China’s Stock Market: A Bullish Outlook?

China is rolling out a series of stimulus measures aimed at boosting confidence, paving the way for a sustained rally in the stock market. Trading volumes are hitting record highs, lifting the gloom that’s lingered for three years.

The People’s Bank of China has introduced an unprecedented tool allowing banks to provide loans to companies for stock buybacks. This bull market began on September 24.

Growing Demand for Long Positions

Lars Naeckter, Head of Asia-Pacific Equity Derivatives Research at Bank of America, notes that demand for long positions has increased since the announcement of these measures.

The cost ratio of call options to put options for Chinese stocks listed on Hong Kong exchanges and U.S. ETFs tracking them is nearing its highest level since 2008. Even though the $HSCEI(HSCEI)$ has given back nearly half its recent gains, the changes in Chinese policy and investors' renewed interest suggest further upside potential.

Opportunities Amid Uncertainty

In early September, as Chinese stock indexes neared their lows, Naeckter suggested a call option strategy that yielded over 360%. He believes opportunities still exist: “As we balance uncertainty with ongoing stimulus, the market has significant upside potential from here.”

He and his team recommend using call options on the $iShares China Large-Cap ETF(FXI)$ . “Noise between China and the U.S. will persist, creating ongoing uncertainty. However, the bigger issue for market participants is China’s policies and upcoming meetings. Some skepticism remains in the market, which might prevent excessive surges.”

Policy Shift: A Key to Stability

ING's Chief Economist for Greater China, Song Lin, points out that China's policy shift aims to restore confidence and stabilize asset prices. This is crucial for breaking the negative feedback loop in the economy.

Beyond the stock market, stabilizing real estate prices, restoring income expectations, and rebuilding investor confidence through market and legal reforms are essential. While these moves are positive, much work lies ahead.