role in pepping up a market. Following several years of decline, the Chinese stock market entered 2024 at relatively low price-to-earnings multiples. Notably, the Shanghai Stock Exchange currently trades at about 15 times' earnings. While this is still lower than those of many developed markets, it is no longer at a distress level. Investors should therefore approach the market with patience and discipline, taking advantage of the corrections to build positions rather than chasing momentum.

Investors have got the opportunity to accumulate positions at comparatively attractive levels, with the Chinese government's visible support for both the real economy and financial markets further boosting investor sentiment.

Institutional activity has also contributed to the market's upswing, while Quasi-sovereign funds have increased their participation in the equity market in recent quarters, helping to stabilize prices in the face of international pressures and reducing long-term foreign positions. These measures, aimed at ensuring market stability, have been welcomed by investors, providing reassurance during global uncertainty.

However, while the stock market has shown resilience, structural challenges remain. The property sector continues to face difficulties, with unresolved debt issues and stalled projects weighing on confidence. At the same time, external conditions are complex. The US has tightened trade and investment restrictions, creating more uncertainty for Chinese enterprises engaged in international supply chains.

Given these facts, the sustainability of the current rally depends on policy support and the careful management of risks. A rapidly rising market can create a positive "wealth effect", supporting consumption and confidence. Yet excessive volatility or a sharp correction could undermine these gains. For this reason, maintaining stability is of the utmost importance.

For investors, selectivity is key. Companies with a strong domestic orientation and proven track record will likely be better positioned to seize the opportunities in the current environment. Sectors such as infrastructure, utilities, consumer goods and technology focused on China's domestic market remain relatively resilient.

Several companies illustrate this dynamic. E-commerce platforms such as JD.com and Meituan are primarily focused on domestic demand and, therefore, less affected by external restrictions. China Yangtze Power, the largest hydropower company, benefits from record electricity demand and the national transition toward green energy. AIMA Technology, a leading electric two-wheeler producer, generates nearly all its revenue from the domestic market. Ping An Insurance, one of the country's largest insurers, is supported by long-term trends such as the expansion of the middle-income group, rising healthcare expenditure, and demographic changes.

Looking ahead, Chinese equities are expected to remain attractive for domestic and international investors. The combination of accommodative monetary policy, policy support for key industries, and comparatively favorable valuations creates an environment in which equities are positioned to perform well. However, ongoing global uncertainties and domestic structural challenges mean caution remains necessary.

In conclusion, Chinese equities' rally reflects the resilience of the domestic financial market and the confidence of investors in China's long-term growth. At the same time, it underlines the importance of prudent investment strategies, steady policy guidance, and continued vigilance against risks. For investors, the message is clear: opportunities are real, but success depends on careful selection, long-term perspective, and a balanced approach.

The author, former prime minister of the Kyrgyz Republic, is a professor at the Belt and Road School of Beijing Normal University.

The views don't necessarily represent those of China Daily.

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