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supported by the favorable policies of "one bank, one commission, and one bureau", china's stock market suddenly surged yesterday (september 24), with a-shares and hong kong stocks both rising by more than 4%, while the day before was still fighting to defend 2,700 points.

in terms of u.s. stocks, chinese assets also exploded. on tuesday, september 24, eastern time, u.s. chinese stocks surged, with the nasdaq china golden dragon index rising by more than 9%, the largest single-day gain since 2022.

today (september 25), a-shares soared at the opening, and although they fell back in the afternoon, they were still safe. the shanghai composite index closed up 1.16%, and the shenzhen component index closed up 1.21%. the hong kong hang seng index also closed up 0.68%.

a foreign exchange trader at a hong kong bank told the reporter of the national business daily (hereinafter referred to as the reporter or reporter), "the number of overseas hedge funds buying offshore rmb has increased significantly, and hedge funds that have already bought it have added long positions." "this is also a sign that overseas capital is about to increase its holdings of chinese assets on a large scale."

who is buying up chinese assets?

is this surge a short-term speculation or a long-term bull market?

looking at northbound funds, one of the representatives of foreign capital, on september 24, the northbound funds of a-shares traded 165.315 billion yuan, and further increased to 188.167 billion yuan today.

1

foreign investment is mostly empty:

a-shares performance in the short term

potentially outperform other emerging markets

on the morning of september 24, the central bank, the china securities regulatory commission, and the state financial regulatory bureau issued a "gift package", including lowering the reserve requirement ratio and the interest rate of existing mortgage loans; creating new monetary policy tools to support the stable development of the stock market; further supporting huijin investment to increase its holdings and expand its investment scope; and promoting the entry of medium- and long-term funds into the market and mergers and acquisitions.

after the announcement of the major stimulus measures by the “one bank, one bureau, and one commission”, several major foreign institutions have shown a significant change in their attitudes towards chinese assets. for example, goldman sachs, which just lowered its gdp growth forecast for china this year in the middle of this month, clearly pointed out in its research report on september 25 that the unprecedented policy emphasis and actions on shareholder returns and long-term investors on tuesday, coupled with the decline in global risk-free interest rates, make us believe that for investors seeking tactical “alpha” or long-term investment, the “shareholder returns portfolio (note: refers to investing in companies that generate stable cash flow, companies with dividends or repurchases that have surprises, and specific central enterprises or state-owned enterprises)” is still one of the best investment themes in the chinese stock market.

ubs's attitude has also changed significantly. as recently as may this year, ubs's chief investment office (cio) believed that china's stock market had limited room for growth and did not believe that a-shares could outperform their emerging market peers. on september 24, the bank's cio stated in its daily report that "china's monetary policy has become more relaxed. we estimate that this reserve requirement cut will add about 1 trillion yuan of long-term liquidity to the financial system. coupled with policies such as the property market and new monetary tools, this series of stimulus measures represents a welcome shift that china has shifted to a more relaxed stance. we expect the stimulus measures introduced on september 24 to provide support to china's stock market in the short term, and we expect interest rate cuts and capital market support to benefit state-owned enterprises concentrated in high-dividend industries, including utilities, telecommunications, energy companies and financial companies."

morgan stanley downgraded the msci china index in early august and warned chinese stock investors to cash out immediately. today, morgan stanley predicted in its latest research report sent to the reporter of the national business daily that the a-share market will respond positively to the policy, which may trigger a tactical rebound and even outperform other emerging markets in the short term.

2

what to buy?

foreign investment banks prefer hong kong stocks

bullish on high dividend stocks

regarding chinese assets, lynn song, chief economist of ing greater china, pointed out in an interview with the "daily economic news" reporter that in the short term, the improvement in market sentiment is obviously a positive signal for the chinese stock market, and the renminbi has also benefited from some capital inflows, but how long the rebound will last will depend on whether follow-up measures will be introduced and how effective the implementation of relevant support policies for the stock market and real estate market will be.

lynn song said: "we don't provide a forecast for the stock market, but given the valuations relative to historical averages, i think h shares may have more room to rebound relative to a shares, but there are additional risks as the hang seng index is still largely driven by foreign capital and sentiment and may face some resistance at 20,000 points. given the loose monetary policy, bonds as an asset class may continue to perform well, but the risk is whether we can still see a significant expansion in bond issuance or whether the people's bank of china will continue to try to steepen the yield curve."

goldman sachs' analyst team led by xinquan chen said in a research report on the 25th that the current tactical rebound background is convincing, which reminds people of the market background in early april this year. in terms of the market, goldman sachs still prefers h shares rather than a shares, because the former has a relatively strong earnings revision trend, the absolute valuation and ah premium are more attractive, the liquidity of southbound funds is more supportive, and it may be more sensitive to the impact of the fed's interest rate cut cycle.

however, goldman sachs believes that when the real estate market shows signs of stabilization or policy momentum is further strengthened, it will take a more positive attitude towards a-shares.

fidelity funds is the world's third largest mutual fund company. nie yixiang, co-investment director of its china company and fund manager, told the reporter of the "daily economic news": "a series of major positive news were released on september 24, and the market responded positively. in general, monetary policy exceeded market expectations, and real estate policy basically met market expectations. we believe that the real unexpected content is mainly reflected in the liquidity support policy for the market, which clearly benefits large-cap stocks and high-dividend stocks. monetary policy has exceeded expectations. whether the subsequent market performance can be sustained depends mainly on whether fiscal policy is implemented simultaneously. if the overall profitability of enterprises cannot be improved, after interest rates fall further, the asset shortage may intensify, and large-cap stocks with stable high dividends and high liquidity will have more investment and allocation value. before further efforts are seen on the fiscal side, we continue to be optimistic about high-dividend stocks and large-cap high-liquidity stocks; we continue to be cautious about the consumer and real estate sectors. looking ahead, we look forward to the subsequent fiscal policy efforts and the politburo meeting at the end of the year to set a positive tone for the economy next year."

vanguard group is the largest fund management company in the united states. grant feng, senior economist of its asia pacific investment strategy department, told the reporter of the daily economic news in an interview that china's latest policy will effectively stimulate the rebound of market sentiment in the short term and show a positive response. although bond yields are expected to remain at a relatively low level, they are still the choice of prudent investors. he pointed out that vanguard group has a long-term investment attitude towards china and has increased its attention to china. however, grant feng also pointed out that since the time after the policy was released was too short, from what he observed, there has been no new capital inflow so far.

"with the support of policies, real estate and consumer companies are expected to rebound. in the long run, the current stimulus policies are not strong enough to improve the fundamentals of chinese companies. china's real interest rates are still at a relatively high level, resulting in continued weak demand, and the profitability of domestic companies may not be improved. we expect the government to introduce a series of policies to solve the problem within the year. for example, the people's bank of china may continue to cut interest rates by 10 to 20 basis points within the year." grant feng added to reporters.

3

who is buying?

hedge funds close short positions

foreign institutions are also paying more attention

on september 24, the hang seng index ushered in its "ten consecutive gains", successfully standing above the important psychological threshold of 19,000 points, and became the largest single-day gain since march 1, 2023. banks, insurance, automobiles, real estate, and auto retail stocks led the gains.

data source: wind

a senior investment researcher working for an investment institution in hong kong told the reporter of china business network: "this time, it is mainly short-term and medium-term funds such as hedge funds that are buying, and long-term funds are still buying less. the original positions of short-term and medium-term funds in china were very low, with chinese asset positions accounting for 4%-6%. now the maximum change is 5%-7%."

according to the investment researcher, short-term and medium-term funds mainly buy tmt, such as alibaba and tencent. it is mainly for rebound, similar to the market at the beginning of this year and the beginning of last year. there is no long-term holding at present. in addition, because a shares are much more expensive than hong kong stocks, many foreign investors are still more willing to buy hong kong stocks.

at the same time, the private equity fund person further pointed out that foreign investment in hong kong stocks mainly focuses on the internet and some booming consumer stocks, and a small part of them will also participate in high dividends such as state-owned banks in hong kong stocks. in terms of a-shares, home appliances and some technology stocks were purchased before, and some financial and consumer stocks were purchased on september 24.

in the communication with foreign institutions, the aforementioned private equity person believes that the policy has boosted the capital market. foreign capital positions in china are at a historical low level and significantly lower than the benchmark. in addition, us dollar assets are at a high valuation and are expensive. therefore, when the policy was released on september 24 and the market rebounded, there will be funds buying chinese assets from an allocation perspective to prevent the risk of missing out.

in addition, a public qdii fund manager also told reporters: "many hedge funds are closing their positions now."

futu's investment research team believes that the fed's announcement of a 50bp rate cut, combined with the expected incremental policy in china, may promote the improvement of foreign capital allocation. the flow of foreign capital and the degree of market recovery are related to the high and low allocation of us dollar capital. at present, the valuation of some markets continues to rise, and global capital continues to look for regions with considerable investment returns for layout. at present, the hong kong stock market has a high dividend rate and a low valuation, which is one of the directions of allocation. market data shows that after the interest rate cut, according to epfr statistics, the scale of allocation-type foreign capital outflow from hong kong stocks has decreased.

at the same time, the valuation of the a-share market is already at a relatively low level. positive policy signals are expected to boost investor confidence. the stable upward trend of the market also depends on the expected improvement in the fundamentals of listed companies. it is expected that core assets such as large-cap blue-chip stocks in a-shares and technology and internet stocks in hong kong stocks will attract foreign capital inflows.

the aforementioned person from the investment institution in hong kong pointed out that foreign capital currently believes that tmt and finance, especially non-bank finance, have the potential to rise in the short term.

the chief executive of a securities firm told reporters: "foreign institutions' attention is indeed still increasing, but it has not increased dramatically, and the degree of attention paid to individual stocks has not changed much compared with before. in other words, for foreign investors, the core concern now is whether the policy is continuous."

4

short-term speculation?

or a long bull?

the rmb exchange rate is a weather vane

foreign sellers have changed their attitudes, and foreign institutions have bought in. how long will this behavior last? perhaps, we can see more clearly what is happening in the foreign exchange market.

in the early morning of september 25, the usdcnh exchange rate in the offshore market once regained the integer mark of "7", setting a new high of 6.9942 this year.

all this happened within 24 hours after pan gongsheng, governor of the people's bank of china, stressed on september 24 that "the rmb exchange rate has a relatively stable and solid foundation."

on the same day, pan gongsheng pointed out that the introduction of a relatively strong monetary policy this time will, first, help support the real economy, promote residents' consumption and boost market confidence. second, the balance of payments remains basically stable. the ratio of current account surplus to gdp in the first half of the year was 1.1%, which is in a relatively reasonable range; third, the central bank and the state administration of foreign exchange attach great importance to the construction of the foreign exchange market, market participants are more mature, trading behavior is more rational, and market resilience has been significantly enhanced.

this has further stimulated the buying sentiment of the rmb in the offshore market.

"after the governor of the people's bank of china expressed the above views on september 24, overseas hedge funds buying the offshore rmb increased significantly, and hedge funds that had previously bought the offshore rmb added to their long positions." a hong kong bank foreign exchange trader told the reporter of the china business network.

correspondingly, more and more rmb shorts among overseas hedge funds have "exited", and some hedge funds have even cut their offshore rmb short positions by 30%-40% in one go.

reporters from the china business network learned from multiple sources that as the offshore rmb regained the integer mark of "7", certain viewpoints that were once "forgotten" by the financial market have become popular again.

previously, stephen jen, the founder of the "dollar smile theory" and ceo of the well-known asset management company eurizon slj capital, expressed the view that the fed's interest rate cut will prompt chinese companies to sell $1 trillion in dollar-denominated assets, pushing the renminbi to appreciate by up to 10%.

many overseas investment institutions were “noncommittal” about this view at the time, but now, more and more overseas hedge funds and asset management institutions agree with this view. this is because more and more overseas investment institutions have found that the surge in foreign exchange settlement by chinese foreign trade enterprises is causing the recent increase in the rmb exchange rate to be higher than the decline in the us dollar index.

this also makes them increasingly agree with pan gongsheng's view that the external pressure for the basic stability of the rmb exchange rate has been significantly reduced.

"in the past 24 hours, the rmb trading atmosphere in the offshore foreign exchange market has changed significantly." the above-mentioned hong kong bank foreign exchange trader told the reporter of the economic daily. first, the domestic foreign exchange differential trading, which was once regarded as a weapon for shorting rmb by overseas hedge funds and speculative capital, has become particularly deserted, because the rmb exchange rate difference between domestic and foreign markets is only 40-50 basis points, which is difficult to cover the operating costs; second, more and more overseas funds have realized that whether they borrow offshore rmb positions to sell short on a daily or weekly basis, they are likely to end in failure.

"therefore, more and more overseas hedge funds have learned from their mistakes and have turned from short to long, no longer clinging to the so-called short-selling arbitrage transactions of the rmb." he told the reporter from the china business network that behind this is that more and more overseas hedge funds and asset management institutions have made considerable profits by betting on the appreciation of the rmb, allowing more overseas capital to see the money-making effect of buying the rmb.

the reporter learned that the overseas hedge funds that were the first to bet on the continued appreciation of the rmb exchange rate in early august now have an average annualized monthly return of about 6% (including investment leverage multiples). this return has attracted more and more overseas hedge funds.

more and more overseas investment institutions are increasingly bullish on the rmb exchange rate and are also changing their exchange rate hedging trading strategies to increase their holdings of domestic bonds.

in the past, during periods of rmb depreciation, overseas investment institutions would establish foreign exchange hedging positions while increasing their holdings of domestic bonds to hedge the risk of offshore rmb depreciation. now, as the offshore rmb exchange rate continues to rise and breaks through the "7" integer mark, more and more overseas investment institutions are choosing not to establish foreign exchange hedging positions.

the reporter learned that within 24 hours after the central bank governor pan gongsheng emphasized on september 24 that "the rmb exchange rate has a relatively stable and solid foundation", over-the-counter foreign exchange options betting on the rmb exchange rate to rise above "7" at the end of the month and to regain "6.95" at the end of october continued to increase, which also shows that overseas institutions' bullish sentiment on the rmb continues to rise.

“this is also a sign that overseas capital will soon increase its holdings of chinese assets on a large scale.normally, when overseas capital is about to increase its holdings of chinese assets, the rmb exchange rate will often be the first to give a signal of rapid rise. "the aforementioned hong kong bank foreign exchange trader pointed out.

to see clearly the next move of foreign institutions in the a-share market, perhaps the rmb exchange rate is the weather vane.