Chinese equity traders have been increasing their inflows into Chinese stocks as hedge start to unwind according to Morgan Stanley (MS). In a Bloomberg piece, MS stated three reasons for bullish bets on China. Firstly, demand to hedge CSI300 and CSI500 index futures is at the lowest since October 2021. Secondly, call buy options are far more popular than bearish puts – which is historically out of the norm. Thirdly, implied volatility is low. Remember that usually low implied volatility is good for the underlying asset.

The calls for support for China’s economy have been bubbling up constantly over the last few weeks. Lower loan rates, calls for more policy to drive up consumption, and various efforts to prop up the struggling property sector all have been announced to halt recent declines. Bloomberg reported that the stock inflows before the Autumn holiday were the largest this year with over $2.1 billion coming into China’s stocks.

With Chengdu in lockdown and China’s communist party meeting ahead there is a chance of sentiment lifting over the next half of the year. One major drag on China’s economy is the persistence of maintaining its Covid Zero policy. This can reduce economic activity as large provinces can suddenly find themselves in a sharp lockdown grip. Goldman Sachs doesn’t see a pivot away from Covid Zero until next year’s National People’s Congress some time in the first half of next year. However, is this now a good time to buy into China’s stocks in anticipation? Is this now time to ride the wave higher? Risk can be easily managed around the area marked below on China’s 50 index. However, this week’s high US inflation print may mean more selling for global stocks, so it may be better to wait until the Fed’s path is clearer.


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