Under the favorable policy of "one line, one meeting, one bureau," China's stock market suddenly surged yesterday (September 24th), with A-shares and Hong Kong stocks both rising by more than 4%, while just the day before, they were fighting to defend the 2700-point mark.

In terms of U.S. stocks, Chinese assets also had a significant outbreak. On September 24th (Tuesday), U.S. Eastern Time, U.S.-listed Chinese stocks rose sharply, with the Nasdaq China Golden Dragon Index surging by more than 9%, marking the largest single-day increase since 2022.

Today (September 25th), A-shares opened with a straight surge, and although there was a slight decline in the afternoon, it was still safe, with the Shanghai Composite Index closing up by 1.16%, and the Shenzhen Component Index closing up by 1.21%. The Hang Seng Index in Hong Kong also closed up by 0.68%.

A foreign exchange trader at a Hong Kong bank told the reporter from "Daily Economic News" (referred to as "Everyday Reporter" or "Reporter"), "The number of overseas hedge funds buying long offshore RMB has obviously increased, and those who had already bought long hedge funds have added more long positions." "This is also a sign that overseas capital is about to massively increase its layout in Chinese assets."

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Who is buying Chinese assets?

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

Looking at one of the representatives of foreign capital, the Northbound funds, on September 24th, the transaction volume of A-shares' Northbound funds was 165.315 billion yuan, and it further increased to 188.167 billion yuan today.Foreign Capital Turns Bullish:

A-shares May Outperform Other Emerging Markets in the Short Term

On the morning of September 24th, the central bank, the China Securities Regulatory Commission (CSRC), and the State Financial Regulatory General Bureau issued a "big gift package." This includes measures such as lowering reserve requirements and reducing the interest rates on existing housing loans; creating new monetary policy tools to support the stable development of the stock market; further supporting Central Huijin Investment Ltd. 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 significant stimulus measures by the "one bank, one commission, one bureau," several major foreign institutions have shown a clear change in their attitude towards Chinese assets. For example, Goldman Sachs, which had just downgraded China's GDP growth forecast for this year in the middle of this month, clearly stated in its research report on September 25th that Tuesday's focus on shareholder returns and long-term investors can be considered an unprecedented policy emphasis and action. Coupled with the decline in global risk-free interest rates, we believe that for investors seeking tactical "alpha" or long-term investments, the "Shareholder Returns Portfolio" remains one of the best investment themes in the Chinese stock market.

UBS has also shown a clear change in attitude. As recently as May this year, UBS's Chief Investment Office (CIO) believed that there was limited room for the Chinese stock market to rise and did not believe that A-shares could outperform their emerging market peers. On September 24th, the bank's CIO's daily report stated, "China's monetary policy has become more accommodative. We estimate that this reserve requirement ratio cut will add about 1 trillion yuan of long-term liquidity to the financial system. Together with policies such as the real estate market and new monetary tools, this series of stimulus measures represents a welcome shift, indicating that China has taken a more accommodative stance. We expect the stimulus measures introduced on September 24th to provide support to the Chinese stock market in the short term, and we anticipate that interest rate cuts and capital market support will benefit state-owned enterprises concentrated in high dividend industries, including public utilities, telecommunications, energy companies, and financial enterprises."

Morgan Stanley had previously downgraded the MSCI China Index in early August and warned Chinese stock investors to cash out immediately. Today, in the latest research report sent to the reporter of "Daily Economic News," Morgan Stanley expects the A-share market to respond positively to the policy, which may trigger a tactical rebound and even outperform other emerging markets in the short term.

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What to Buy?Foreign investment banks are more inclined towards Hong Kong stocks

Optimistic about high dividend stocks

Regarding Chinese assets, Lynn Song, Chief Economist for Greater China at ING Group, pointed out in an interview with a reporter from Daily Economic News that in the short term, the improvement of market sentiment is obviously a positive signal for the Chinese stock market, and the renminbi also benefits from some capital inflows. However, how long the rebound will last will depend on whether follow-up measures will be introduced and the effectiveness of the implementation of support policies related to the stock market and real estate market.

Lynn Song said: "We do not provide stock market forecasts, but considering the valuation relative to historical average levels, I believe that H-shares may have more room for rebound compared to A-shares, but there are additional risks because the Hang Seng Index is still largely driven by foreign capital and sentiment, and may face some resistance at the 20,000 point level. Given the loose monetary policy, bonds may continue to perform well as an asset class, but the risk lies in 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."

A team of analysts led by Xinquan Chen at Goldman Sachs said in a research report on the 25th that the current tactical rebound context is convincing, which also reminds people of the market context at the beginning of April this year. In terms of the market, Goldman Sachs still prefers H-shares over A-shares because the former's earnings revision trend is relatively strong, absolute valuations and A-H premiums are more attractive, the liquidity of southbound funds is more supportive, and it may be more sensitive to the impact of the Federal Reserve's rate cuts.

However, Goldman Sachs believes that when there are signs of stabilization in the real estate market or policy momentum further strengthens, it will adopt a more positive attitude towards A-shares.

Fidelity Fund is the world's third-largest mutual fund company. Nie Yixiang, Head of Investment and Fund Manager at Fidelity Fund's China company, said to a reporter from Daily Economic News: "A series of major benefits were introduced on September 24, and the market responded positively. Overall, monetary policy exceeded market expectations, and real estate policy basically met market expectations. We believe that the content that truly exceeded expectations is mainly reflected in the liquidity support policies for the market, clearly adding benefits to large-cap stocks and high dividend stocks. Monetary policy has already exceeded expectations, and whether the subsequent market performance can continue mainly depends on whether fiscal policy will also exert force. If the overall profitability of enterprises cannot be improved, after interest rates further decline, the asset shortage may intensify, and stable high dividend and high liquidity large-cap stocks will have more investment and allocation value. Before seeing further efforts from the fiscal side, we continue to be optimistic about high dividend stocks and large-cap high liquidity stocks; remain cautious about the consumer and real estate sectors. Looking forward to the future market, we look forward to subsequent fiscal policy efforts and the end-of-year Politburo meeting to make a positive tone for next year's economy."

Vanguard Group is the largest fund management company in the United States. Grant Feng, Senior Economist of the Asia-Pacific Investment Strategy Department at Vanguard Group, told a reporter from Daily Economic News in an interview that China's latest policies will effectively stimulate market sentiment rebound in the short term and show a positive response. Although bond yields are expected to remain at relatively low levels, they are still a choice for prudent investors. He pointed out that Vanguard Group maintains a long-term investment attitude towards China and has increased its focus on China. However, Grant Feng also pointed out that due to the short time since the policy was released, as far as he observed, there has been no new capital inflow so far.

"With policy support, the stock market will rebound in the short term, but long-term growth still depends on more demand-side policy stimulation. In the long run, the current stimulus policies are not strong enough to improve the fundamentals of Chinese enterprises, and China's real interest rates are still at a relatively high level, leading to the continued existence of weak demand, and the profitability of domestic enterprises may not be able to be improved. We expect the government to introduce a series of policies to solve problems 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 the reporter.Who's Buying?

Hedge Funds Covering Short Positions

Foreign Institutions' Attention is Also on the Rise

On September 24th, the Hang Seng Index achieved a "ten-day rally," successfully crossing the significant psychological threshold of 19,000 points and marking the largest single-day increase since March 1, 2023. Banks, insurance companies, automobiles, real estate, and automotive retail stocks led the gains.

A senior investment research professional at a Hong Kong-based investment institution told the Daily Economic News reporter, "This time, it's mainly medium to short-term funds like hedge funds that are buying, with long-term funds still purchasing less. The original positions of medium to short-term funds in China were quite low, with the proportion of Chinese assets at 4%-6%, and now the change is at most 5%-7%."

According to the investment research professional's observation, medium to short-term funds are primarily purchasing TMT stocks, such as Alibaba and Tencent. The main goal is to profit from a rebound, similar to the market conditions at the beginning of this year and last year, and there is currently no indication of long-term holding. Additionally, since A-shares are generally much more expensive than Hong Kong stocks, many foreign investors are more willing to buy Hong Kong stocks at present.

At the same time, a private fund company executive in Beijing told the Daily Economic News reporter, "From the end of April to the middle of May this year, there was a noticeable inflow of foreign capital into Chinese assets, mainly focused on Hong Kong internet stocks. After June, as economic data weakened and market sentiment was low, there was some outflow of foreign capital. Yesterday (September 24th), there were hedge funds buying and short covering, and in the afternoon, some long-only (long position) funds also started to buy."At the same time, the private equity fund insider further pointed out that foreign capital's purchases of Hong Kong stocks are mainly focused on the internet and certain prosperous consumer stocks, with a small portion also participating in high dividend stocks such as state-owned banks in Hong Kong. In terms of A-shares, they previously bought home appliances and some technology stocks, and on September 24th, some financial and consumer stocks were purchased.

In communication with foreign institutions, the aforementioned private equity insider believes that policies have played a role in boosting the capital market. Foreign capital's position in China is at a historical low level and significantly below the benchmark. Coupled with the high valuation of dollar assets, the policy announcement on September 24th led to a market rebound, and there will be funds buying Chinese assets from a portfolio perspective to prevent the risk of missing out.

In addition, a public fund manager of a QDII fund also told reporters: "Now many hedge funds are closing positions."

The Futu Research Team believes that the Federal Reserve's announcement of a 50BP interest rate cut, combined with the expected incremental policies domestically, may promote the improvement of foreign capital allocation. The direction and extent of foreign capital flows and market recovery are related to the high-low allocation of dollar capital. Currently, some market valuations continue to rise, and global capital is continuously looking for regions with attractive investment returns for layout. At present, the Hong Kong stock market has a relatively high dividend rate and low valuation, which is one of the directions for allocation. Market data shows that after the interest rate cut, the scale of allocation-type foreign capital outflow from Hong Kong stocks has decreased according to EPFR statistics.

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

The aforementioned investment institution in Hong Kong pointed out that foreign capital currently believes that TMT and finance, especially non-bank finance, have the possibility of a short-term rise.

A chief from a securities firm said: "The attention of foreign institutions is indeed increasing, but it has not surged dramatically. The degree of attention to individual stocks has not changed much compared to before. In other words, for foreign capital, the core focus now is still whether the policy has continuity."

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Short-term speculation?

Or long-term bull market?The Renminbi Exchange Rate as a Weathervane

Foreign capital sellers change their attitudes, and foreign institutions are buying in one after another. How long will such behavior last? Perhaps, by looking at the changes happening in the foreign exchange market, we can get a clearer picture.

In the early morning of September 25th, the offshore market exchange rate of the US dollar to the Renminbi (USDCNH) once again reclaimed the "7" integer threshold, setting a new high for the year at 6.9942.

All of this occurred within 24 hours after the People's Bank of China's governor, Pan Gongsheng, emphasized that "the Renminbi exchange rate has a relatively stable solid foundation" on September 24th.

On that day, Pan Gongsheng pointed out that the introduction of a relatively strong monetary policy would, firstly, help support the real economy, promote consumer spending by residents, and boost market confidence. Secondly, the balance of payments has remained basically stable. The current account surplus to GDP ratio in the first half of the year was 1.1%, which is within a relatively reasonable range. Thirdly, the central bank and the State Administration of Foreign Exchange attach great importance to the construction of the foreign exchange market. Market participants have become more mature, their trading behaviors have become more rational, and the market's resilience has significantly increased.

This has further stimulated the popularity of buying Renminbi in the offshore market.

"After the People's Bank of China's governor made the aforementioned remarks on September 24th, the number of overseas hedge funds buying Renminbi in the offshore market noticeably increased. Hedge funds that had already bought Renminbi in the offshore market added more long positions," a Hong Kong bank foreign exchange trader told a reporter from Every Daily.

Correspondingly, an increasing number of Renminbi short sellers among overseas hedge funds are "exiting the market," with some hedge funds even cutting their offshore Renminbi short positions by 30%-40% at one go.

As the offshore Renminbi reclaims the "7" integer threshold, 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 firm Eurizon SLJ Capital, expressed his view that the Federal Reserve's interest rate cuts would prompt Chinese companies to sell $1 trillion worth of dollar-denominated assets, driving the appreciation of the Chinese yuan by up to 10%.

Faced with this viewpoint, many overseas investment institutions were "non-committal" at the time, but now, an increasing number of overseas hedge funds and asset management institutions are recognizing this viewpoint. This is because more and more overseas investment institutions have found that the tide of foreign exchange settlement by Chinese foreign trade companies is causing the recent appreciation of the Chinese yuan to exceed the decline in the US dollar index.

This also leads them to increasingly recognize Pan Gongsheng's view - the external pressure on the basic stability of the Chinese yuan exchange rate has been significantly reduced.

"In the past 24 hours, the atmosphere of the Chinese yuan transaction in the offshore foreign exchange market has changed significantly," the Hong Kong bank foreign exchange dealer pointed out to the reporter. First, the domestic foreign exchange difference transaction, which was once regarded by foreign hedge funds and speculative capital as a tool for shorting the Chinese yuan, has become particularly quiet, because the exchange difference between the domestic and foreign Chinese yuan is only 40-50 basis points, which is difficult to cover the operation cost; second, more and more overseas funds realize that whether it is on a daily or weekly basis, borrowing offshore Chinese yuan positions for short selling is likely to end in failure.

"So, more and more overseas hedge funds learn from their mistakes and turn from short to long, no longer lingering on the so-called Chinese yuan short selling arbitrage transactions," he said. Behind this, more and more overseas hedge funds and asset management institutions have made considerable profits by betting on the appreciation of the Chinese yuan, allowing more overseas capital to see the profit effect of buying the Chinese yuan.

The overseas hedge funds that took the lead in betting on the continuous rebound of the Chinese yuan exchange rate at the beginning of August now have an average annualized return rate of about 6% (including the investment leverage multiple). This return has attracted more and more overseas hedge funds to "flock to it."

More and more overseas investment institutions are increasingly bullish on the Chinese yuan exchange rate, which is also changing their exchange rate hedging transaction strategy for increasing their positions in domestic bonds.

In the past, during the depreciation of the Chinese yuan exchange rate, overseas investment institutions would establish foreign exchange hedging positions to hedge the risk of offshore Chinese yuan exchange rate depreciation while increasing their positions in domestic bonds. Now, with the continuous rise of the offshore Chinese yuan exchange rate and breaking through the "7" integer point, more and more overseas investment institutions choose 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 Chinese yuan exchange rate has a relatively stable solid foundation," the off-exchange foreign exchange options betting on the Chinese yuan exchange rate to rise and break through "7" at the end of the month, and to recover "6.95" at the end of October, are continuously increasing, also showing that the overseas institutions' bullish sentiment on the Chinese yuan continues to rise.

"This is also a sign that overseas capital is about to add a large position in Chinese assets. Under normal circumstances, when overseas capital is about to significantly increase its holdings of Chinese assets, the Chinese yuan exchange rate will often give a rapid rise signal first," the aforementioned Hong Kong bank foreign exchange dealer pointed out.To discern the next moves of foreign institutions in the A-share market, perhaps the Chinese yuan exchange rate could serve as a barometer.