China’s reset: dividends, policy shifts and the return of global capital

While China’s investability has been questioned from 2023 onwards, recent developments suggest a fundamental sentiment shift is taking place.

In contrast to growing questions surrounding US ‘exceptionalism’ of market valuation multiples, there is growing evidence of renewed investor confidence in China, through increasing capital inflows and responses to policy adjustments and technological advancements.

The change has been particularly noticeable over the past six months. China arguably transitioned from ‘uninvestable’ to ‘tradable’ following the September 2024 stimulus package released by Beijing. Now, signs are that it is regaining full investability. Short-term trading activity is being replaced by more stable, long-term institutional allocations.

The tariff situation is highly volatile at present, of course, with news pouring in every minute and no clear picture. However, the damage has already been inflicted, even if tariffs might be entirely revoked at some point in future. In the mid-long term, the US may cease to be a dependable partner or ally for numerous countries. If China seizes this opportunity, it can emerge as a reliable and responsible trade partner globally.

One aspect to emphasise is that China is not merely a powerful exporter but also a significant importer. According to the WTO, in 2024, China's goods imports reached $2.55tn, ranking second only to America's $3.17tn. Coupled with its domestic consumption market of more than $10tn, if the US persists with its exorbitant tariffs, China will encounter more opportunities rather than retaliation from the rest of the world.

The investors shift is evident in increasing allocations to China by active funds globally. By March 2025, these had risen to 6.5 per cent from a historic low of 5 per cent in September 2024, according to Goldman Sachs figures. While still well below past highs of 15 per cent, this trend underscores renewed confidence in China’s markets. Notably, large-cap stocks such as Tencent, Alibaba, and Meituan have seen significant inflows, signalling interest from high-quality, long-only funds rather than just speculative capital.

Market data aside, the private banking community in Hong Kong is once again sharing anecdotes of US investors expressing more interest in China, and of family offices returning from previous exodus to Singapore. The diaries of those working in private equity and venture capital are also becoming busier.

Central government has encouraged long-term funds to enter the equity market, requiring insurance firms to allocate at least 30 per cent of their new premium income into stocks. This, combined with corporate share buybacks supported by a People’s Bank of China refinancing policy, is reinforcing confidence in high-quality dividend-paying stocks.

The chase for yield is also spurring interest. The 10-year treasury bond trades at 1.7-1.8 per cent currently, whereas blue chips can provide a yield of more than 4 per cent — attractive to those insurance companies, the social security pensions and even for a lot of retail money. It is worth noting the market discount that state-owned enterprises still trade at, relative to private enterprises, even as the government pursues its Value Up programme intended to improve corporate governance.

“China cannot rely on the state alone to encourage investors. This is where innovators are stepping in to further boost market sentiment”

Birth-linked subsidies

The evolving policy stance has been a key driver. While previous measures focused on supply-side support, recent initiatives emphasise demand-side stimulus. The government has introduced incentives to boost domestic consumption, including birth-related subsidies, local government debt restructuring, and measures to support real estate markets.

For example, Beijing is allocating RMB12tn ($1.65tn) over four to five years to address local government debt issues. In the property sector, primary home sales are finally showing signs of recovery after four years of decline. The secondary home market has skyrocketed, with tier one cities such as Beijing, Shenzhen and Shanghai recording 20-30 per cent volume growth this year so far.

But China cannot rely on the state alone to encourage investors. This is where innovators are stepping in to further boost market sentiment.

The emergence of DeepSeek, a low-cost large language model, has reinforced confidence in China’s ability to compete in artificial intelligence (AI), despite US restrictions on advanced semiconductor exports. This tallies with China’s broader economic goals of becoming self-sufficient in critical industries such as AI, manufacturing, and energy, where the government is keen to boost domestic capabilities.

The recent meeting between president Xi Jinping and entrepreneurs including Alibaba founder Jack Ma was telling. It sent a signal that the government is keen to foster private enterprise, particularly in the growth industries, albeit maintaining commitment to the Common Prosperity policy intended to smooth out the most extreme differences in wealth in the country. This remains a key plank in the Chinese Dream, alongside being recognised as a big nation alongside the US, Russia and the EU.

Our own way of measuring bottom-up opportunities using a proprietary Free Cash Flow to the Firm (FCFF) Cycle Index pointed to one of the lowest readings in its history at the end of September. It may record another low for the end-December data, but given the fundamental shift of the past several months, we may already have passed the worst of the cycle.

Looking ahead, China’s economy is shifting toward a more balanced growth model. While exports and the Belt and Road Initiative remain strategic priorities, domestic consumption is becoming an increasingly significant driver of economic growth. In March, the 30-point plan was announced, focused on boosting consumer confidence through salary increases for public servants, tax incentives, and social security enhancements. All will be critical in sustaining economic momentum.

Despite persistent concerns such as deflationary pressures and debt challenges, China’s policy shifts, technological advancements, and strong dividend culture position it as an attractive investment destination. As capital reallocations continue, the coming months could mark the beginning of a sustained uptrend in China’s markets.

Luo Jing, investment director and member of the research and portfolio management team, Value Partners