Recent developments indicate a significant shift in foreign investment sentiment towards China, igniting discussions among global traders and analysts.

The latest insights from UBS Asset Management shared in their "The Red Thread" report issued on December 5th, paint a remarkably optimistic picture regarding the investment potential within the Chinese stock market

Barry Gill, the Global Investment Officer at UBS, stated, "China is my top pick; it’s currently the cheapest stock market globallyBe it from policy stimulus or corporate capital allocation decisions, there are numerous facets from which China holds surprises for investors."

In an unexpected twist, Wall Street traders have begun to strategize their positions on China's A-share market by leveraging large volumes of bullish optionsReports indicate that on the previous Monday alone, over 200,000 call options for Direxion Daily CSI 300 China A Share Bull 2X Shares (ticker: CHAU) were acquired, reflecting a newfound confidence in China’s economic future.

Moreover, traders have also shown interest in a more leveraged ETF, which aims to triple the stakes on the FTSE China Index, bolstering the theory that the sudden purchasing spree of call options may signify a broader shift in foreign investment sentiment towards Chinese assets—something that astute investors should take note of.

Experts believe that as we approach the end of the year, critical policy windows are opening, suggesting that positive factors may indeed propel the A-share market towards what is often termed the “year-end rally.”

Voices from Foreign Investment Giants

On December 5, UBS Asset Management reiterated an optimistic outlook for investment opportunities in the Chinese stock market, citing strong valuations for numerous quality companies.

Ms

• Fighting for Capital in a Falling Rate Environment
• Growth of Supply Chain Finance Continues
• Fallen Giants Struggle to Rebound
• Gold: Awaiting Its Moment!
• Japan Sells $5.9B in U.S. Bonds, Making Market Moves Again

Shi Bin, head of China equities at UBS Asset Management, remarked, “Many quality companies in the Chinese stock market have valuation levels that are highly attractive, especially those seeing growth in their foreign market shares.”

As global markets increasingly become unpredictable, diversification once again emerges as a core investment principleBarry Gill elucidated on this trend, stating, “China stands out as my preferred choice, being the most undervalued stock market worldwideWith potential across various avenues—from policy stimuli to corporate capital allocation—there lies a wealth of surprises in store for savvy investors.”

The head of Asian fixed-income portfolios at UBS, Guilin noted that Chinese USD high-yield credit is now classified among the best-performing categories of fixed-income assets year-to-date

Over the past four years, the Asian and Chinese dollar high-yield bond markets have undergone significant structural changes, indicating a diversification that didn't exist previously.

According to the report, China has navigated through one of the most challenging phases of its transformation journeyBeyond fiscal and monetary policies, initiatives aimed at ensuring support for consumers, investors, and businesses have also been pivotal in restoring market confidenceBy mitigating risks within the property sector and bolstering the competitiveness of manufacturing and export sectors, China has made substantial progress towards a structural transformation of its economic model.

Additionally, FTSE Russell's official accounts on December 5 indicated that in March 2021, they announced a gradual integration of Chinese government bonds (CGB) into their flagship index, the “World Government Bond Index” (WGBI), starting November of that year over 36 months

This integration was completed in October 2024, marking the inclusion of all qualifying Chinese government bondsConsequently, China has surpassed Japan, becoming the second-largest market in the FTSE World Government Bond Index.

A Surge in Purchases

It’s noteworthy that Wall Street traders are currently placing significant bets on the A-share market through hefty call options.

Recent option market data revealed that over 200,000 call options for Direxion Daily CSI 300 China A Share Bull 2X Shares (ticker: CHAU) were purchased in a single day

At an average contract price of approximately $2.64 each, this transaction amounted to a total investment of around $55 million.

This option empowers holders to purchase up to 20 million shares of the ETF at a set price of $15 before mid-May next year.

Interestingly, this ETF is designed to provide double leverage over the CSI 300 IndexGiven that this ETF typically exhibits relatively low trading volumes for options, such a sudden surge of 200,000 trades within a day is both remarkable and noteworthy.

Furthermore, traders have also started to acquire call options for another more leveraged ETF aiming for triple leverage.

Data shows that last Friday, over 98,000 call options for the Direxion Daily FTSE China Bull 3X Shares ETF (YINN), expiring in January 2026 at a strike price of $27, were processed

On the following Monday, an additional 38,000 call options for YINN were traded, reinforcing the bullish sentiment towards the Chinese market.

Analysts observe that the unexpected influx of bullish options for Chinese equities, especially following recent substantial outflows in the U.Smarkets, may suggest a transformation in foreign investors' attitudes toward Chinese assets—a shift that warrants careful attention from the investment community.

In recent months, the trends of foreign investment in Chinese equity ETFs have exhibited considerable volatilityIn October, there was a record inflow into these ETFs, only to witness significant outflows in November.

Currently, foreign investors are eagerly anticipating that new stimulus measures from China will effectively enhance the country’s economic and capital market conditions.

The recently released November Caixin China Manufacturing Purchasing Managers' Index (PMI) recorded a 51.5, reflecting a 1.2 percentage point increase from October, marking two consecutive months in an expansionary territory

Breaking down the data, both production and new orders indices in the manufacturing sector accelerated expansion, hitting their highest levels since July 2024 and March 2023, respectively.

Global Market Strategist Zhao Yaoting from Invesco Asia Pacific noted that the overall improvement in China's PMI for November signified ongoing momentum in economic growth, reaching a seven-month highHe highlighted that government fiscal stimulus and robust export performance in manufacturing have supported economic growth and are expected to continue driving growth into next year.

Will a Year-End Rally Occur?

As we move into December, the question on many investors minds is whether the A-shares and Hong Kong markets can experience a year-end rally.

CICC has observed that looking back over the last 15 years of market performance from December to February, the market has shown upward trends over half of that period, with significant upward phases correlating with improved investor policy expectations, bolstering fundamentals, and liquidity support.

At this juncture, CICC believes that the prolonged “tumultuous period” for the A-shares may be coming to an end

With the crucial policy windows approaching year-end, optimistic factors could set the stage for a year-end rally.

Guotai Junan Securities also projects that typically, in a stable policy environment devoid of sudden external risks, the likelihood of a year-end, early-year rally (incorporating year-end, new year, and year-end plus early year scenarios) is significantly highIn this regard, keen attention should be given to the December Central Economic Work Conference outcomes for next year’s policy directions.

CITIC Securities highlighted that recent trends indicate a positive shift in earnings expectations, liquidity forecasts, and risk appetite within the market

Early policy initiatives are starting to yield results, with expectations for expanded policy deployments from significant December meetingsWith seasonal factors in play, the inflow of insurance and other long-term capital during year-end is promisingA continued optimistic outlook for year-end rallies prevails, and investors are advised to consider proactive positioning should market volatility occur.

Zhang Jian Securities forecasts that as December unfolds, the market continues to gather momentum for the next stage of trends, potentially transitioning into a breakout phase at any momentUpcoming key economic meetings may set a more positive tone for the following yearAdditionally, debt solutions have substantially reduced local government debt risks, while recent signals from real estate sales and prices have indicated reduced sector risks