Foreign Investors Re-Engage with China, but Policy Uncertainty and Capital Controls Loom Large

Foreign investors are re-entering China after one of the largest investment pullbacks in recent memory, but confidence remains fragile. Speaking at the Milken Institute Asia Summit in Singapore, investors and economists agreed that China is “too big to ignore, yet too controlled to trust.”

The caution stems from Beijing’s continued capital controls and opaque policymaking. “It’s a capital-controlled market,” said Charles Li, founder of Micro Connect and former CEO of the Hong Kong Stock Exchange. “Everything is designed to prevent money from leaving.” His comments capture a broader unease over China’s rigid financial system, where stability is prized over flexibility.

Data underline the scale of the retreat. Net foreign direct investment has flipped from $334 billion of inflows in 2021 to nearly $154 billion of outflows in 2024 - the steepest reversal in two decades. U.S.-dollar funding for Chinese private equity has also slumped, with newly utilized FDI down 12.7% year-on-year through August, according to China’s Ministry of Commerce.

Asset managers are cutting exposure. Partners Capital, a $60 billion firm, has reduced its China allocation from 8% in 2018 to around 3% since 2021, citing heavy government intervention and limited exit options for offshore investors. “You need to know what the environment looks like ten years from now,” said Yale’s Song Ma, pointing to the lack of regulatory clarity and state dominance in key sectors.

Even so, the market rebound has been striking. The Hang Seng Index has climbed 35% year-to-date, while the Hang Seng Tech Index has surged 48%. Onshore, the CSI 300 is up 21%, hovering near a three-year high. Data from Morgan Stanley show August recorded the strongest foreign buying of Chinese equities in six months, driven by optimism around tech names such as DeepSeek and Beijing’s renewed push to stabilize markets.

To sustain this momentum, analysts say China must translate its pledges of openness into clear, consistent rules. Tax incentives and reinvestment policies may attract temporary inflows, but long-term confidence hinges on transparency and freedom of capital movement. As one investor put it in Singapore, “China doesn’t need to promise more access, it needs to prove it can keep the door open.”