According to Bloomberg data, five major ETFs investing in Chinese equities attracted over $6 billion in the week ending October 4th, reaching an unprecedented scale.

The $iShares China Large-Cap ETF (FXI.US)$ saw the largest inflow last week, surpassing $3.4 billion. The $KraneShares CSI China Internet ETF (KWEB.US)$ attracted nearly $1.4 billion. Additionally, the $Direxion Daily FTSE China Bull 3X Shares ETF (YINN.US)$ and the $iShares MSCI China ETF (MCHI.US)$ drew in $801 million and $340 million respectively. The $Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR.US)$ garnered over $130 million.

Focus on Fiscal Policy Stimulus

On Monday, the market opened with a surge in trading volume, marking the first day after the long holiday. The $SSE Composite Index (000001.SH)$ climbed over 10% during morning trading, closing up 4.59%, led by gains in semiconductor, brokerage, and internet sectors.

However, Hong Kong stocks faced a significant pullback, with the $Hang Seng Index (800000.HK)$ dropping 9.41% and the $Hang Seng TECH Index (800700.HK)$ down 12.82%. Shares of Chinese brokerages, real estate, and semiconductors fell sharply.

Today’s rally lost some momentum, seemingly due to fiscal policy announcements from the National Development and Reform Commission that fell short of market expectations.

Gary Ng, senior economist at Natixis, stated: “Nothing much is new compared to the previous announcements, and the latest commitment to fiscal stimulus looks weaker than market expectations.”

Aleksey Mironenko, global head of investment solutions at Leo Wealth in Hong Kong, commented, “The durability of this China rally will depend on action following words on the fiscal side of the equation,” adding, “The key thing we are watching going forward — what policies will be announced in coming weeks following the Politburo and State Council statements?”

Market Outlook Remains Upbeat

Goldman Sachs upgraded its view on Chinese equities to overweight in an Oct. 5 report, predicting a 15-20% upside for the market. The firm raised its 12-month target for the MSCI China Index to 84 and the $CSI 300 Index (000300.SH)$ to 4,600 points.

In a recent report released Monday, Goldman Sachs listed “10 reasons to buy China Equity,” noting that Chinese stock valuations remain low. As of Oct. 3, China's valuation discount relative to developed and emerging markets stood at 40% and 15% respectively. On a forward PEG basis, China offshore and A shares are at 0.9 and 1.1, compared to 1.5 for developed markets and 1.2 for emerging markets excluding China.

Goldman Sachs stated that MSCI China and CSI 300 are trading at 11.2x and 13.3x forward P/E, at or slightly above mid-cycle levels. The bank raised its target P/E multiple to 12.0x and 14.2x for MSCI China and CSI 300, citing reduced left-tail risk, potential for further fiscal easing, and a moderately improved earnings growth outlook.

The sectors rated as overweight include Media, Retailing, Consumer Services, Insurance, and Food & Beverage.

Citi analysts also find Chinese equity valuations attractive, stating, "We remain bullish as Chinese equity valuations are still low compared to emerging market stocks, even after recent share price gains." They see further upside potential, especially if economic support continues.

Citigroup has increased its target prices for China's major stock indices by over 20% for mid-next year. The bank forecasts the CSI 300 Index will hit 4,600 points, the Hang Seng Index 26,000 points, and the MSCI China Index 84 points. These targets suggest potential gains of 8.1%, 24.2%, and 19.4% respectively from Monday's closing prices.

Citi also anticipates companies may revise fiscal year 2025 earnings forecasts upward during the third-quarter earnings season from mid-October to early November, boosting the stock market further.

Source: Bloomberg, Investing, CNBC