This article first appeared on GuruFocus.

UBS (NYSE:UBS) Asset Management has outlined a scenario in which China could see rising capital inflows if global investors step up diversification away from US assets amid mounting policy uncertainty. Speaking in Shanghai, Massimiliano Castelli, head of global sovereign markets strategy at UBS Asset Management, said that if tensions tied to the US intensify including further strain in the Treasury market and continued political pressure on the Federal Reserve that weakens credibility central banks could lift their medium-term target allocation to the yuan toward 10%. That would represent a step up from the roughly 6% average long-term allocation target cited by around 40 central banks in a UBS survey last year, even as IMF data show the yuan made up just 1.9% of global foreign-exchange reserves as of September 2025.

• Warning! GuruFocus has detected 6 Warning Sign with UBS.

• Is UBS fairly valued? Test your thesis with our free DCF calculator.

Castelli framed this potential shift against growing scrutiny of US policy direction under US President Donald Trump, with some investors reassessing assets long viewed as core portfolio anchors. He emphasized that the dollar’s dominance is not under immediate threat, noting it still accounts for more than half of global transactions and is expected to remain the leading currency over the short to medium term. Recent dollar weakness, he said, appears driven more by cyclical forces such as interest-rate differentials than by structural change, even as strong central-bank gold purchases and choppy trading patterns point to lingering unease around the greenback.

Within that backdrop, UBS sees scope for China to attract incremental flows across both reserves and equities. Castelli said Chinese stocks could draw more inflows this year, supported by looser policy conditions and rising institutional interest in artificial intelligence and high-value manufacturing. He added that the yuan could gradually appreciate against a basket of peers without significantly undermining export competitiveness, and that progress on market liberalization and transparency could enhance the currency’s longer-term appeal. Looking ahead to 2026, UBS remains constructive on global markets absent major shocks, with a positive outlook for equities and selective opportunities in fixed income at current yield levels.