In late September,a series of favorable policies catalyzed a significant rally in the A-share market,prompting a substantial influx of overseas capital.Notably,the scale of several Chinese stock ETFs experienced remarkable growth,signaling a renewed interest in the region's equities.However,following this surge,the market underwent a correction as some hedge funds began to adjust their positions,leading actively managed funds to utilize the recent price fluctuations for rebalancing their portfolios.

The rise in the scale of Chinese stock ETFs was particularly notable.On September 24,a coalition of financial regulators unveiled a comprehensive package of policies intended to stabilize the market and promote economic growth.Following this announcement,one of the largest Chinese stock ETFs listed in the U.S.,FXI,saw a dramatic increase in its scale.As of October 10,FXI registered a net inflow of $6.151 billion,bringing its total assets to an impressive $10.58 billion.This marked the first time a U.S.-listed Chinese stock ETF transitioned beyond the $10 billion threshold,a significant milestone that wasn't achieved during previous Chinese stock bull markets in 2015,2019,and 2020.

FXI,managed by the globally renowned asset management firm BlackRock under its iShares brand,tracks the FTSE China 50 Index,which includes the 50 largest and most liquid stocks listed on the Hong Kong stock exchange.The top holdings in FXI’s portfolio encompass major players such as Meituan,Alibaba,Tencent,JD.com,China Construction Bank,Xiaomi,Ping An,BYD,Bank of China,and Industrial and Commercial Bank of China,reflecting the diverse sectors of the Chinese economy represented in the fund.

As the National Day holiday approached,overseas capital was notably aggressive in its acquisition of Chinese equities.On October 9,FXI recorded a staggering net inflow of $1.6 billion within a single day,setting a new record for daily inflows into the fund.This surge can be attributed to a growing belief among investors that the previous underrepresentation of the Chinese market in many international portfolios could present an attractive opportunity.

But what fuels this intense interest in FXI?An executive at a foreign financial institution emphasized that the prior underweight of Chinese equities among overseas investors was now being corrected as the market began its rebound.The FXI ETF serves as one of the most accessible means for investors to gain exposure to Chinese equities amidst this recovery.Alongside FXI,the KWEB ETF,which focuses on Chinese internet stocks,mirrored this trend; on October 1,KWEB reported a net inflow of $687 million,setting a record for daily inflows since its inception,thus bringing its total size to $7.42 billion.

As of October 10,the five largest Chinese stock ETFs listed in the U.S.included not only FXI but also KWEB,which tracks the Chinese Internet index; MCHI,which follows the MSCI China Index; ASHR,which tracks the CSI 300 Index; and YINN,which offers three times the leverage on the FTSE China 50 Index.The current scales for these ETFs stand at $10.58 billion,$7.42 billion,$6.25 billion,$2.96 billion,and $2.48 billion respectively.

In addition to passive ETFs,several actively managed funds have also taken advantage of the market's upward momentum to adjust their holdings accordingly.For instance,the Capital Group,a trillion-dollar giant in active management,has made adjustments to its positions in certain Chinese stocks since October began.The firm increased its holdings in stocks like Trip.com and ENN Energy while trimming its stakes in Tencent,Meituan,and Kweichow Moutai.

Capital Group emphasizes thorough research into the Chinese market.A delegation from the firm visited China at the end of August,providing insights that investors should focus on three key aspects: stocks with potential valuation improvements,companies that prioritize capital returns,and firms that are leading in the global electric vehicle sector.

In addition to bottom-up fundamental research,the Capital Group also forecasts stock risk premiums and valuations based on regulatory,geopolitical,and industry dynamics.Remarkably,they noted that despite the inherent risks that the Chinese market may present,viable investment candidates can still be identified within specific industries and companies—namely,the internet services sector,leisure and tourism in China,the electric vehicle supply chain,and industrial automation.

Furthermore,the Capital Group has asserted that China will remain a critical player in global supply chains across various industries for the foreseeable future.They plan to continue conducting on-the-ground assessments of relevant companies,reinforcing their commitment to understanding the evolving landscape of this pivotal market.

Another investment firm,Baillie Gifford,which has a long-term investment focus,recently shared insights from its China Growth Trust fund manager,Sophie Earnshaw.She expressed the increasing recognition among institutional investors that neglecting the Chinese market poses significant risks when it comes to generating attractive returns for clients.Earnshaw pointed out that certain emerging markets,particularly in the Middle East,have begun to emerge as vital sources of capital for the Chinese market.

As the investor base for Chinese equities undergoes notable changes,she believes that once the trend of economic recovery in China is firmly established,overseas capital will inevitably flood back into the market.Given the attractive valuations still present in the Chinese market alongside the continue positive momentum in fundamental operations,Baillie Gifford's China Growth Trust has recently increased its investments in various Chinese consumer brands.