The Chinese stock market has recently experienced significant volatility following a sharp rally that saw shares rise over 30% in just a few weeks. On October 10, 2024, doubts about the sustainability of this rally surfaced as investors awaited further economic stimulus measures from the Chinese government.
According to Bloomberg, investors in Hong Kong are now heavily investing in exchange-traded funds (ETFs) that profit from declining stocks, indicating a rapid shift in market sentiment. In the past week alone, institutional and retail investors poured approximately $290 million into inverse ETFs, marking a record weekly inflow, while withdrawing $1 billion from ETFs benefiting from rising Hong Kong stocks—the largest weekly outflow since January 2015.
This shift in investment strategy highlights the growing concerns over China's economic plans, particularly after a key government meeting failed to deliver significant announcements. As a result, the Hang Seng Index in Hong Kong plummeted by 9.4% on Tuesday, marking its worst day since 2008, although it rebounded slightly to close about 3% higher on Thursday.
Market analysts, including Rebecca Sin from Bloomberg Intelligence, suggest that the inflows into inverse ETFs may continue to rise amid ongoing market volatility. The upcoming briefing from the Chinese Ministry of Finance is anticipated to provide clearer economic plans that could influence market recovery.
Hedge funds have also reacted to the market's instability by selling a record amount of Chinese stocks, as noted by Goldman Sachs. The response from hedge funds included not only liquidating long positions but also establishing short positions, resulting in heightened market fluctuations.
Despite the recent downturn, there remains a degree of optimism among global strategists regarding Chinese stocks, with recent stimulus measures leading to several upgrades from firms like BlackRock and Goldman Sachs. However, the volatility is expected to persist as traders await further government announcements regarding economic support.