Billions of dollars have been withdrawn from the largest money market exchange-traded funds (money market ETFs) in China's financial markets, which are investment tools with a very high level of security and liquidity, investing in government bonds, central bank notes, repurchase agreements, etc. They are also known as 'cash assets', as their liquidity is almost equivalent to cash, but fundamentally they are investment instruments. At the same time, there have been billions of dollars flowing into the A-share market, especially large ETFs tracking stocks, particularly index ETFs, largely indicating that, under a series of recent stimulating policies by the government, those investors who were skeptical have finally returned to A shares.

Statistical data shows that last week, the largest 10 money market ETFs in the Chinese stock market saw outflows of up to $4.1 billion, while the largest 10 stock ETFs attracted as much as $6 billion of new funds pouring in. This significant shift in fund attitude occurred following a new round of large-scale stimulus measures by the Chinese government since September 24, with these highly unexpected 'stimulus policy combinations' vastly boosting the A-share market, delivering its best performance week since 2008.

Since last week, the Chinese government has introduced a package of stimulating measures to boost the Chinese economy and provide immensely strong liquidity support to the domestic financial markets, also striving to revitalize the long-depressed real estate industry amid the throes of a debt crisis. This comprehensive policy has substantially boosted global investors' confidence in the A-share market, driving the CSI 300 index to surge over 25% since September 24.

In the Hong Kong stock market, the optimism for this envisioned 'bullish market' has become even more intense, benefiting from the unexpected 50 basis point rate cut by the Federal Reserve, kicking off an easing cycle, as well as the liquidity support provided by domestic monetary stimulus policies. Hong Kong stocks have enjoyed the 'double liquidity dividends' from both China and the US. Coupled with numerous bullish catalysts such as domestic promotion fees and policies to drive private sector economic development, the Hang Seng Tech Index soared over 20% last week, while the Hang Seng Index rose over 13%. Following the opening on October 2, the Hang Seng Tech Index continued to rise, although there was a slight correction on October 3, the weekly gain reached as high as 16%.

Statistical data shows that the capital outflow was mainly concentrated in the two largest A-share money market ETFs: the YinHua Exchange-Traded Monetary Market Fund suffered losses of approximately $2.4 billion, and the Huabao WP Cash Enhancement Money Market Fund lost around $1.7 billion, both representing over 10% of the fund size. The inflow scale of the top 10 stock ETFs was led by popular broad-based index ETFs such as Huatai Baoer CSI 300 ETF, which attracted around $2.9 billion in new funds flowing in last week.

As stock fund values ​​rise, cash ETFs face outflows. The weekly capital outflow leader is money market funds, while the stock funds rank first in terms of inflows.

The Chinese government unexpectedly rolled out a series of stimulating measures intended to support the economy and financial markets, including lowering borrowing costs, relaxing rules on purchasing second homes, and providing cash subsidies. Nicholas Ferres, Chief Investment Officer at Singapore's Vantage Point Asset Management, stated that incorporating fiscal stimulus measures into the measures has been a significant driving factor behind the market's strong bullish response. Ferres commented in an interview, 'So far, the new direction is definitely very crucial - this is important.'

Due to rate hikes in many developed market economies to counter once soaring inflation rates, money market funds worldwide have attracted significant inflows. In China, however, investors are flocking to purchase such high-security and highly liquid financial products mainly because the country's stock market has long been in a slump. Wealthy investors seeking asset appreciation are focusing on this low-risk asset, and their long-standing demand for money market ETF investments has even helped non-bank financial institutions evade seasonal liquidity crunches.

In a research report on the rise of the Chinese stock market by Britney Lam, the long-short stock head from Magellan Investments Holdings Ltd, she stated that more investors may choose to "buy first, think later." She mentioned that recent stimulus measures are similar to those announced a decade ago, including local government debt support, which could lead to a continuous surge in the Chinese stock market.

"This seems like a replay, so do not miss this super rebound because of focusing on economic data lagging behind reality," said Britney Lam in an interview. "Like all market cycles, stock valuations are primarily influenced by emotions, followed by fundamental changes."

Not only are domestic investors flocking to the Chinese stock market, but also significant foreign capital is entering the market.

Not only are domestic investors optimistic about A-shares, but also foreign capital, including Wall Street hedge funds, are bullish on A-shares. Recently, these foreign capital entities have heavily bet on A-shares, and Hong Kong stocks are expected to see a new round of bull market.

According to market observers, the tide of funds that earlier left the Chinese stock market to invest in Japan and Southeast Asian stocks is now trying hard to reverse the investment direction after the Chinese government's latest series of stimulus measures. This shift actually began quietly before the holiday: stock markets in South Korea, Indonesia, Malaysia, and Thailand all experienced net outflows last week. In the first three weeks of September alone, over $20 billion has been withdrawn from the historically high Japanese stock market.

Market participants, especially hedge funds, are actively bullish on the Chinese stock market (including A-shares and Hong Kong stocks) through call options derivatives trading. This has pushed the volatility hedging cost for next month's Hang Seng Index futures contracts to a two-year high relative to the six-month term, indicating increasingly strong confidence among institutional investors in the mid-term. It also signifies significant losses for funds shorting the Chinese stock market and seeking 'neutral hedging' strategies, with some institutions even facing liquidation.

Eric Yee, senior portfolio manager at Atlantis Investment Management in Singapore, stated, "We are reducing long positions across Asia to fund purchases of Chinese stocks. It appears that everyone is doing the same, driven by a policy-led strong recovery. You wouldn’t want to miss out on such an opportunity."

Wee Khoon Chong, Senior Market Strategist for the Asia Pacific region at Bank of New York Mellon, stated, "We are seeing a significant increase in interest for Chinese stocks as we head into the Chinese National Day holiday, which is encouraging and signals a potential complete turnaround in global investors' sentiment towards China after long-term outflows." He added that foreign long-term investors started robust buying from last Thursday (26th), showing a clear shift in sentiment.

Renowned global billionaire investor David Tepper has advised investors to "buy everything" related to China, attributing his significant bet on the Chinese stock market to the recent massive stimulus package in China. Tepper's bullish call has led to a sharp increase in the trading volume of bullish options trading on some exchange-traded funds (ETFs) tracking benchmark indices of the Chinese stock market in the US stock market.

Last week, Goldman Sachs' hedge fund clients had the highest net buying scale of Chinese stocks since the business statistics data of this Wall Street financial giant's main brokerage in 2016. According to the data of LSEG Lipper, foreign stock exchange-traded funds (ETFs) focusing on Chinese stocks received a whopping $2.4 billion in inflows in the last three trading days of September, in stark contrast to the $2.7 billion outflows from the beginning of the year through September 25.

Furthermore, according to EPFR data as of the end of August, there is a very high possibility of a significant increase in global mutual funds' future shareholding of Chinese assets. EPFR data indicates that the total allocation of global mutual funds in Chinese stock assets is only about 5%, the lowest level in the past decade, highlighting the substantial operating space for many foreign funds to increase their holdings of Chinese stocks.

Editor/Lambor