Outbound investment from China has grown steadily in recent years, and Chinese companies with the highest exposure to international revenue sources have outperformed the broader China market.

Although Chinese equities generally performed poorly from 2021 through 2023, certain dedicated China funds earned double-digit annualized returns. We propose a three-layer framework to help demystify the drivers of excess returns in the China market. 

Since early January, several forces, including leverage and crowded longs in small- and micro-cap stocks, have contributed to a mini liquidity crisis among some quantitative mutual and hedge funds in China.

Northbound outflows set a record in the last five months of 2023, primarily exiting the financial, consumer-staples, industrial, materials and information-technology sectors.