Foreign Capital Shifts to China's Hard Tech: From Internet to Semiconductors, Seeking a 'Second Battlefield' in the AI Era

As global AI-related trades become increasingly crowded, a growing number of overseas investors are seeking a "second battlefield" in Chinese assets to capture opportunities in the AI era.

Multiple foreign institutions note that offshore capital's perception of Chinese assets is shifting from traditional sectors such as consumer and internet toward hardcore technology fields including semiconductors and advanced manufacturing. Looking ahead, as Chinese tech companies continue to improve their global competitiveness and earnings stability, Chinese technology assets are expected to see sustained allocation increases from overseas capital.

Rising Demand for Derivatives

In September, a trader in the United States purchased a large volume of call options on the KraneShares CSI China Internet Fund, betting on a recovery to price levels seen in early 2026.

This is not an isolated case. According to trading desks at international investment banks such as Barclays and UBS, client demand for call options and swap contracts linked to Chinese stock indices has been rising steadily. Meanwhile, an increasing number of strategists are advising investors to use derivative instruments to gain exposure to Chinese equities, particularly small- and mid-cap stocks.

"We have recently observed growing investor interest in bullish strategies on China's equity market. This reflects, to some extent, investors seeking to diversify sources of equity returns as valuations and return expectations for certain popular investment themes in global markets come under question," said Kanwar Singh, Head of Equity Flow Derivatives Sales for Asia Pacific at Barclays.

In a recent report, UBS noted that the CSI 500 index...

"I am more convinced that the Chinese market is entering a phase of 'slow gains rather than sharp rallies, structural moves rather than broad-based rallies.' This precisely explains why investors are increasingly willing to use call option spreads. They are re-establishing long exposure to Chinese assets, but expressing it with disciplined, risk-budgeted optimism—not the euphoria typically seen at market peaks," said Jason Hsu, Founder and Chief Investment Officer of Rayliant Global Advisors.

ETF Launches Accelerate

Beyond derivatives, overseas issuers have been actively launching China-focused technology ETFs this year, with product themes expanding from broad Chinese tech to niche hard-tech sectors such as semiconductors and humanoid robots.

In June, Van Eck Associates launched the first U.S.-listed ETF (SMHC) dedicated exclusively to China's domestic semiconductor industry. The fund tracks the MarketVector China Semiconductor 25 Index, covering companies from design and manufacturing to advanced packaging and asset management.

In August, Defiance ETFs, a U.S. issuer of thematic and leveraged ETFs, launched the first U.S. ETF (CRO) focused on China's humanoid robot ecosystem, including companies such as Harmonic Drive, Inovance Technology, and Hengli Hydraulic.

Additionally, several overseas ETFs have included Chinese tech leaders in their portfolios with significant weightings. For example, the Tema Memory ETF (DISK) has maintained a high allocation to ChangXin Memory Technologies (CXMT). As of September 14, CXMT accounted for 7.55% of the portfolio, ranking ahead of Sandisk and SK Hynix.

The world's largest memory ETF, the Roundhill Memory ETF...

In Hsu's view, the launch of a series of China hardware tech ETFs by overseas firms reflects not only a recovery in risk appetite for Chinese equities among foreign investors but, more importantly, a re-evaluation of what "Chinese technology" truly represents.

"The launch of ETFs focused on China's tech sub-sectors by overseas asset managers, or the inclusion of leading Chinese tech companies in active portfolios, reflects a gradual recognition and reassessment of the value of Chinese tech assets," said Luo Jing, Investment Director at Value Partners Group.

Luo noted that this indicates growing global investor attention to the international competitiveness of China's tech industry, particularly in the hardware sector, where some Chinese companies have secured important positions in global supply chains and developed advantages in manufacturing efficiency, supply chain integration, cost control, and product iteration.

Long-Term Revaluation Opportunity for China's Hard Tech

The increase in foreign allocation to Chinese assets will not happen overnight. Luo acknowledged that overseas investors will continue to monitor factors such as earnings delivery, industry景气度, corporate governance, and the external environment. However, over the medium to long term, if more Chinese tech companies demonstrate stable profitability and global competitiveness, foreign investors are expected to gradually increase their research coverage and allocation to Chinese tech assets.

Xavier Baraton, Global Chief Investment Officer at HSBC Asset Management, said the attractiveness of the Chinese market is supported by multiple factors, including artificial intelligence...

Hsu added that previously, when overseas investors talked about Chinese technology, they often thought first of internet platforms and e-commerce. Now, the focus is shifting to AI, robotics, and new energy.

He believes that an important direction for AI in the next phase is moving from the digital world to the physical world—so-called Physical AI. For robots to achieve large-scale commercialization, they require not only AI models but also motors, reducers, sensors, and batteries.

"For China's capital markets, a truly long-term revaluation will not occur simply because 'Chinese stocks are cheap.' Rather, it will happen as global investors gradually realize: if you want to invest in AI, robotics, semiconductors, and advanced manufacturing over the next decade, you may not be able to bypass China," Hsu said.

(Source: Shanghai Securities News)