Despite China’s significant AI breakthroughs, foreign investors remain hesitant due to Beijing’s opaque policy communication and unpredictable regulatory actions. This lack of transparency, highlighted by abrupt probes and crackdowns on major companies, creates market volatility that overshadows the country’s technological gains.
While China’s AI sector shows promise with new model launches, it struggles to attract the broad capital needed to overcome inherent investor risks, prompting calls for greater clarity and trust in financial policy. 
Hi, this is Evelyn, writing to you from Beijing. Welcome to the latest edition of The China Connection — a snapshot of what I'm seeing and hearing from local businesses.
China's advancements in artificial intelligence are capturing global attention, but their ability to attract significant foreign investment remains limited. Despite remarkable tech breakthroughs that might concern Washington regarding U.S. tech stock competitiveness, Wall Street investors are exercising caution when it comes to Chinese alternatives. Beijing's distinct communication style, particularly concerning policy shifts and anti-corruption probes, presents a stark contrast to the transparency and predictable regulatory environments foreign investors typically expect.
The Big Story: Policy Communication Hinders Investment
Beyond the inherent risks of emerging markets, it is the opaque nature of state policy communication that continues to deter foreign capital. A recent example is the investigation announced against Fang Xinghai, a Stanford-educated former vice chair of China's securities regulator. Fang was a familiar figure to Wall Street investors in China, unlike many other targets of the country's anti-corruption campaigns. The probe, announced with scant detail, quickly spurred domestic discourse around his past support for algorithm-driven quantitative trading, which has been blamed for market losses and frequently draws regulatory scrutiny.
Liqian Ren, a quantitative manager at U.S.-based fund manager WisdomTree, highlights this challenge: "This is exactly where communication can be better." Ren emphasizes that for China, the immediate focus is tech competition, not yet financial market competition. She notes that China's market volatility often stems from "totally unexpected" policy information disclosure, leading to swings significantly higher than those seen in more transparent markets like Europe or Japan.
While U.S. investors have honed skills in parsing intricate Federal Reserve statements on policy direction – a practice that has arguably reduced market volatility over decades – China's stock markets, only three decades old, lack a reputation for transparency. Major policy changes, from a surprise yuan devaluation in 2015 to recent crackdowns on after-school tutoring and cross-border stock trading, often appear abrupt to outsiders. These sudden moves have led to significant investor losses, such as Trip.com's nearly 20% plunge after an antitrust probe, or Futu and UP Fintech shares dropping over 25% following renewed crackdowns on overseas stock trading services.
Perhaps most strikingly, just days after its U.S. IPO in June 2021, SoftBank-backed Didi faced a cybersecurity probe and app suspension in China, leading to a prolonged stock decline and eventual delisting. While analysts later identified warning signs, investors often failed to grasp their full implications until after the fact.
Despite these risks, positive headlines, such as the DeepSeek R1 release or the Kimi K3 model launch, have seen Chinese stocks climb. Ren suggests these "good headlines" can neutralize some of the impact of abrupt regulations. However, overall Chinese stocks have yet to deliver returns significant enough to consistently outperform U.S. stocks and bonds, and thus attract foreign capital willing to overlook the inherent policy risks.
BlackRock Investment Institute maintains a neutral stance on Chinese stocks, viewing AI-related opportunities as highly stock-specific rather than a broad regional trade. Furthermore, promising alternative chip plays like CXMT, a state-backed memory chip company whose debut saw a nearly 470% surge last week, are often listed in Shanghai, making direct access challenging for most foreign investors. Nevertheless, global stock index giant MSCI has announced CXMT's inclusion in the MSCI China All Shares Index by August 10, potentially opening avenues for foreign funds.
As Fred Hu, former Goldman Sachs banker and now chairman of Primavera Capital, recently articulated, China's greatest challenge lies not in AI but in finance. And finance, more than any other sector, demands trust and clear communication.
Need to Know
China's Chip Breakthrough: Caveats Remain
China's reported advancements in chip manufacturing using homegrown DUV machines come with significant questions. The critical unknown is whether a Chinese manufacturer can achieve a chip yield comparable to or exceeding that of machines from ASML. A lower yield could severely impede the widespread adoption of China's domestic chip-making technology.
U.S. Pushes AI in Asia, China Dominates Cheaper Models
The U.S. is actively promoting American AI in Asia through export programs and other initiatives. However, between the first and second APEC AI meetings, the U.S. has become notably quieter on its progress. Meanwhile, China continues to dominate the market for more affordable AI models, posing a challenge to U.S. influence.
China Threatens Retaliation Over U.S. Humanoid Robot Ban
Following the FCC's escalated restrictions on Chinese goods, including humanoid robots, China's commerce ministry has stated that such actions "severely damage China-U.S. economic and trade stability." Beijing has urged the U.S. to reverse its decision and threatened countermeasures if the ban is not withdrawn.
Coming Up
- Aug. 5: RatingDog China Services PMI
- Aug. 7: China trade data
- Aug. 9: China CPI, PPI
