Hello everyone, and welcome back to our weekly positioning update!

Everything is about China these days, with both the PBoC and the Politburo preparing stimulus packages to save the Chinese economy from its nasty downturn.

While the stimulus initiatives are not very large, relatively speaking (roughly a percentage of GDP on average across stimulus packages), markets clearly see the heavy amounts of proposed stimulus as a “whatever it takes” signal, sparking a strong momentum trend in the Hang Seng and China proxies. From a fundamental perspective, the currently proposed packages are likely not enough to turn the ship in China, but while we fundamentally disagree with the moves seen in Chinese assets currently, it’s really not worth it to play the reversal at this point.

The change in sentiment around Chinese assets this time around mirrors almost perfectly the moves we saw back in May, when authorities tried to implement similar stimulus initiatives. Aggregate fund flows into Chinese equity ETFs are spiking, in line with the headlines and updates we have received from major market makers and banks, who state that China is now starting to become the most crowded trade out there.

Chart 1: Large Flows into China ETFs