The National Day holiday has witnessed a frenzy among overseas investors striving to secure a piece of the Chinese asset pieA report published by Bank of America Securities on October 4 addressed eight critical questions from clients regarding Chinese assets, highlighting a significant influx of capital into Chinese stocksInvestors aimed to capitalize on the rising A-shares before their market openingThe uncertainty surrounding whether this new capital would alleviate prior underexposure levels remainsRecent figures indicate that overseas Chinese Exchange-Traded Funds (ETFs) have garnered more than 10 billion yuan in net purchases since September 24. Bank of America Securities has recommended investors use swaps to increase their positions in the CSI 500 and CSI 1000 indices or to directly invest in overseas ETFs indexed to the CSI 300.

This capital accumulation suggests a gradual filling of the "underexposure gap." One of the inquiries from clients was about whether the recent surge in funds indicated that Chinese equities were still underweighted

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Bank of America responded that it is challenging to ascertain this without the September and October holding data from public fundsNevertheless, the bank's platform indicates that global capital positions in China are appearing increasingly substantiveOver the past two weeks, there has been a net purchase of $3.4 billion in Chinese stocks, a figure reminiscent of the aftermath of the pandemic's reopeningHowever, the speed of capital accumulation in this instance is notably fasterInvestors worldwide seem eager to make their move ahead of the upcoming Tuesday market open, by buying into Hong Kong stocks, US-listed Depositary Receipts, and ETFs linked to Chinese A-sharesHence, even if there is a market correction when the A-shares open next week, it is expected to be minimal.

When comparing A-shares and H-shares, Bank of America Securities believes A-shares currently offer a more attractive value

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The bank even suggests the possibility of a bull market akin to that of 2014-2015 emerging within the A-share marketOver the past few years, the public has stockpiled substantial savings that could be funneled into the stock marketThe bank highlighted that prior to the bull market initiation in 2014, savings had increased by 15 trillion yuan, while in the current landscape, savers have amassed 40 trillion yuanThis reality suggests a massive pool of capital is poised for investment.

It is also noteworthy that most Asian markets, with the exception of India, had already undergone adjustment phases prior to the rebound in the Chinese stock marketSince May, Japan has experienced roughly $31 billion in capital outflowsThis prompts Bank of America to speculate that if the Chinese market continues its upward trajectory, India may become a destination for capital flight.

In a striking development, the KWEB ETF, which tracks internet stocks, has seen a net inflow exceeding 10 billion yuan as of October 3. Two Chinese ETFs, KWEB and FXI, were among the five most attractive funds in the United States for new capital inflows during the past week

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Data from the ETF tracking site (ETF.com) revealed that KWEB had net purchases exceeding $1.4 billion, whereas FXI attracted $1.251 billion within the same timeframeChinese ETFs are gaining prominence, a scenario that has seldom occurred in the last three years.

The rapid growth of KWEB, buoyed by firm capital inflows, has expanded its size to $7.35 billionFrom September 23 to the present, KWEB attracted net inflows totaling $1.811 billion, equivalent to approximately 12.7 billion yuanThe Chief Investment Officer of the fund's issuer, WisdomTree Investments, Branden Ahern, remarked in an interview on October 3 that there is still room for growth in Chinese stocks.

Despite the Chinese market's impressive rally, the rate at which short positions are being unwound remains sluggishData from S3 Partners indicates that as of October 1, short sellers of US-listed Chinese companies have recorded nearly $7 billion in losses

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The report from S3 detailed that since September 23, China has actively injected stimulus measures aimed at stabilizing the real estate sector and bolstering economic confidenceConsequently, since its low point on September 13, the CSI 300 index has seen remarkable gainsSurprisingly, despite the widespread rebound of Chinese stocks listed in the US, short sellers have refrained from aggressively covering their positions, enduring significant unrealized losses.

On October 1, Alibaba's short position amounted to almost $7 billion, and Pinduoduo surpassed $4.1 billionThese two internet stocks boast the largest short position among Chinese companies in the US marketTypically, a short seller borrows shares to sell and re-purchases them later at a lower priceWith the Chinese stock market soaring, these short sellers face steep unrealized lossesGiven this predicament, why haven't they cut their losses? An equity investment director from a Hong Kong private equity firm offered two insights

The first is a behavioral inertia formed by investors over the past three yearsEach previous upward movement in Chinese equity markets presented opportunities for shorting, leading some investors to cling to this mindsetSecondly, certain hedge funds aim to generate alpha unaffected by market fluctuations, maintaining net positions above 20%, and therefore do not jump onto the bandwagon of rising prices.

S3 Partners predict that if the Chinese market continues its ascent, an unprecedented wave of short-covering could further amplify stock pricesThis is likely to have the most significant effect on AlibabaFollowing this surge, Alibaba's short position has increased, and as short sellers begin to cover their positions en masse, the dual buying pressure from covering and going long could steepen the rate of its price appreciation significantly.

Investors are now closely observing the data emerging from China’s "Golden Week" holidays

Since September 24, regulatory announcements regarding stimulus plans have sparked a global influx of investments into Chinese assetsBlackRock has raised its rating on Chinese stocks to "moderately overweight." Nonetheless, some investors remain cautiousFor instance, Rajiv Jain, the portfolio manager of GQG Partners' emerging market equity fund, expressed that the rebound could be short-lived.

Many overseas entities believe that the future trajectory of Chinese assets hinges on forthcoming stimulus measuresInvestors await the upcoming data from the National Day holiday period to gauge whether consumer spending has rebounded.

Britney Lam, head of long/short strategies at Magellan Investment Holdings, indicated that in the coming weeks, Chinese authorities may announce additional consumer-driven stimulus measures, particularly those related to social welfare and securityThe shift in global asset allocation towards Chinese equities could become a significant catalyst for Chinese assets