International capital flows to China "avoid shocks"

A stable and predictable institutional environment and convenient investment channels are continuously strengthening global long-term capital’s confidence in Chinese assets.

The fighting in the Middle East has stirred up turmoil across global capital markets—oil prices have surged, stock markets have wavered, and risk-avoidance sentiment has kept heating up.

On April 2, local time, U.S. President Trump threatened on social media that he would strike the bridges and power plants in Iran. The uncertainty of the geopolitical conflict is rapidly transmitting into the prices of all kinds of assets in financial markets.

In contrast to the extreme volatility in global markets, Chinese assets have shown relatively strong resilience in this round of shocks. Since March, discussions about Middle East capital flowing into Hong Kong have intensified, with multiple signals emerging—from the interbank market to the ETF product end. Meanwhile, so-called “China dividend assets,” represented by high-dividend stocks and RMB bonds, are gradually becoming a “shock absorber” for global capital.

Several financial institutions, in interviews with reporters from International Finance Daily, pointed out that, against the backdrop of continued optimization of the energy structure, a complete industrial system, a relatively stable macro environment, and the steady advancement of capital market reforms, Chinese assets are demonstrating distinctive resilience and allocation value.

Capital flows east

In these discussions around Middle East capital allocation to Chinese assets, the first change to appear was not the stock market, but rather the more sensitive funding-side indicators.

From the money market perspective, the trajectory of Hong Kong dollar rates and U.S. dollar rates has shown a rare divergence. Against the backdrop of the Federal Reserve maintaining relatively high interest rates, in March this year, Hong Kong’s 1-month HIBOR fell from around 2.36% at the start of the month to about 1.95%, showing a clear downward trend.

Chen Li, Global Chief Economist of Soochow Securities, said that under the linked exchange rate system, this interest rate divergence itself is an important signal of capital inflow, meaning that new liquidity has appeared within the banking system. At the same time, the Hong Kong dollar exchange rate strengthened to around 7.8 on multiple occasions; the simultaneous movement of interest rates and the exchange rate allowed the market to capture signs of improved liquidity earlier at the banking-system level.

Apart from funding-side signals, the product end is also gradually providing an observation window. Recently, the capital inflow situation of multiple Hong Kong-listed ETFs related to Middle East capital, as well as ETFs tracking core local indexes in Hong Kong, has become an important thread the market continues to follow. Some institutions noted that, compared with the delayed cross-border disclosure of data, ETF creations and redemptions data have stronger real-time features and can serve as a “high-frequency indicator” for observing where capital is going. Especially against the backdrop of Middle East sovereign wealth funds and family offices gradually entering the market through passive products, the importance of such instruments has further increased.

In fact, Middle East capital has been stepping up its allocation to the Hong Kong market over the past two years.

On the primary market side, according to Wind data, since 2026, Hong Kong IPOs have attracted about 230 cornerstone investors to participate. Middle East capital has appeared frequently: the Abu Dhabi Investment Authority shows up on the cornerstone lists of frontier tech projects such as MiniMax and Jifeng Medical; Qatar Investment Authority participated in the issuance of Eastroc Beverage’s H shares; and Saudi Aramco’s Prosperity7 has also entered the investor lists of multiple technology projects in Hong Kong stocks.

On the secondary market side, according to disclosures in listed companies’ annual reports, as of the end of last year’s fourth quarter, the Abu Dhabi Investment Authority appeared in the list of the top 10 tradable A-share shareholders for six companies, including Beixin Building Materials, Keda Li, Baofeng Energy, Yangnong Chemical, CRRC Engineering Heavy Industry, and Fuling Zhacai. Kuwait Investment Authority holds companies such as New Natural Gas, Kunhua Pharmaceutical Group, and Yunda Shares. If the time horizon is extended to the end of the third quarter of 2025, the Abu Dhabi Investment Authority appeared in the top 10 tradable A-share shareholder lists for 24 A-share companies, with a market value of its holdings of 8B yuan; Kuwait Investment Authority appeared in the top 10 tradable A-share shareholder lists for 14 A-share companies, with a market value of its holdings of 4.21B yuan.

Overall, its holding directions are concentrated in large-cap companies with industrial leadership, resource security, energy transition, infrastructure, and stable cash flow.

In the view of Xing Ziqiang, Chief Economist for China at Morgan Stanley, in the short term, conflicts in the Middle East create some disruption to local investors’ travel and investment decisions, making them more inclined to watch for stability. But in the medium to long term, demand from large investors such as Middle East sovereign wealth funds for diversified asset allocation will increase significantly.

Flight-to-safety value

Beyond Middle East capital allocation, amid broad pressure on global risk assets recently, China’s stock market funding structure has also shown positive changes.

Zhang Yu, Chief Economist at Huachuang Securities, said that in a phase when global risk assets are generally being sold off, China’s stock funds—against the trend—have still received net inflows of capital. Taking the period from March 19 to March 25 as an example, overseas funds recorded a substantial net inflow of $1.38 billion, and together with a week’s inflow reversal of $980 million from passive funds, they jointly constructed the micro-level funding structure for China’s stock fund market during that week.

The fundamental reason capital “flows east” at this time is that Chinese assets demonstrate relative stability amid global turmoil. This is clearly reflected in the horizontal comparison of global stock markets in March.

Wind data shows that in March, major U.S. stock indexes saw sizable adjustments, and Asia-Pacific markets such as Japan and South Korea also faced obvious pressure. In March, the Nikkei 225 index and the Korea Composite Index both fell by 13.23% and 19.08%, respectively. COMEX (New York Mercantile Exchange) gold dropped from a high of $5,472.3 per ounce to a low of $4,128.9 per ounce. By comparison, the Shanghai Composite Index and the Shenzhen Component Index fell cumulatively by 6.51% and 7.02% in March, respectively—significantly less than the Japan and South Korea markets over the same period. In the FX market, the RMB against the U.S. dollar has appreciated by more than 1% since the start of this year, also significantly stronger than other non-U.S. currencies.

In their latest strategy reports, multiple foreign-invested institutions pointed out that during a phase of declining global risk appetite, China’s market, supported by relatively low valuations and policy stability, shows certain characteristics of a “quasi-flight-to-safety asset.”

Zhao Yuting, a Global Market Strategist for the Asia Pacific region at Invesco, also believes that China’s large-scale and diversified economy has strong resilience in responding to extreme global macro conditions.

“China’s investment in energy security, food security, and supply-chain self-reliance over many years has significantly enhanced macroeconomic resilience. China also benefits from abundant coal reserves, fast-growing renewable energy, a large inventory of crude oil, and lower reliance on oil in the Middle East—making it more resilient than other economies when facing energy-driven inflation,” Zhao Yuting said.

Pictet Asset Management Switzerland stated that the Middle East conflict and the energy crisis have cast a shadow over the outlook for global stock markets. Therefore, in most markets, the firm has moved stock allocations back to benchmark levels. “However, Chinese stocks are an exception. With strong commodity reserves, sufficient alternative energy supply, and policy support, we still maintain a positive stance.”

At the asset level, high-dividend sectors represented by energy, banks, and utilities provide significantly steadier cash returns than bonds in the current environment. According to Wind data, the dividend yield of the CSI Dividend Low Volatility Index is about 4.45%, compared with the yield on 10-year Chinese government bonds of about 1.8%, meaning the spread exceeds 2.6 percentage points. With the risk-free yield staying low, this risk premium is highly attractive to long-term capital seeking absolute returns.

Multiple foreign-invested institutions noted that this “dividend-to-bond substitution” feature means Chinese dividend assets are both defensive and income-generating: on one hand, stable cash flows enhance resistance to volatility; on the other hand, lower valuations provide potential space for capital gains.

A head of a European asset management firm said that amid instability in the global interest-rate system, the “high-dividend + low-volatility” combination is becoming a new flight-to-safety vehicle.

Unlike high-dividend assets that mainly attract capital by boosting returns, RMB bonds reflect China’s flight-to-safety attribute from the perspective of stability. Typically, bond yields and prices move inversely; when yields rise, bond prices are under pressure.

Since the outbreak of the conflict between the U.S. and Iran, the yield on U.S. 10-year Treasuries has surged by 38 basis points to 4.34%, and the yield on U.K. gilts has also risen significantly by 70 basis points, reflecting increased volatility in bond markets of major developed economies. Meanwhile, to support domestic economic growth and currency stability, central banks in many countries have begun reducing holdings of U.S. Treasuries. The size of U.S. Treasuries held by foreign central banks in custody at the Federal Reserve Bank of New York has fallen to its lowest level since 2012.

By contrast, China’s Treasury market has been more stable. The yield on 10-year government bonds has stayed relatively stable and has edged down slightly to 1.82%, highlighting its value as a stable allocation in a globally volatile environment.

At the 2026 China Debt Capital Markets Annual Conference of the International Capital Markets Association held on March 31, Chen Weimin, Deputy Governor of the Hong Kong Monetary Authority, said that this is a good time to unlock the global market potential of RMB bonds. On the one hand, the RMB exchange rate remains basically stable around a reasonable and balanced level, reducing FX conversion risk; on the other hand, RMB interest rates are relatively low, which supports the RMB’s role as a financing currency. International investors are seeking diversified asset allocation, and RMB bonds are becoming an important option.

Strategic allocation

As inflows of capital and asset performance create a positive feedback loop, the role of Chinese assets in the global allocation system is changing.

Recently, overseas research firm Gavekal Research released a report stating that China’s long-term government bond performance has been resilient, and it has become one of the few high-quality assets capable of going through cycle volatility. With both safety, yield, and stability, it is shifting from peripheral allocation toward becoming a core choice for global reserve assets.

The report believes that in the current global environment, China’s government bonds as reserve assets are even more prominent in value, and are expected to attract more marginal buying in the future as investors shift from gold and U.S. Treasuries to RMB-denominated assets.

Shuang Yousi, CEO of Standard Chartered Group, also said that China’s large economic scale, the considerable size of its bond market, and ongoing progress in financial opening—together with the acceleration of RMB internationalization—have been driving a continuous rise in international investors’ demand to allocate to RMB assets. Chinese government bonds have solid investment value. A stable and predictable institutional environment and convenient investment channels are continuously strengthening global long-term capital’s confidence in Chinese assets.

In this process, the Hong Kong market plays a key role. On one hand, its mature financial system and open environment make it a gateway for international capital to enter China; on the other hand, through mechanisms such as “Stock and Bond Connect,” capital can further allocate to mainland stock and bond markets. This institutional arrangement forms a closed loop in which capital, industries, and technology flow across regions.

Chen Weimin said that Hong Kong will leverage its dual positioning as an international financial center and an offshore RMB business hub, and will push RMB bond further toward international markets by making efforts from multiple dimensions, including deepening Stock and Bond Connect, optimizing market supporting arrangements, and upgrading infrastructure.

Xing Ziqiang added that the fundamental drivers of RMB internationalization and attracting foreign capital are the deepening of China’s own financial markets and an improvement in asset yields. At present, China’s bond market product categories and the yield curve still need further refinement; the top priority is to raise the yield and market depth of RMB assets through a combination of stimulus and reforms. Only when domestic financial products have real appeal can China effectively absorb allocation demand from the Middle East and even global capital.

Beyond bonds, the logic for long-term allocation in the equity market is also being reinforced. Zhao Yuting said that the Middle East conflict once again highlights the importance of diversified investing. In his view, increasing allocation to China’s energy-related sectors would be a sensible move. Especially in areas such as renewable energy, electric vehicles, electric vehicle battery, and grid infrastructure—these are core key fields of China’s long-term energy strategy and are less likely to be hit by volatility in global commodities.

Li Changfeng, head of market strategy at Lianbo Fund, said that investors can look at the performance of China’s market from a longer-term asset allocation perspective. There are three directions that keep trending positively. First, the upgrade in export structure. China’s export companies—especially those in higher value-added sectors—are showing clear growth momentum, indicating that Chinese companies are accelerating their move into the world and upgrading into higher value-added areas. Especially after fluctuations in global trade policies, some overseas companies tried to shift supply chains but failed—this in turn proves the non-substitutability of China’s supply chain, and also implies that overseas income may become a new engine for profit growth.

Second, the formation of the artificial intelligence (AI) industry chain. Whether it is the “shovel sellers” of AI infrastructure or the “users” of AI applications, Chinese companies are actively laying out the market. China’s relatively stable power infrastructure construction also provides a good development space for the AI industry ecosystem. China’s demand for AI tokens is rising sharply.

Third, improvements in corporate governance. It can be seen that more and more companies are increasing dividend payout ratios and starting share buybacks. For long-term investors, the investment appeal of Chinese companies is increasing.

Liu Jinzun, Goldman Sachs’ Chief China Equity Strategy Analyst, said that the strategy is still to increase holdings of A shares and H shares. Benefiting from Chinese companies’ commitment to continuously improving return on shareholders’ net assets, cash return, and improvements in earnings per share for A shares, it is expected that overall profit growth in China’s A-share and H-share markets in 2026 could reach 10%. This expectation is supported by factors including AI, “going global,” and the “anti-squabbling/anti ‘involution’” policy, among others.

Xing Ziqiang further said that under geopolitical conflicts, China has advantages in energy security and opportunities for industrial upgrading. In the technological revolution, the development paths of industries such as China-U.S. AI show differences between “making the impossible possible” and the “best value-for-money” route. Under the “stability in the East and volatility in the West” pattern, Chinese assets are expected to gradually benefit in global capital allocation processes.

Reporter Li Xizi

Text editor Cheng Hui