The way investors think about Chinese assets is undergoing a notable shift. Steady returns during the turmoil surrounding the Iran war and the global AI investment boom have demonstrated that China’s markets are moving to their own beat — making them an increasingly attractive hedge against worldwide volatility.
That change in perception has pushed money into China’s bond market and led investors to seek out Chinese stocks whose performance is tied to factors separate from global trends.
“The role of China in portfolios is evolving from a simple emerging-market growth allocation toward a more nuanced source of diversification,” said Christopher Hamilton, head of client investment solutions for Asia Pacific ex-Japan at Invesco, a firm managing roughly $2.2 trillion in global assets. “Diversification is ultimately about combining exposures that respond differently to economic and market conditions, and China is increasingly being assessed through that lens.”
Since the Middle East conflict broke out at the end of February, China’s bond market has outperformed every other in the world. The yuan has also stood apart as the only major currency to have strengthened against the U.S. dollar during that same stretch.
Those currency gains helped mainland blue-chip Chinese stocks post a nearly 11% increase in dollar terms during the first half of the year. That performance trailed the roughly 13% gain in the S&P 500 and fell well short of the remarkable 110% surge in South Korea’s KOSPI, but it was achieved without the same dependence on AI enthusiasm or sensitivity to U.S. interest rate movements that have driven other markets.
“It means that when we allocate to, and assess, Chinese assets, it is no longer determined by short-term valuations, trading sentiment or changes in the Federal Reserve’s interest rates,” said Liu Gongrun, executive deputy director at the CEIBS Lujiazui International Institute of Finance, a Shanghai-based think tank.
Analysts point to several reasons why China’s markets have become more insulated from global forces. The country’s economy is out of sync with the inflationary cycles seen elsewhere in the world, and its stock market is heavily driven by individual retail investors whose priorities differ sharply from those of global fund managers.
Chinese regulators, state-owned banks, and government-backed investors have also made market stability a clear policy priority — a stance analysts say has been a key factor behind the yuan’s impressive performance.
The Chinese currency has climbed 5.4% against the dollar over the past 12 months, even as the dollar has broadly strengthened and Chinese bond yields have remained extremely low. Strong export activity and a deliberate government push for a slow, gradual currency appreciation have both played a role.
Forecasters expect the yuan to climb further. Global banks have revised their year-end projections upward, anticipating gains beyond June’s 3-and-a-half-year high of 6.7522 per dollar.
“Yuan strength is sort of detached from traditional bog-standard long-run drivers like how the economy is doing,” said Kelvin Lam, senior economist at Pantheon Macroeconomics. “Instead, it is policy driven — the intention from the authorities to project currency stability at a time of global chaos.”
The shift in sentiment has brought major global asset managers back to Chinese markets — a remarkable turnaround for a market that some investors had labeled “uninvestable” just a few years ago.
“There has been renewed demand for China bonds, which we believe was driven by relative safety and low volatility,” said Wee Khoon Chong, Asia-Pacific macro strategist at BNY.
China’s benchmark 10-year government bond yields have dropped nearly 10 basis points to 1.73% since the Iran war began, while U.S. 10-year yields have risen by 51 basis points over the same period. The Chinese bond market recorded net foreign inflows for the first time in more than a year during May, the most recent month for which figures are available.
Foreign ownership of onshore Chinese A-shares also grew, rising from 3.67 trillion yuan — about $541 billion — at the close of last year to more than 4 trillion yuan, according to Liu Haoling, vice chairman of China’s securities regulator, who shared the figures at a forum in late May. China stopped releasing regular equity capital flow data in 2024.
Not everyone is convinced, however. Manulife John Hancock Investments has maintained a neutral to underweight stance on Chinese stocks in some of its strategies, citing weaker earnings growth compared to markets like South Korea or Taiwan, according to co-chief investment strategist Matthew Miskin. Others point to China’s sluggish consumer spending and its prolonged property market slump as reasons for caution.
“We aren’t thinking of it as a safe haven,” said Tom Graff, chief investment officer at Facet in Phoenix, Maryland. “We certainly want to find assets that are less correlated to U.S. markets, but in doing so we’re primarily thinking about risks around the AI trade and the U.S. dollar. Developed markets and some non-China emerging markets can serve that purpose just fine.”
Still, many investors find themselves drawn to the unique characteristics behind China’s divergence from global market trends.
“We’ve long seen China’s market, especially onshore-listed China A-shares, as a rare source of diversification,” said Phillip Wool, head of portfolio management at Rayliant Investment Research. “Now, in addition, you’ve got an actual economic decoupling that’s happening.”
