The Rebound of Chinese Concept Stocks: Key Insights from the Options Market
This is the TradingFlow Team, and in this article, we will dive into the recent Chinese stock market rally, breaking down the key factors driving this surge.
Policy Support and Federal Reserve Rate Cuts: Multiple Catalysts Driving the Rebound of Chinese Concept Stocks
The recent broad surge in Chinese concept stocks has been fueled by both the Federal Reserve’s interest rate cuts and multiple supportive policies from the Chinese government. These factors combined have led to a short-term market recovery for Chinese stocks and may lay the foundation for future valuation corrections.
（Source: Tradingview, data as of 4th October）
Firstly, the Federal Reserve’s shift in monetary policy has had a significant impact on the market. On September 18, the Federal Reserve announced a 50-basis-point rate cut and indicated that further cuts of 50 basis points or more could occur within 2024. This move not only signals the end of the U.S.'s tightening policy but also releases global liquidity, creating opportunities for capital inflows into emerging markets. As a key part of the global market, Chinese concept stocks, with their relatively low valuations, have attracted more attention from investors. After nearly four consecutive years of decline, the valuations of Chinese concept stocks have dropped to historical lows. As of September 23, the price-to-earnings (P/E) ratio of Chinese concept stocks stood at just 17.75, significantly lower than the median valuation over the past five years, making them more attractive compared to other asset classes.
Moreover, the Federal Reserve’s rate cuts typically lead to a weaker U.S. dollar. Historical trends show that when the dollar weakens, capital tends to flow back into emerging markets. This suggests that more international capital may be reallocated to high-quality emerging market assets, including Chinese concept stocks, driving their valuations higher.
At the same time, China’s government policies have provided additional internal support for Chinese concept stocks. Recently, the Chinese government announced a policy allowing investors to take out loans using their stock accounts as collateral, injecting a substantial amount of incremental capital into the stock market. This policy enables investors to use the assets in their stock accounts as collateral to obtain loans, allowing them to further leverage their portfolios and increase market liquidity. This has significantly boosted the stock market, particularly for Chinese concept stocks.
Additionally, the Chinese government has injected 500 billion yuan of "targeted liquidity" into the stock market. A portion of these funds has been explicitly directed toward supporting the development of capital markets, helping restore market confidence and vitality. The injection of capital not only increases market liquidity but also stabilizes investor expectations, especially for those long-undervalued Chinese concept stocks. Against this backdrop, the market performance of Chinese stocks has received multiple layers of support, showing strong rebound potential.
With the dual benefits of the Federal Reserve and Chinese government policies, capital is flowing back into Chinese concept stocks. After suffering a decline of up to 70%, the market has already fully priced in factors such as policy, performance, and high valuations. Now, as the Federal Reserve's rate-cutting cycle begins, coupled with the easing of domestic policies in China, market pessimism is gradually being corrected.
Of particular note are certain Chinese concept stock leaders that have bucked the downtrend during the market collapse, such as Trip.com and Legend Biotech, which have demonstrated strong risk resistance. According to Trading Flow’s option data, Trip.com’s option Open Interest surged significantly over the past week. Further analysis by navigating to the Symbol Level Developer interface, where contracts are sorted in descending order by contract Premium and Size, we can see that the majority of these open positions are call options for Trip.com. Delving further deeper into these call options, we can see from the Option Chain Analysis Historical OI Overview section in the following graph, the TCOM $55 Call with expiration date 12/20/2024 had 94.2K and 171.5K completed on Ask side on Sept. 24 and Sept. 27th accordingly. This was a huge bullish sentiment indicating buyers were eager to buy this $55 Call option. Another unusual movement was the TCOM $55 Call with expiration date 01/17/2025 roared from September 26th to September 27th. The contract size of TCOM $65 Call with expiration date 06/20/2025 was outstandingly larger than other call options of which sizes were already large, indicating Trip.com may have further growth in the near future. Trip.com’s robust performance in both domestic and international markets, along with its expansion strategy in the Asia-Pacific region, helped it achieve a countertrend growth of over 28% while most Chinese stocks were in decline.
Overall, the Federal Reserve’s rate cuts will continue to release liquidity, attracting more capital to flow into emerging markets, while China's policy support provides crucial internal momentum for Chinese concept stocks. Going forward, as policies ease and liquidity increases, Chinese concept stocks are likely to experience further valuation recovery. Those leading companies that performed well during the downturn are most likely to become the driving force behind the rebound. Therefore, as market sentiment improves and capital returns, Chinese concept stocks are poised to emerge from their prolonged decline and enter a new upward cycle.
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Disclaimer: This article is for informational purposes only and does not constitute investment advice. Before making any financial investment decisions, please ensure you thoroughly understand all aspects of the information and conduct your own research.
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