Foreign investment in China’s A-share market is expected to continue in the second half of 2023, though at a slower pace than the record inflows seen in the first half, analysts said at a recent conference.

Meng Lei, China equity strategist at UBS Securities, spoke at UBS’s annual China A-share strategy conference in Shenzhen on Monday, outlining expectations for foreign holdings of domestic mainland shares denominated and traded in yuan. According to Meng, overseas investors increased their exposure to A shares significantly during the first half of the year, with total foreign holdings reaching approximately 4.4 trillion yuan (HK$5.1 trillion) by the end of June—a historic high for the market.

This surge was driven largely by global fund managers rapidly expanding their positions, particularly in sectors linked to artificial intelligence (AI) and green energy. Holdings under the Qualified Foreign Institutional Investor (QFII) scheme jumped 87 percent in value, reaching 272.8 billion yuan at the end of June, according to data from financial services provider Wind.

Despite the strong inflows, Meng noted several factors contributing to a more cautious outlook among foreign investors in recent months. Much of the second-quarter buying was concentrated in technology stocks, which have since declined in the third quarter amid renewed concerns about sector valuations internationally. This pullback, combined with rising long-term U.S. Treasury yields—which serve as a benchmark for global borrowing costs—has tempered appetite for emerging-market equities, including China’s A shares. The 10-year U.S. Treasury yield hovered around 4.75 percent at the end of August.

“Higher U.S. yields could make some investors hesitant to allocate capital to emerging markets,” Meng said, adding that China remains part of this investment universe.

Nonetheless, he emphasized that net foreign inflows into the A-share market are likely to persist, supported by China’s strategic focus on technological self-sufficiency. The unique industrial ecosystem within China’s tech sector continues to attract global interest, he explained. Additionally, the yuan’s sustained strength and forecasted appreciation over the next year enhance the attractiveness of yuan-denominated assets by improving returns for foreign investors.

Meng also highlighted potential opportunities beyond technology stocks, pointing to Chinese exporters and high-end manufacturers as promising targets for overseas capital.

Overall, while the pace of foreign inflows may moderate compared to the first half of 2023, structural factors and ongoing reforms appear to provide continued support for foreign investment in China’s domestic equity market through the remainder of the year.