Foreign Capital Expected to Further Flow In

Morgan Stanley stated that the trend of foreign capital inflows may accelerate, driven by Chinese regulators' efforts to improve shareholder returns, attractive valuations in the Chinese stock market, and growing expectations of U.S. interest rate cuts. Lower U.S. interest rates could lead to capital repatriation from other countries and bring new inflows to China's capital market.

In July, U.S. inflation data did not rebound further due to the drag from energy components, leading to increased market expectations for a Fed rate cut in September. The market has largely priced in the likelihood of a September rate cut, and the focus has shifted from "whether there will be a rate cut" to "how large the rate cut will be." According to CME's "FedWatch" data, the probability of a 25-basis-point rate cut in September is as high as 93.8%, while the chance of a 50-basis-point cut has risen to 6.2%.

During the Fed's rate-cutting cycle, narrowing interest rate differentials between the U.S. and other countries, along with periodic dollar weakness, could help alleviate capital outflow pressures in emerging markets. At the same time, Fed rate cuts are often accompanied by temporary economic slowdowns, leading to lower short-term risk-free returns, which may motivate capital to seek higher returns elsewhere.

CICC believes that, given the constraints of the China-U.S. interest rate differential and exchange rates, Fed rate cuts will undoubtedly provide more room and conditions for domestic monetary easing. Fed rate cuts could ease liquidity pressures and policy constraints, offering a temporary boost, particularly for interest rate-sensitive growth sectors.

Goldman Sachs analysts also noted in a recent report that investor interest in Chinese stocks has risen to its highest level in recent years. This is driven by several factors: demand for diversification beyond U.S. markets, expectations of a stronger RMB against the USD, the emergence of Chinese AI models and applications, domestic support for the private sector, and the discount in Chinese stock valuations compared to global major markets. Goldman maintains an "overweight" rating on Chinese stocks.