In recent weeks, the Chinese stock market has shown remarkable resilience and strength, attributed largely to an assortment of incremental policies implemented in late SeptemberThe A-shares have rebounded spectacularly, with several institutions asserting that this resurgence is predominantly fueled by fresh capital inflowsNotably, exchange-traded funds (ETFs), dividend buybacks, and significant participation from overseas investors have played a vital role in this bullish wave.

As December unfolds, indications of an inflow of overseas capital into Chinese assets are becoming increasingly evidentOne notable product—a leveraged fund designed to invest in A-shares—has reached an unprecedented scaleThis trend is underpinned by an overarching optimism regarding the sustained recovery of the Chinese economy and escalating expectations for supportive government policies that could induce a more proactive shift in capital allocation towards Chinese stocks.

The surge in dividends and share buybacks has emerged as a significant catalyst for market movements

As of December 10, the Shenzhen Component Index and Shanghai Composite Index had surged by 33.76% and 24.5%, respectively, since September 24, placing them at the forefront among global marketsAnalysts point out that the expansion in stock ETF shares and widespread buybacks by listed companies have been primary sources of this influx of capital.

According to data from Choice, stock ETFs accumulated a staggering 69.04 billion yuan in net inflows from September 24 through December 9. Breaking it down further, the Jiashi Shanghai Stock Exchange Science and Technology Innovation Board Chip ETF experienced a remarkable increase of 12.561 billion units, yielding a net inflow of 17.624 billion yuan when based on an average transaction price of 1.4 yuanThis ETF led in inflows, followed closely by several others such as the Jiashi CSI 500 ETF and the Morgan CSI 500 ETF, which also garnered substantial net inflows.

The continued popularity of stock ETFs has not been coincidental

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Year-to-date, stock ETFs have attracted approximately 758.885 billion yuan in net inflows, a trend steered primarily by investor confidence following policy adjustmentsFor instance, the Huatai-PB Shanghai Shenzhen 300 ETF leads the pack with a net inflow of over 190 billion yuan, indicating a strong preference amongst investors for ETFs as a means of market engagement.

Beyond the robust inflows into stock ETFs, share repurchases and dividend payments by listed firms have significantly bolstered market momentumHistorical analysis by Wulian Futures highlights the diverse sources of incremental market funding, including foreign capital, equity funds, margin trading, and increasing activities in the ETF spaceThis year has witnessed an uptick in corporate buyback initiatives, which, despite primarily being for staff incentives, effectively act as buying power that enhances stock valuations in the short term.

Regulatory encouragement and reduced capital expenditure have spurred a wave of mid-year dividends from companies, with most firms increasing their dividend payout ratios

Forecasts suggest that total dividends distributed by public companies in 2024 may reach around 28 trillion yuan, signaling a growth trajectory of nearly 6 trillion yuan over 2023's totalsWhen considering the freely tradable market cap associated with dividends, estimates indicate approximately 8.5 trillion yuan in payouts for 2024, a gain of 1.5 trillion yuan from the previous year.

This expanding optimism comes amidst a backdrop of international market buoyancyFrom December 2 to 6, overseas funds notably tilted towards bullish positions in Chinese equities, especially through leveraged ETFsBy December 6, the asset size of the 2x long CSI 300 ETF-Direxion had soared to 354 million dollars, representing a staggering increase of 30.54% from the previous week—a historic high.

Moreover, the options market indicates heightened investor confidence, with over 200,000 contracts for the 2x long CSI 300 ETF-Direxion call options transacted on December 2, translating into an investment of around 55 million dollars

Such extraordinary activity in an otherwise quiet options space speaks volumes about market sentiment.

Accompanying these developments is a noteworthy recovery in China's economic indicatorsThe Purchasing Managers' Index (PMI) for the manufacturing sector stood at 50.3% in November, marking the highest level seen in seven months and sustaining itself above the critical threshold for two consecutive months.

Analysts interpret the transition from heavy outflows in November to a recent resurgence in call options for Chinese stock ETFs as a signal that foreign investor sentiment towards Chinese assets is warming up once moreWith supportive policies anticipated to converge, several institutions assert that further capital inflows are on the horizon.

Looking ahead, various agencies project that a confluence of positive factors could maintain the influx of fresh capital in the Chinese market

Huaxi Securities notes that healthy liquidity, buoyed by favorable policy expectations, has become the primary underpinning for recent market activityLikewise, the influx of foreign capital and sustained net buying behavior from leveraged funds is believed to maintain liquidity momentum in stocks.

Moreover, Wulian Futures anticipates that a decline in the market's risk-free return rate could lead a substantial volume of external funds to adapt to the ETF routes for investing in the Chinese stock echelon, aiming for capital preservation and growth—a trend that could further propel A-shares upwards.

As pointed out by Hualong Securities, a series of incremental policies since late September have bolstered market expectations, with diverse types of capital inflating on the supply sideThe resultant amplification in market activity underscores a promising long-term outlook as the economic landscape appears increasingly favorable

Jim Rogers, the founder of Quantum Fund, recently scaled back his investments in various global markets but maintained his positions in China, affirming his belief in the country’s robust economic trajectory and its growing importance on the world stage.

Furthermore, Schroders Investment has posited that the Chinese stock market benefits from robust policy support, which may drive price momentum moving forwardCurrently, foreign investors are notably underexposed to the Chinese market, with a considerable amount of cash still held by domestic investors—a condition that provides an approachable entry point for future investments.

The latest Red Thread report issued by UBS Asset Management reinforces this confidenceBarry Gill, Global Head of Investments at UBS, advocates for China as an optimal investment destination, citing its status as the most cost-effective equity market globally