According to the latest data from the overseas trading platform marketchameleon, the call option trading volume of the iShares China Large Cap ETF (FXI), which monitors Chinese stocks abroad, has surged in the past week, attaining its zenith in over a year. Concurrently, the bullish contract trading volume of the KraneShares CSI China Internet ETF (KWEB), concentrated on the technology sector, has also ascended, reaching the second highest echelon in historical records.
Certain analysts posit that, extrapolating from the aforementioned signals, discernible interest has surfaced among major foreign banking institutions and hedge funds regarding the current valuation allure of the Chinese market. Bank of America strategist Michael Hartnett opines that investing in Chinese equities presently may constitute the most enticing contrarian long-term prospect globally.
Simultaneously, the competitive environment among bargain-seeking funds within the domestic market has intensified. Per Wind data, as of January 28, the net influx of capital into stock ETFs within a singular week reached an impressive 72.468 billion yuan. On January 22, the daily net influx of capital into stock ETFs exceeded 38 billion yuan, establishing a new pinnacle since 2023. Observing a protracted timeline, starting from January 2024, stock ETFs have garnered a cumulative influx exceeding 140 billion yuan.
Contemplating the market’s trajectory, a recent research report disseminated by CITIC Securities asserts that the strategy of stabilizing the capital market has centered on elevating market expectations in the immediate future. Since the inception of the year, the adverse feedback loop in the market’s liquidity cycle has been effectively arrested. With the gradual realization of performance risks, the market is entering a monthly-level resurgence trading phase.
Serendipitous Developments Abound
Referring to the latest data from the overseas trading platform marketchameleon, the call option trading volume of the iShares China Large Cap ETF (FXI), shadowing Chinese stocks on foreign soil, has surged dramatically in the preceding week, culminating in a pinnacle not witnessed in more than a year.
Noteworthy is the fact that the iShares China Large Cap ETF ranks among the largest ETFs in the United States tracking the Chinese stock market, boasting an asset size of $4.2 billion (approximately RMB 30 billion).
As per research conducted by China Merchants Securities, the underlying index monitored by the iShares China Large Cap ETF is the FTSE China 50 Index. From the standpoint of constituent stocks, it predominantly holds Chinese large-cap stocks listed on the Hong Kong Stock Exchange. Key heavyweight stocks encompass Alibaba Hong Kong shares (9.2%), Tencent (8.7%), China Construction Bank H shares (7.4%), Meituan (7.0%), and ICBC H shares (4.7%).
It’s crucial to note that since January 2024, the option positions of FXI have undergone substantial alterations, with the proportion of long positions consistently attaining new zeniths.
According to tracking data from China Merchants Securities, the total trading volume of FXI options on January 9 skyrocketed to 500,000 contracts, wherein the call option trading volume exceeded 405,000, constituting over 80%. This level of activity hadn’t been observed in less than a month since the last occurrence.
A mere fortnight later, FXI call option trading volume reached another zenith this week, with the proportion of call options soaring to an impressive 86%.
China Merchants Securities has previously clarified that the escalation in call option positions, in and of itself, does not provide directional cues. However, historically, when call option positions reach relatively elevated points, the underlying FTSE China A50 Index it shadows often experiences a rebound with substantial gains.
Moreover, Caitong Securities analyst Li Meicen highlighted in a recent report that the surge in FXI call option positions in the short term might indicate a revival of external market confidence in A-shares.
Furthermore, the optimistic sentiment toward Chinese assets among foreign investors is affirmed by the recent surge in northbound fund flows. According to Wind data, the weekly net outflow of northbound funds has ceased. In the past five trading days, there were four days of net inflow of northbound funds, accumulating a total net inflow of 12.102 billion yuan in a singular week. In the preceding three weeks, there was consistent net outflow of northbound funds, amounting to a total of 31.458 billion yuan.
Explosive Inflow Surpasses 140 Billion
Over the last five trading days, A-shares have staged a noteworthy resurgence. Bolstered by a series of favorable policies, the Shanghai Composite Index has notched up four consecutive gains, successfully reclaiming the milestones of 2800 points and 2900 points, with a weekly surge of 2.75%.
From a market value perspective, as of last Friday’s close, the aggregate market value of A-shares approximated 79,984.9 billion yuan, representing a cumulative increase of approximately 1,313.5 billion yuan in a solitary week.
Amidst this formidable resurgence, the competition among bargain-hunting funds has intensified, and stock ETFs have emerged as the linchpin in attracting these funds.
Per Wind data, as of January 28, the net weekly capital inflow into stock ETFs reached a staggering 72.468 billion yuan. On January 22, the daily net capital inflow into stock ETFs surpassed 38 billion yuan, setting a new record for a single day since 2023. On both January 24 and January 26, the net capital inflow exceeded 10 billion yuan on each trading day.
Over an extended timeframe, since January 2024, stock ETFs have garnered over 140 billion yuan in cumulative funds. This marks the second consecutive month that stock ETFs have attracted over 100 billion yuan in funds, posing a potential challenge to the record net inflow of 160.7 billion yuan in August of the previous year.
Industry insiders underscore that stock ETFs, characterized by transparent holdings, modest fees, and robust liquidity, have consistently served as a convenient investment tool for market participants. Many trading investors prefer utilizing stock ETFs to navigate market fluctuations.
From a capital flow perspective, ETFs featuring concentrated heavyweight stocks, such as CSI 300 and SSE 50, have been the primary destination for capital inflows.
Wind data reveals that as of January 28, the CSI 300 ETFs managed by the prominent index giants Huatai-Berry, E Fund, Harvest, and ChinaAMC occupied the top four positions in the net inflow list of stock ETF funds for the week. Among them, the Huatai-Berry CSI 300 ETF secured the leading position, with a net capital inflow exceeding 17.5 billion yuan, and the cumulative net capital inflow of the four CSI 300 ETFs amounted to an impressive 54.633 billion yuan.
At this juncture, the foremost concern for investors is likely the trajectory of this A-share resurgence. The latest research report from CITIC Securities contends that the strategy of stabilizing the capital market has concentrated on augmenting market expectations in the short term. Since the commencement of the year, the negative feedback loop in the market’s liquidity cycle has been effectively disrupted. As the perils associated with performance forecasts gradually materialize, the market is poised to enter a monthly-level rebound trading phase.
CITIC Securities delineates three key rationales:
Primarily, regulatory authorities have promptly responded to market apprehensions, with reforms on the investment front anticipated to accelerate. Support policies in the real estate sector have been substantially bolstered, with further interest rate cuts expected in February. The State-owned Assets Supervision and Administration Commission continues to underscore the investor returns of listed central enterprises, with heavyweight stocks of central enterprises serving as a stabilizing force. Policies aimed at enhancing the business environment are being rolled out with frequency, fostering expectations of a gradual restoration in market confidence.
Secondly, quasi-“levelling” funds are alleviating the pressure of snowball knock-in and quantitative liquidation, expediting the process of equalizing institutional positions.
Finally, as annual report performance forecasts are progressively actualized, the performance risks in the fourth quarter of 2023 are being fully realized. The rebound window period is expected to continue exhibiting transaction-oriented fund characteristics. Low-volatility dividends of central enterprises and high dividend sectors are poised to be the most consensual mainstay during this window period. Moreover, attention should be directed towards the deployment opportunities of undervalued blue-chip stocks.
CICC Research concurs that positive transformations are underway at the policy level, with short-term liquidity risks gradually dissipating, and the index displaying signs of recovery. Nevertheless, the overall performance of growth industries and small and medium-cap styles, heavily held by institutions at present, remains weak, indicative of ongoing investor risk aversion. Combining cautious expectations implied by current low valuations with positive shifts in policy dynamics, there’s no compelling reason to adopt an excessively pessimistic outlook on subsequent market performance. Allocation strategies should, in the short term, emphasize areas poised to benefit from policy shifts, focusing on a blend of offensive and defensive recovery and dividend-yielding assets.