Everything is about the ongoing rally in Chinese equities at the moment, with China now being the best yielding country in the world in equity space after both the PBoC and the Politburo coming through with stimulus proposals, which has caught all China bears on the wrong side of the trade.

We learned today that the PBoC is cutting the standing lending facility rates by 20 bps, a move not seen since the pandemic broke out. They have normally cut the interest rates in the lending facility by 10 bps at a time, so this is likely a sign that they’re truly willing to do something about the slump in growth / real estate. Whether it will actually matter is a question for another day, but this is further fuel to the rally in Chinese equities, and the pain trade is higher for now.

This also coincides with the story about quant hedge funds in China being hit in a rather large short squeeze, which forces potentially semi-large players to buy back their positions – again, further fuel to the fire. Wasn’t 15-20% in 2 weeks enough? Fund flows are skyrocketing as well, so it certainly looks like that everyone wants to get into the trade – and fast too. We are not willing to get involved as it seems so out of sync with fundamentals as we have alluded to over the course of the week. China has been THE widow-maker trade since 2022 in many ways.

Our models are starting to point in direction of higher equities once again with the growth outlook in the US looking decent (see chart 1c), but we are not willing to enter the China trade just yet, as macro is looking awful in China still, and we have instead opted for a long in NIFTY, as India looks to gain once (if) the China story fades while still providing exposure to risk assets.

Chart 1.a: China is stating that they’re willing to come through with stimulus

Chart 1.b: Markets are competing about who can get into the China bet the quickest

Chart 1.c: The outlook in the US is improving