China re-emerges as a strategic priority for sovereign investors

Emerging markets remain a strategic focus for sovereign wealth funds, but priorities within the opportunity set are shifting. As supply chains fragment, regional blocs gain strength, and political risk becomes a more persistent feature of the investment environment, sovereign wealth funds are adapting. Rather than seeking broad EM exposure, they are building portfolios toward structural growth trends and strategic diversification objectives.

Our 2025 Global Sovereign Asset Management Study shows a clear resurgence of interest in China, with a growing number of institutions positioning the country as a core allocation. Despite ongoing geopolitical tensions, sovereign wealth funds cite attractive local returns, diversification benefits, and China's accelerating leadership in critical technologies as compelling reasons to engage. “We see this as an opportunity to build exposure where future global leadership will emerge,” noted a Middle Eastern investor.

At the same time, broader EM strategies are becoming more targeted. Asia (excluding China) continues to rank high with strong domestic fundamentals, favorable demographics, and an expanding role in global supply chain realignment. Rising middle-class consumption, infrastructure investment, and ongoing policy reforms are reinforcing confidence in Southeast Asia’s longer-term growth trajectory. India also remains a major focus for its scale, expanding digital economy, and relative insulation from global trade tensions. For sovereign wealth funds, these offer differentiated growth profiles and opportunities for political diversification.

Chinese technological leadership in the spotlight 

This year's study shows a significant majority of sovereign wealth funds expect to increase their China allocations over the next five years, led by APAC and Africa-based professionals. Even North American sovereign wealth funds show high willingness to engage, despite current political tensions, to focus on long-term structural opportunities.

This renewed interest reflects a more deliberate, sector-focused approach, targeting areas where China is positioned to achieve global leadership. Sovereign wealth funds are therefore increasingly orienting their China strategies around specific technology ecosystems over broad macroeconomic exposure, seeing China as a global leader in semiconductors, cloud computing, artificial intelligence (AI), electric vehicles, and renewable energy infrastructure.

As a Middle Eastern sovereign wealth fund noted, "There is no real competitor to China in clean energy and green technology. China will dominate solar, wind, EV, and battery markets for decades." An APAC-based sovereign wealth fund echoed: “On semiconductors, cloud, and AI, it's only a matter of time until China closes the gap with the US.”

Divergent views on China's economic transition

While optimism around China's innovation capabilities is widespread, views on the broader economic transition are more mixed. Our study found 78% of sovereign wealth funds believe China's technology and innovation sectors will become globally competitive, and 48% believe China will successfully pivot from an export-led to a consumption-led economy.

The property sector, demographic headwinds, and local government debt continue to weigh in. One North American sovereign wealth fund noted, “We don't see the aging population as the major concern here. However, we do view stimulus-led growth as insufficient and think eventually China will have to open up its markets.” This divergence reinforces the case for selective engagement and influences investment choices.

External managers critical for emerging market success

Sovereign wealth funds continue to rely heavily on active management and specialist expertise to navigate China and broader EMs. External managers are used extensively for more complex or frontier opportunities.An APAC-based institution said, “Most of our EM exposure still comes through EM managers. It’s about navigating complexity with people who know the terrain.”

The emphasis on external expertise highlights a broader strategic point: successful EM investing today demands local knowledge, regulatory insight, and tactical agility, which external managers with deep market specialization are generally seen as best positioned to provide.

Conclusion: the new EM investment playbook

Sovereign wealth funds are reshaping their approach to emerging markets with greater selectivity and an emphasis on long-term structural opportunity. Broad-based EM beta strategies are giving way to targeted allocations built around differentiated ecosystems, technological leadership, and political diversification.