Beijing’s AI Boom Hides a Bigger Risk for Foreign Investors

The recent news of Fang Xinghai’s probe into algorithm-driven quantitative trading has sent ripples through Wall Street and Washington, highlighting a more profound issue: China’s opaque policy communication. This isn’t just about the sudden suspension of Ant’s IPO or the alleged monopolistic practices investigated in Trip.com. It’s about the fundamental challenge Beijing faces in building trust with foreign investors.

China’s tech advances may be making waves globally, but when it comes to Chinese alternatives, foreign investors remain selective. The reason lies not in emerging market risks, but in the state of policy communication. Liqian Ren, a quantitative manager at WisdomTree, noted that “for China, the number one thing is tech competition, not yet financial market competition.” This lack of transparency has been a hallmark of Beijing’s policies, from surprise yuan devaluations to crackdowns on after-school tutoring and cross-border stock trading.

In contrast, US policymakers have long made efforts to communicate policy intentions clearly. For decades, UBS has skillfully parsed Fed statements to guide policy direction. However, China’s market volatility isn’t due to quantitative trading; it’s often caused by unexpected policy information disclosure. Ren observed that Chinese market swings are significantly higher than in Europe or Japan – markets popular with US investors.

The consequences of this opacity have been seen time and again. Shares of Trip.com plunged nearly 20% after China’s investigation into monopolistic practices, while Futu shares dropped by over 27% on May 22, and UP Fintech fell by more than 25%. Even SoftBank-backed Didi faced a cybersecurity probe and app suspension in China, leading to months-long stock decline and eventual delisting.

Ren noted that Chinese stocks climbed after the DeepSeek R1 release and more recently after the Kimi K3 model launch. However, she cautioned that “good headlines can neutralize some of the Chinese government regulations or abrupt regulations.” The problem is that these regulatory whiplash events have yet to generate returns that exceed US stocks and bonds enough to attract significant amounts of capital willing to overlook the risks.

Foreign investors are holding back due to lack of trust in Beijing’s opaque policy communication. BlackRock Investment Institute has kept a neutral view on Chinese stocks, viewing AI-related opportunities as stock-specific rather than regional plays. With alternative chip plays like CXMT listed in Shanghai, making it difficult for most foreign investors to access, the challenges for Beijing’s policymakers only grow.

Fred Hu, former Goldman Sachs banker and chairman of Primavera Capital, recently told my colleague Anniek Bao that finance – not AI – is Beijing’s biggest challenge. Building a more transparent and stable financial system requires communication and trust, which China needs to work on if it wants to continue its upward trajectory in tech.

In recent months, China has reported chip breakthroughs with some caveats: it remains unclear whether Chinese manufacturers can deliver chip yields close to or above those of ASML machines. The US has launched initiatives to bolster its AI in Asia, but China dominates cheaper models. As the FCC escalates restrictions on Chinese goods, Beijing is threatening retaliation against the US humanoid robot ban.

For foreign investors, the takeaway from this story is clear: while AI might be a growth driver, it’s not enough to overcome the lack of trust caused by Beijing’s opaque policy communication. As China continues its ascent in tech, policymakers would do well to prioritize building a more stable and transparent financial system – one that can reassure foreign investors and unlock the full potential of the Chinese market.