Foreign capital has made a significant shift! In a week when emerging market stock funds recorded the second-largest weekly inflow of funds this year, the Chinese market has become a hot spot, while the inflow of funds into the Indian market has been significantly reduced.

At the end of September, the Chinese government announced a preliminary package of stimulus measures, including interest rate cuts and adjustments to bank liquidity requirements, which have driven a significant surge in the Chinese stock market and sparked a wave of foreign investment in China. At the same time, foreign capital seems to have weakened its interest in other Asian markets such as India.

In the week ending October 2nd, emerging market stock funds tracked by EPFR recorded the second-largest weekly inflow of funds this year, and these inflows almost entirely went to the Chinese market.

Cameron Brandt, Director of Research at EPFR Global, said that the foreign capital flowing into the Chinese stock market has reached an "amazing" level: the scale of overseas funds inflow into the Chinese market as of the week ending October 2nd reached over $13 billion, setting the highest weekly scale on record. In contrast, India's net inflow of funds for the week was $101 million, less than one-tenth of China's.

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Brandt said that since last year, the average weekly inflow of foreign capital into India has been between $400 million and $500 million, and last week's inflow meant a sharp decline compared to the average level of a year.

Some people sold other stock markets to provide funds for this rotation trade, which to some extent explains the selling of emerging markets except the Chinese market this week. As of last Friday's closing, India's main stock index NSE Nifty fell by about 4.5% for the week, the largest drop since June 2022.

Brandt expects the rise in the Chinese stock market to continue for a period of time. He said, "China has made it clear that they want the stock market to rise, and this situation may continue for a period of time."

Chinese concept ETFs listed in the US are frantically absorbing funds.

Last week, while the mainland Chinese financial market was closed for the National Day holiday, investors injected $5.2 billion into ETFs related to the Chinese market in US exchange-traded funds (ETFs), while last year this type of ETF had an average weekly outflow of funds of $27 million. This significant shift represents a sharp change in the investment sentiment of overseas investors towards the Chinese market.Some asset management firms believe that this optimism can continue.

Michael Reynolds, Vice President of Investment Strategy at Glenmede Trust, a wealth management company based in New York, said, "The market has been waiting for China to make a credible commitment to get the economy back on track. Now we need to see follow-up action."

Jonathan Krane, founder and CEO of KraneShares, said, "The Chinese market has been oversold." According to data from Morningstar, the company's flagship ETF - KraneShares CSI China Internet - attracted $1.39 billion in new assets last week alone, making the fund's inflows profitable since the beginning of the year.

Krane believes that the recent surge in Chinese stock prices is just the beginning, as investors' exposure to Chinese stocks remains low. He added, "The current inflows are also just a small part of the global investors' return to China, and this is all a very early reaction."

Data from TrackInsight, a data analysis company based in Paris, shows that more than 20 China-focused ETFs achieved double-digit returns in the past week, with gains ranging from 10% to 28%, surpassing the other 3,000+ ETFs traded in the U.S. market last week.

The largest China concept ETF is BlackRock's iShares China Large-Cap ETF. According to Morningstar, the ETF attracted inflows of up to $2.7 billion last week.

Michael Barrer, head of ETF capital markets at Matthews Asia, an asset management firm, said, "When market volatility is so high, money will first flow into these (index-linked) products. Nevertheless, its $44.8 million Matthews China Active ETF also soared after net inflows of $11.7 million last week.

Jason Hsu, founder and CEO of asset management firm Rayliant Global Advisors, said that for China-focused ETFs to continue to hold new assets, the Chinese government needs to announce a package of detailed and far-reaching reform measures. He said, "The trigger for the next wave of gains must be the formal development of a new stimulus plan and an increased timetable."

Dave Mazza, CEO of Roundhill Investments, said he has seen a shift in investor sentiment. The company launched the Roundhill China Dragons ETF last week, focusing on what Roundhill considers the nine largest and most innovative Chinese technology companies. Mazza said the ETF attracted net inflows of $35 million in the first two trading days.

He added, "We believe that at some point in the near future, the situation will reverse, and Chinese assets will once again become investable."