The broader Asian markets have shown improved sentiment because of positive trade discussions yet investors remain cautious due to structural problems, including unpredictable regulations and liquidity difficulties.

The latest bilateral talks between the United States and China have set the stage for possible tariff reductions, which has triggered market speculation about strengthened trade relations between both countries. Institutional investors continue to express doubt about rapid improvements in China's equity markets. David Lin, Chief Global Strategist at Axis Capital, explained that unclear regulatory conditions in China prevent significant investment allocations in Chinese stocks.

Limited appetite for Chinese equities

Data on global fund flows shows that investors demonstrate less interest in Chinese equities compared to other emerging markets. Data from EPFR Global shows that equity funds targeted at China experienced $750 million withdrawals in March 2025, whereas broader emerging-market equity funds attracted $3.2 billion in inflows during the same time frame. The gap between market trends illustrates worries that short-term benefits from US-China tariff reductions fail to overcome persistent structural risks which undermine investor confidence about the long-term future.

Regulatory volatility stands as the primary factor that fuels investor caution. Government crackdowns on sectors like technology, real estate, and education have historically caught investors off guard due to their unpredictable nature according to analysts. Lin pointed out that we cannot price risk correctly because policy direction remains unclear. Global money managers have been reallocating funds to India and Southeast Asian markets because these regions demonstrate more stability compared to others.

Liquidity and market transparency remain barriers

Institutional investors interested in Chinese equities face significant challenges due to liquidity concerns. The expansion of China's capital markets has not led to increased foreign participation because access to key market segments remains restricted. While international participation has grown through the Stock Connect programme and other initiatives, international investors can participate, but smaller-cap stocks and bond markets still fail to meet global liquidity standards.

Additionally, concerns about transparency create further hesitation. The hesitation of many fund managers to invest fully in Chinese equities stems from corporate governance discrepancies, inconsistent reporting practices, and a perceived lack of unbiased supervision. A strategist from a major European asset management firm stated during a market outlook seminar that, although tariff de-escalation might cause a rally, the fundamental risks remain too significant to sustain long-term growth for foreign investors.

Implications for portfolio strategy

The existing scepticism about Chinese stocks indicates institutional investors will keep diversifying their investments across emerging markets. Tactical opportunities from tariff de-escalation will likely be viewed as temporary measures rather than strategic decisions. According to a report from Bloomberg Intelligence released earlier this month, investors have adopted a wait-and-see strategy. At the same time, many choose to increase their holdings in markets like Vietnam or Brazil.

Portfolio managers remain cautious about making aggressive changes because the global equity environment faces challenges including increased interest rates along with geopolitical tensions and slowing global economic growth.

Next steps for investors

Investors will likely wait for evident progress in mitigating structural risks before adjusting their portfolios involving Chinese equities. Institutional confidence will depend on ongoing transparent regulatory improvements that favour investors and strengthened market liquidity together with higher corporate governance standards.

US-China tariff de-escalation seems promising, but many investors still focus their efforts on thorough due diligence and risk management instead of speculative excitement. Global money managers hold Chinese equities on the edge of their portfolios until they perceive a stable and more transparent investment environment.