[Salon] China records bumper capital inflow as Gulf investors hedge against US

https://www.scmp.com/economy/china-economy/article/3314922/china-records-bumper-capital-inflow-gulf-investors-hedge-against-us?module=top_story&pgtype=homepage

China records bumper capital inflow as Gulf investors hedge against US

18 Jun 2025

China saw a US$33 billion capital inflow in May, as investors seek a safe haven and reduce their US exposure amid rising global instability

China has attracted a growing influx of capital from Middle Eastern investors seeking to diversify their US-heavy portfolios in recent months, but Beijing will need to further open up its financial markets to sustain the trend, analysts said.

Beijing announced on Tuesday that China had recorded a US$33 billion net capital inflow from non-banking sectors and higher foreign holdings of Chinese equities in May – an acceleration from April’s US$17.3 billion inflow.

The department did not break down the figures by country, but analysts noted a growing trend for global investors – including large Gulf sovereign wealth funds – to pivot towards stable, high-growth markets in Asia amid rising global instability.

“It is possible that some funds have been withdrawn from the US market for safe-haven purposes and redirected towards major trading nations and countries with substantial overseas net assets, such as China,” said Sun Lijian, director of Fudan University’s Financial Research Center in Shanghai.

Washington’s support for Israel amid an escalating regional conflict had left Gulf investors reluctant to put “all their eggs in one basket”, according to Sun.

The growing capital inflows into China also reflected the Gulf states’ increasing confidence in China’s opening-up policies and efforts to internationalise the yuan, he noted.

The Abu Dhabi Investment Authority (ADIA) and Kuwait Investment Authority (KIA) were among the top 10 shareholders of 51 companies listed on China’s A-share markets as of the end of the first quarter, with their total holdings exceeding 16 billion yuan (US$2.23 billion), according to the state-run newspaper Securities Times.

While overall Gulf assets in Asia are still far below their holdings in the US or western Europe, this pivot is significant

The ADIA obtained Qualified Foreign Institutional Investor status, which allows it to invest in Chinese A shares, as early as 2008, and its investment focus has gradually expanded from the pharmaceutical and biotechnology sectors to industrial hardware, building materials and beyond.

The KIA, meanwhile, obtained a QFII licence in 2011 and has focused on investing in sectors including home appliances, machinery, industrial hardware, automotive components and electrical equipment.

Gulf sovereign wealth funds have increasingly pivoted towards Asia since 2022, with many establishing new offices throughout the Asia-Pacific region and substantially increasing their capital allocations to high-growth economies including China and Asia, according to a Deloitte report released in March.

Major Gulf funds have identified opportunities to capitalise on the geopolitical decoupling between China and the West, stepping into the Chinese market as Western investors look to exit, the report said.

“While overall Gulf assets in Asia are still far below their holdings in the US or western Europe, this pivot is significant,” it added.

The funds are also benefiting from closer political and trade ties between China and the Gulf nations. Last month, Chinese Vice-Premier He Lifeng met the chairman of the ADIA’s management committee, Majed Al Romaithi, and stressed Beijing’s support for investment from foreign institutional investors.

Around 62 per cent of the investments in China by sovereign wealth funds come from Gulf nations, including the ADIA, KIA and Saudi Arabia’s Public Investment Fund (PIF), according to a report by Global SWF, a data platform tracking sovereign wealth funds, released in January.

China’s inflows from sovereign investors rose by 21 per cent year on year in 2024, according to the platform’s tracker of nearly 750 state-owned investors worldwide.

But Beijing will need to further open up its financial system to continue attracting more foreign investment, as investors still face a range of obstacles in China, according to Jamus Lim, associate professor of economics at the ESSEC Business School.

“Foreign investment opportunities there are limited, especially beyond listed stocks or government bonds,” he said. “The renminbi is not fully convertible, and perhaps most importantly, a capital exit strategy is not always assured.”

Beijing has pledged to introduce more financial reforms.

Wu Qing, chairman of the China Securities Regulatory Commission, said that China would optimise its QFII system to allow more foreign participation in financial trading during a speech at the Lujiazui Forum in Shanghai on Wednesday.