China's Asset Surge: A Resurgence in the Market

Following a series of favorable policies, China's assets have recently experienced a robust rebound in the market. This surge has not only revitalized the domestic market but has also caught the attention of international investors, especially with Chinese stocks listed in the U.S. showcasing remarkable growth.

Significant Gains in Chinese Stocks

As the Chinese stock market surges, Chinese concept stocks are also shining on Wall Street. Over the past ten days, notable stocks have seen significant increases. For instance, Bilibili (BILI.US) has seen its share price double, while Futu Holdings (FUTU.US) has increased by nearly 90%. Other major players like Beike (BEKE.US) and JD.com (JD.US) have experienced gains of approximately 75% and over 55%, respectively. Pinduoduo (PDD.US) has also followed suit with a similar increase.

Strong Performance of Chinese ETFs

This impressive market performance is reflected in the rising expectations among investors, leading to a notable influx of hedge funds into the Chinese market. The performance of Chinese asset ETFs listed in the U.S. has shown a strong rebound, reaching new highs. For instance:

• 3x Long FTSE China ETF - Direxion (YINN.US) has surged nearly 132% in the last ten trading days.

• 2x Long China Internet Stocks ETF - Direxion (CWEB.US) has risen close to 115%.

• 2x Long CSI 300 ETF - Direxion (CHAU.US) has exceeded a 92% increase.

• KraneShares CSI China Internet ETF (KWEB.US) and Invesco China Technology ETF (CQQQ.US) have both seen increases of nearly 50%.

A Shift in Foreign Investment

The recent rally in Chinese assets has led to a significant change in foreign investment flows. The return to the Chinese market has become one of the hottest topics among investors. Billionaire hedge fund founder David Tepper recently stated that after the Federal Reserve's interest rate cut, he placed a substantial bet on all Chinese-related stocks, indicating a potential doubling of his investment limits in this sector.

Global Hedge Funds Eyeing Chinese Markets

According to Bloomberg's research, U.S.-based hedge fund Mount Lucas Management has established bullish positions in Chinese ETFs. Additionally, Singapore's GAO Capital and South Korea's Timefolio Asset Management are purchasing blue-chip stocks in China. Meanwhile, Sydney-based Tribeca Investment Partners is acquiring Australian mining companies linked to China.

David Aspell, Chief Investment Officer at Mount Lucas, noted that many investors who had previously distanced themselves from the Chinese market are now returning, betting on a strong rebound before an economic recovery. They are utilizing strategies like call spreads to capitalize on the recovery of consumer stocks like JD.com.

Capital Flows Returning to China

On October 2, market observers noted that funds previously allocated to Japanese and Southeast Asian markets are beginning to return to China. Last week, net outflows were recorded in the stock markets of South Korea, Indonesia, Malaysia, and Thailand, while over $20 billion left the Japanese stock market in the first three weeks of September. BNP Paribas strategist Jason Lui pointed out that some foreign investors are decreasing their holdings in Japan and reallocating funds back to China.

Short Sellers Facing Heavy Losses

Interestingly, a report from market analysis firm S3 Partners revealed that the recent stimulus-driven surge in Chinese stocks has resulted in approximately $69 billion in losses for short sellers trading U.S.-listed Chinese concept stocks. The astounding gains have wiped out nearly $37 billion in profits previously accrued by these short sellers, leaving them with about $32 billion in unrealized losses.

Ihor Dusaniwsky, Managing Director of Predictive Analytics at S3, commented that short sellers had been building positions before the recent rebound, but this activity has slowed since the rally began. Despite the upward movement in U.S.-listed Chinese stocks, short sellers have not rushed to cover their positions. However, S3 anticipates that if the market continues to rise, a significant short covering could further boost stock prices.

Optimism Among Traders

The explosive growth of Chinese assets has become a focal point in the market, prompting options traders to increase their bets on the recovery of the Chinese stock market. In the options market, the call volume for the $43 billion iShares China Large-Cap ETF (FXI.US) has surged to its highest level since February. The premium for contracts betting on a 10% rise versus a 10% decline over the next month has reached its highest level since 2015.

Predictions for Future Growth

Morgan Stanley recently indicated that if the Chinese government announces further spending measures in the coming weeks, the Chinese stock market could rise by an additional 10% to 15%. Mark Mobius, often referred to as the "father of emerging markets," has expressed that the stimulus measures have reinvigorated the Chinese stock market. The intensity and timing of this stimulus have exceeded expectations, leading to a rapid rebound in the A-share index. While the short-term outlook presents opportunities in sectors like technology and consumer goods, Mobius believes that sustaining a bull market will require time and further reforms.

Conclusion

The resurgence of Chinese assets amid favorable policies signals a transformative moment for both local and foreign investors. As the market rebounds, the implications for global investment strategies are significant, making China a focal point for future capital flows. With a potential for continued growth, now may be an opportune time for investors to re-evaluate their positions in this dynamic market.