Fresh foreign capital shows investor confidence

China attracted fresh foreign capital in May despite mounting geopolitical tensions and broad outflows from emerging markets, highlighting investor confidence in the country's economic resilience and policy support.

Chinese equities recorded net inflows of $8.1 billion during the month, while non-resident investors withdrew a net $26.6 billion from emerging market stocks and bonds, according to data released by the Institute of International Finance on Wednesday.

Although the conflict in the Middle East has affected global energy markets, China's dependence on Gulf crude oil is relatively limited.

China's relatively low reliance on Gulf oil imports and the resilience of its industrial base have helped shield the economy from external shocks.

At the same time, the country benefits from a supportive policy environment, said Desmond Kuang, China chief investment officer at HSBC Private Bank and Premier Wealth.

Kuang emphasized that the structural rally in China's A-share market remains intact, with technology continuing to be the dominant investment theme.

As of May 25, the CSI 300 Index, which tracks the 300 A-share heavyweights, had risen 6.3 percent from the beginning of this year, with gains heavily concentrated in technology-related sectors.

Capital has flowed into high-growth areas such as artificial intelligence hardware and semiconductors, which are supported by strong earnings fundamentals, he said.

Looking ahead to the full year, HSBC expects a structural recovery in A-share earnings, with materials, energy and information technology seeing the largest upward revisions to profit forecasts.

In China's equity market, the development trajectory of AI remains clear. As of May 25, the STAR 50 Index had gained 41 percent and the ChiNext Index had risen 25 percent. First-quarter earnings growth in industries such as electronics, computers and semiconductors ranged from 54 percent to 123 percent year-on-year.

"The development of AI will continue to be supported by strong capital investment and productivity gains, which in turn will improve earnings expectations across multiple industries and markets.

"The expansion of digital infrastructure and the advancement of AI will not only attract global capital into the technology sector, but also benefit other sectors and investment themes, including industrials and materials," said Kuang.

Lu Ting, chief China economist at Nomura, said on Thursday that China's AI application ecosystem is expanding rapidly, with the daily volume of tokens processed by AI models growing exponentially.

Backed by strong policy support, China is accelerating its "AI Plus" strategy, promoting the deep integration of AI with manufacturing. This has led to significant growth in AI-related hardware exports and increased activity in capital markets, said Lu.

In a recent report, Lu highlighted that the AI boom is supporting economic growth through fixed-asset investment, exports and productivity gains, and its contribution to economic expansion is becoming increasingly important. Global investment in AI infrastructure has become the single largest driver of China's export growth so far this year, he said.

Speaking at a news conference on Jan 21, Zhang Yunming, former vice-minister of the Ministry of Industry and Information Technology, said the core AI industry is estimated to exceed 1.2 trillion yuan ($177 billion) in value in 2025.

The figure accounted for approximately 0.9 percent of China's GDP last year.

Over the past few months, AI-related industries have experienced explosive growth and their share of China's GDP could surpass 1 percent in 2026, Lu said.

Edwin Chen, co-head of global banking of UBS Securities, said on June 4 that allocations to Chinese equities by actively managed global funds have rebounded from around 5 percent at their trough to nearly 7 percent currently, though still well below the roughly 15 percent peak seen in 2021.

"That gap itself represents a potential upside," Chen said.