According to a report from Zhitong Finance APP, global fund managers are reversing a multi-year trend of cutting exposure to Chinese equities, drawn in by the prospects of the artificial intelligence (AI) sector and attractive valuations.

After analyzing nearly 2,800 global funds, Bank of America found that since June, the average allocation to Chinese stocks among active long-only funds has risen to a "benchmark-neutral" level, ending a four-year stretch of "underweight" positioning. Nigel Tupper, a strategist at the bank, said these funds collectively manage US$562 billion in Chinese equity assets.

This shift indicates that attractive valuations and improving earnings expectations in growth sectors such as AI have bolstered funds' confidence in allocation. Although this does not mean the market is set for a broad bullish run, it suggests fund managers have largely completed their exposure-reduction operations, removing a major obstacle on the path to market recovery.

Gary Tan, a portfolio manager at Allspring Global Investments, said: "Selling pressure is nearing a bottom, and investors' focus is shifting from position adjustments to corporate earnings delivery." He added that his institution is selectively adding to Chinese stocks. "An improved market environment in China does not require global investors to turn fully bullish; it is enough that they stop continuously reducing holdings."

Fund Flow Data

Other data on capital flows also corroborates this trend. Industry research data shows that exchange-traded funds (ETFs) focused on mainland China and Hong Kong recorded an inflow of US$19 million in August after an outflow of US$1.94 billion in July. Meanwhile, emerging market funds excluding Chinese assets are still seeing expanding outflows.

Rebecca Sin, an industry research analyst, said: "Among major emerging markets, China ETFs once experienced the most dramatic allocation cuts, and now the systemic underweight situation may be bottoming out. The momentum behind the various factors causing underweight positions in Chinese assets has weakened."

Valuation Advantage

Valuation advantages are also providing support. The MSCI China Index currently trades at about 10.2 times forward 12-month earnings, below its 10-year average of 11.7 times. In addition, earnings in some sectors related to the domestic technology development direction have shown signs of recovery.

According to statistics, driven by technology hardware and new economy companies, net profits of listed companies on the Shanghai Stock Exchange still grew 17.6% year-on-year in the first half, despite weak performance in the real estate and consumer sectors.

However, this divergence also means that China's market recovery remains uneven. The CSI 300 Index fell about 11% this quarter, and investors continue to maintain a structural stock-picking approach.

Herald van der Linde, head of Asia-Pacific equity strategy at HSBC Holdings, said: "To invest in China, you need to buy China's future." He is bullish on hardware technology and biopharmaceutical sectors, while the consumer industry and real estate represent "China's past."