Chinese equities have outperformed Wall Street for two consecutive years, yet the label ‘uninvestable’ continues to stick, analysts say, in the wake of the tech crackdowns and the still-unfolding property crisis. In January, China equity funds recorded their largest weekly outflow on record. China bulls have not abandoned the market, but they remain divided over whether state-owned enterprises should be kept or avoided.
In mid-January, China equity funds saw almost 50 billion dollar in outflows, according to data from Emerging Portfolio Fund Research. Bank of America called it the largest weekly outflow from Chinese equities ever. In comments to Reuters, the bank attributed the move to selling by the so-called ‘national team’ of state-backed investors. This national team supported the stock market through its investments in 2024 and 2025, but reduced its exposure in 2026 in an effort to cool markets down.
Those outflows do not stand on their own, but fit into the broader distrust that has surrounded China since 2021. Once a no-brainer for investors, China became a clear ‘no way’ five years ago, when regulatory intervention in the technology sector began to weigh heavily on sentiment. That reinforced perceptions of unpredictable political interference by the Communist Party. At the same time, the property market, long seen a key engine of growth and wealth creation, imploded. The result was a sharp bear market: China, once the default choice within emerging markets, was heavily underweighted until the end of 2023.
“After a period of extremely negative sentiment, we are seeing a re-rating of Chinese equities towards their underlying fundamental value.”
Stefan Albrecht, Qilin Capital
In early 2024, sentiment began to shift cautiously. The Chinese government acknowledged the economy needed support and announced targeted stimulus measures. Since then, the Chinese equity market has risen by around 40 percent, although pre-2021 levels remain out of reach.
Expanding allocation
According to Asia-focused investors, the moment has come to increase allocations to China. Not least because the Chinese Communist Party’s fifteenth Five-Year Plan (2026–2030) is set to officially take effect this year. The plan, expected to be approved in March, provides a guiding framework for subsidies and capital allocation.
Qilin Capital aligns its investments with that roadmap, portfolio manager Stefan Albrecht told Investment Officer. Albrecht runs the 75 million euro Acatis Qilin Marco Polo Asien Fund. He points to the plan’s focus on technological self-reliance, economic resilience and innovation in AI and semiconductors. “It creates a more favourable business environment for private companies. Even Jack Ma, who was once sidelined, has been asked to contribute.”
That is why Asia-focused Qilin Capital has been reducing its exposure to India while increasing China to 65 percent of the portfolio. The Acatis Qilin fund also carries a strong technology tilt, with a 40 percent allocation to the sector. Over the past two years, the fund delivered a return of 52 percent, an outperformance of 18 percent.
Technological frontrunner
“After a period of extremely negative sentiment, we are seeing a re-rating of Chinese equities towards their underlying fundamental value,” Albrecht said. “With state-owned enterprises, political considerations often blur the investment case. That is why we avoid SOEs during periods of positive market momentum. In bear markets, state-owned companies tend to perform better because they receive more government support.”
At present, Qilin Capital prefers private companies that benefit directly from the new Five-Year Plan. Technology is given priority, and China is taking an increasingly dominant position in that field. Take the Chinese automotive industry. “The value for money is so strong that German industry can no longer compete,” the German-born fund manager said.
Companies such as BYD Auto and battery maker CATL illustrate that strength. BYD sold around 4.3 million vehicles in 2024, making it the global leader in electric mobility. CATL holds a 37 percent share of the global battery market. And the breakthrough of AI start-up DeepSeek in early 2025 underscored China’s ability to develop AI models more cheaply than Western competitors. In other words, China has moved from being a simple manufacturer to becoming a technological frontrunner.
State-owned enterprises: avoid or select?
Not everyone shares the strategy of excluding state-owned companies. Ivy Ng, Chief Investment Officer Asia-Pacific at DWS, takes a fundamentally different approach. “You don’t have to avoid Chinese SOEs categorically,” she said, referring to China’s State-Owned Enterprises.
Ng notes that during the property crisis, state-owned enterprises often proved more resilient, supported by stronger balance-sheet discipline and better access to financing. “SOEs with exposure to the property sector held up relatively better during that period,” she said.
Rushil Khanna, head of equities at Ostrum AM (part of Natixis IM), agrees. “A binary approach often leaves value on the table, so I would not exclude SOEs by default. Four major Chinese state banks frequently trade at significant discounts to book value and offer attractive dividend yields.”
Excluding state-owned companies also significantly reduces the investment universe. According to the Peterson Institute for International Economics, SOEs now account for roughly 54 percent of the market capitalisation of China’s 100 largest listed companies.
Cheap valuations
Despite the rise in Chinese equities since 2024, valuations remain low relative to the United States. In both absolute terms and relative to their growth potential, Chinese stocks still look cheap, Albrecht argues. “China also has a vast pool of household savings — around 22 trillion dollar — that could still flow into equity markets,” he said.
Albrecht also sees increasing capital flows from pension funds and sovereign wealth funds in the Middle East into China. This strengthens alternative economic networks and reduces vulnerability to Western sanctions or capital restrictions, he said.
The fund manager acknowledges that the recent outperformance of his Asia fund is not yet enough to beat its benchmark over a five-year period. But since the weak performance of Chinese equities between 2021 and 2023 was driven mainly by negative investor sentiment rather than poor corporate fundamentals, Albrecht believes the outlook for China’s equity market remains favourable.