In the past week,we've witnessed a significant shift among hedge funds regarding their investment strategies.While many were initially hesitant,a consistent influx of passive investments into Chinese assets has become evident.As of now,the largest exchange-traded fund (ETF) for Chinese stocks listed in the United States has surpassed the monumental $10 billion mark,reaching an impressive $10.58 billion.This milestone is noteworthy as this is the first occasion in history for a U.S.-listed Chinese stock ETF to breach the $10 billion threshold.In previous bull markets for Chinese stocks in 2015,2019,and 2020,no single U.S.-listed Chinese ETF ever achieved this level of asset size.Recently,the Chinese market has seen a rebound from its lows,prompting a tidal wave of capital inflow and significant growth in certain Chinese stock ETFs.

Since the announcement of stabilizing policies by the country's financial regulators on September 24,the FXI—a prominent ETF—has attracted a net inflow of approximately 43.5 billion yuan in just a few weeks.The latest measures were designed to stabilize markets and bolster economic growth,leading to a staggering growth in FXI's size.From September 23 to October 10,FXI recorded a net buy amounting to $6.151 billion.By October 10,its size had ballooned to $10.58 billion.FXI is managed by BlackRock's iShares brand and tracks the FTSE China 50 Index—a collection of the 50 largest and most liquid stocks listed on the Hong Kong market.

The top holdings within FXI reveal a balanced representation of major Chinese corporations,including Meituan,Alibaba,Tencent Holdings,JD.com,China Construction Bank,Xiaomi Group,Ping An Insurance,BYD,Bank of China,and Industrial and Commercial Bank of China.

Particularly noteworthy was the day of October 9,when FXI attracted a staggering $1.6 billion in net inflow—setting a new record for single-day net inflow for the ETF.What explains the sudden rush of capital into FXI?According to an official from a foreign financial institution responsible for U.S.ETFs,foreign investors had previously been underexposed to the Chinese market.As the market rebounded,utilizing FXI to increase exposure to Chinese assets became one of the most convenient options.Alongside FXI,another popular Chinese ETF,KWEB,demonstrated similar trends; on October 1,it attracted a net buy of $687 million,marking the largest single-day net inflow since its inception.KWEB's latest size reached $7.42 billion.

By mid-October,other notable Chinese stock ETFs listed in the United States included KWEB—tracking the China Internet Index; MCHI—tracking the MSCI China Index; ASHR—tracking the CSI 300 Index; and YINN—providing three times leveraged exposure to the FTSE China 50 Index.Their sizes were recorded at $10.58 billion,$7.42 billion,$6.25 billion,$2.96 billion,and $2.48 billion respectively.

China's recent policy measures have not only benefited its own markets but have also bolstered emerging market indices.In a report dated October 9,Goldman Sachs underscored how these policy maneuvers have supported broader changes within emerging market stocks,leading to widespread rebounds in these markets.Earlier this summer,the broader emerging market stock indices had been under significant pressure.

With the Federal Reserve beginning to ease its monetary policy,the global macroeconomic environment has been ameliorating.Chinese policymakers have recently announced a round of stimulus measures coordinated across various ministries,propelling a robust surge in emerging market stock indices.The MSCI Emerging Markets Index has risen by 11% since mid-September,tallying a year-to-date increase of 15%.The recent rebound was largely driven by Chinese equities,which have surged nearly 40% from their lows.In fact,over the past three weeks,China's performance relative to other emerging markets has outdone any phase observed in the last 25 years.

In the past two weeks,China's influence has been pivotal in elevating the emerging markets index.A comparison of the MSCI Emerging Markets Index and the MSCI Emerging Markets Index (excluding China) has revealed a marked divergence following September 23.Since that date,EEM—linked to the MSCI Emerging Markets Index—has significantly outperformed EMXC,which tracks the same index without Chinese stocks.

Asian hedge funds have also reaped rewards from the robust performance of the Chinese market.For instance,by the end of September,the flagship Dymon Asia hedge fund exceeded $3 billion in size.Furthermore,Goldman Sachs has forecasted further improvements in emerging market equities,upgrading its stance on the Chinese market to 'overweight.' The investment bank has assessed the potential spillover effects of China's growth from economic,foundational,and stock price perspectives.Analysts noted that Korea,Malaysia,South Africa,and even commodity-based markets in Peru and Chile demonstrate a high sensitivity to the growth of China,suggesting they might directly benefit from a Chinese recovery.

An abundance of capital is now looking for entry points into the A-share market,reflecting a bullish sentiment among investors.A research report published by UBS on October 10 projected that the upward momentum in China's A-share market is likely to continue in the near term.However,the increases are expected to happen at a more moderate pace and oscillations may persist,as the sentiment revival driven by policy easing continues.

This influx of funds consists of various new capital streams—including newly opened retail investor accounts,new fund launches,foreign capital that previously maintained low positions in Chinese stocks,and long-term institutional investors waiting on the sidelines to enter the market.Should adjustments occur in the A-share market,the investors who missed the earlier rebound might seize the opportunity to enter or increase their stakes.

Looking ahead,sustainable market rebounds will hinge on corporate profitability.According to UBS,the outlook for the A-share market suggests a potential decline in profitability of approximately 3% year-over-year for the first half of 2024,while industrial profits experienced a year-on-year rise of 4.1% in July before declining in August.If profits gradually improve with the fundamentals,there remains potential for further upward movements in the A-share market.

Who has been driving the recent uptick in the market?UBS proposes that four categories of investors have likely influenced this trend.Firstly,retail investors are anticipated to account for about 60% of A-share market transactions.Notably,the recent surge in trading volume indicates that retail investors are eager to engage as market sentiment improves.Secondly,public funds appear to be active players; the last week of September saw a substantial increase in new fund issuances for stock portfolios,marking a near 9-fold growth to 20.1 billion yuan—highest weekly amount in two years—indicating that public funds now have more capital to invest.Thirdly,certain insurance funds may have played a role in the recent rebound as well.Lastly,foreign capital saw a withdrawal of 74.6 billion yuan between mid-June and mid-August,yet they are likely to have increased their holdings following the recent resurgence in A-shares.

A founder of a Singapore-based asset management firm stated that this ongoing bull market is unlikely to end abruptly,attributing this to sustained policy initiatives aimed at economic stability and the anticipated continuation of inflows of new capital.In the medium to long term,the outlook for the A-share market appears optimistic.