UBS: Foreign Investors’ Willingness to Allocate to Chinese Assets Is Rising, Significant Upside Remains
Table of Contents
You might want to know
1. How quickly can foreign active managers increase their exposure to Chinese equities given current valuation, liquidity and macro conditions?
2. Which segments of Chinese and Hong Kong markets are most likely to attract incremental overseas capital this year?
Main Topic
Representatives from UBS recently outlined a cautiously optimistic view on foreign allocation to China, noting a meaningful increase in interest while emphasizing that the overall allocation remains well below historical peaks. UBS's China CEO and the chairman of UBS Securities, together with the co-head of the global investment banking division at UBS Securities, said at a media seminar that the proportion of global actively managed funds invested in Chinese equities has recovered from a low point in late 2024 of roughly 5% to nearly 7%. Despite that rebound, this level still falls short of the approximately 15% peak seen around 2021, indicating a continued underweight stance by many active managers and substantial potential for further allocation increases.
UBS points to an improvement in corporate earnings as a primary rationale for becoming more constructive on Chinese assets. Their data show that earnings growth for A-share companies in the first quarter has accelerated, contributing to an upward revision of UBS's full-year A-share earnings growth forecast to 11%. Stronger profitability provides a tangible fundamental basis for investors to increase exposure, particularly when combined with improved market liquidity and product development.
On the liquidity front, UBS highlights that the A-share market's liquidity environment has steadily improved in recent years. The scale of industry and thematic ETFs has expanded nearly threefold over the past two years, rising from about RMB 500 billion to roughly RMB 1.5 trillion. That expansion in ETF assets provides deeper secondary market liquidity, making China easier to access for institutional and cross-border investors and reducing market-impact costs for larger flows.
UBS research also highlights currency dynamics as a supportive factor for foreign participation. Their team regards the renminbi as one of the world's core currencies with strong fundamental support this year and estimates an appreciation potential of 3%–4% against major currencies. A strengthening RMB increases the local-currency returns for foreign investors and can act as an additional incentive to allocate to onshore assets.
Turning to the Hong Kong market, UBS notes a high degree of activity and important structural shifts so far this year. New listings have been dominated by hard-tech and next-generation productivity companies, which have become the backbone of IPO issuance. UBS data show that technology and science-oriented issuers accounted for about 63% of Hong Kong IPO proceeds year-to-date, a significant jump from 16% in the same period last year. This shift reflects both issuer preferences and investor demand leaning toward companies with clear technology content and growth stories.
Fundraising in Hong Kong has also accelerated. UBS reported that in the first five months of 2026, Hong Kong equity financing reached approximately $43 billion, up markedly from around $28 billion over the same period last year. UBS's research team projects full-year IPO fundraising in Hong Kong could land between $45 billion and $50 billion, underpinning their confidence that the Hang Seng Index may breach the 30,000 level this year.
Another notable development is a marked pickup in the convertible bond market in Hong Kong. UBS noted explosive growth in listed convertible issuance, with financing via convertibles exceeding traditional equity placements and follow-on offerings in certain cases. High-quality issuers have been able to raise capital at extremely low coupon costs—or even with zero or negative yields on an effective basis—enabling near-zero-cost leverage for large-scale financing needs.
UBS also observed shifts in the investor base for Hong Kong IPOs. Five years ago, U.S. investors made up roughly 30%–40% of IPO allocations, but that share has fallen to about 20% today. In contrast, allocations to European and Middle Eastern investors have risen from roughly 20% to between 30% and 40%, reflecting a geographic diversification of demand that may support continued issuance activity.
Looking ahead, UBS expects the main engine driving China’s capital markets to be substantive earnings growth at the corporate level. They are constructive on two broad categories of assets. The first category comprises large-cap technology leaders poised to benefit from the global rollout of AI applications and a trend toward technology self-sufficiency. The second category includes small- and mid-cap companies with structural capabilities to expand overseas—firms that can capitalize on export growth and international market penetration.
Overall, UBS's remarks point to a combination of improved fundamentals, deeper liquidity, and supportive currency dynamics as the main drivers that could prompt a further meaningful reallocation by foreign active managers into Chinese onshore and Hong Kong-listed assets. While current allocations are recovering, the gap relative to historical highs suggests there is still significant room for foreign capital to increase exposure over time.
Key Insights Table
| Aspect | Description |
|---|---|
| Foreign allocation level | Active funds' China equity weight rose from ~5% to ~7%, below the ~15% 2021 peak. |
| A-share earnings outlook | Q1 profitability improved; UBS raised full-year A-share earnings growth forecast to 11%. |
| ETF and liquidity growth | Industry and thematic ETF assets expanded from RMB 500B to RMB 1.5T, enhancing liquidity. |
| RMB outlook | UBS sees RMB as a fundamentally supported currency with potential 3%–4% appreciation vs major currencies. |
| Hong Kong IPO mix | Tech and sci-tech issuers account for ~63% of YTD IPO proceeds, up from ~16% last year. |
| HK financing | YTD Hong Kong equity financing ~$43B; full-year IPO fundraising could reach $45B–$50B. |
| Convertible bonds | Convertible issuance surged, sometimes outperforming traditional equity raises, with near-zero financing cost for top issuers. |
| Investor base shift | U.S. allocation to HK IPOs down; Europe and Middle East allocations up, diversifying demand sources. |
Afterwards...
Looking forward, the trajectory of foreign flows into China will hinge on continued earnings momentum, further liquidity deepening and stable currency performance. If corporate profits continue to improve and product innovation—particularly in AI, hard-tech and export-oriented SMEs—remains robust, foreign active managers may accelerate reallocation from underweight positions toward parity with historical exposures. Market participants should monitor quarterly earnings, ETF flows, convertible issuance trends and regional investor allocation shifts as leading signals of sustained incremental capital inflows.
