^{Photo: South China Morning Post}

As China attempts to restore foreign investor confidence following a historic drop in capital inflows, global investors are showing tentative interest — but deep skepticism remains. Despite Beijing’s recent promises to open up its economy and support foreign investment, concerns over capital controls, policy unpredictability, and government interference continue to overshadow the recovery.

Beijing’s Balancing Act: Growth vs. Control

China’s leadership faces a tough balancing act — enticing foreign capital while maintaining its long-standing control over money movement. “It’s a capital-controlled market. Everything is protected by denying depositors the freedom to move their money away,” said Charles Li, founder and chairman of Micro Connect and former CEO of the Hong Kong Stock Exchange, during the Milken Institute Asia Summit in Singapore.

For Beijing, financial stability remains paramount, even if it means restricting the free flow of funds. But this very caution is what makes many global investors wary. The sentiment at this year’s Milken Summit was clear: China’s economy is too large to overlook — but still too constrained and opaque to fully trust.

Capital Flight and Investor Anxiety

The world’s second-largest economy has seen a sharp outflow of capital in recent years. According to Chinese data provider Wind, net foreign direct investment (FDI) plummeted from a peak of $334 billion in 2021 to outflows nearing $154 billion in 2024 — its lowest level in more than 20 years.

Much of this retreat stems from Beijing’s tightening grip on the private sector, slowing domestic demand, a prolonged property crisis, and escalating geopolitical tensions with Washington. The combination has eroded investor confidence and made China’s policy landscape harder to navigate.

Even with Premier Li Qiang and other top officials publicly committing to reforms and business-friendly policies, the lingering fear of abrupt regulatory shifts keeps investors on edge.

The Policy Uncertainty Problem

“Foreign investors still have to navigate a system with heavy state oversight and unclear rules about market access and exit routes,” said Song Ma, professor of finance and entrepreneurship at Yale University. “State-backed funds still control a vast amount of quality assets, especially those tied to technology and defense.”

This uncertainty discourages long-term investors who depend on predictability. Adam Watson, partner at Partners Capital — a global asset manager overseeing $60 billion in assets — noted that when planning new private investments, investors need clarity about what the environment will look like a decade from now.

Partners Capital, for example, has cut its exposure to Chinese markets from 8% in 2018 to about 3% since 2021, citing “aggressive government intervention” and “a lack of compelling opportunities.” The difficulty of exiting investments due to legal ambiguities and tightened U.S.-China financial regulations has further complicated matters.

A Slow and Uneven Return

Despite the headwinds, signs of a cautious rebound are emerging. “After a long period of hibernation, some foreign capital is beginning to trickle back into China,” said Guo Kai, executive president of the CF40 Institute, a leading Chinese economic think tank.

Encouraged by new market reforms, breakthroughs in artificial intelligence, and a resurgence of domestic tech players like DeepSeek, investors are re-evaluating their positions. Data from Morgan Stanley shows that August 2025 marked the largest monthly buying of Chinese equities by global hedge funds in six months.

The momentum is also reflected in the markets:

• Hong Kong’s Hang Seng Index has climbed over 35% year-to-date, on track for its strongest annual performance since 2017.
• The Hang Seng Tech Index surged 48%, driven by renewed interest in Chinese tech firms.
• Mainland China’s CSI 300 Index rose 21%, reaching its highest point in over three years.

Beijing’s Next Move

To sustain this momentum, Beijing is offering tax incentives and encouraging foreign firms to reinvest profits domestically. These measures are part of a broader strategy to stabilize foreign capital flows and rebuild global trust.

However, experts say actions must match words. “What China does next to improve transparency, simplify exit mechanisms, and open more sectors to foreign participation will determine if this recovery lasts,” said Ma.

As the government strives to balance economic revival with control, the coming months could define whether foreign investors see China as a renewed opportunity — or an enduring risk.

In the end, China’s challenge isn’t just about attracting capital — it’s about convincing the world that this time, it will stay.