In recent days, Chinese stocks have been attracting significant attention from both local and overseas investors, with a particularly noteworthy surge in U.S.-listed Chinese stocksOn Monday, a dramatic rally took place, with the Nasdaq Golden Dragon China Index soaring by over 10%. Overseas investors who recently leveraged their bets on Chinese stocks are now reaping substantial profitsThe surge in Chinese stocks is reflective of a broader trend that has seen a significant increase in the popularity of exchange-traded funds (ETFs) tracking Chinese markets, particularly smaller, leveraged ETFs that have played a pivotal role in these movements.

Among the most prominent ETFs benefiting from this surge are the Direxion Daily CSI 300 China A Share Bull 2x Shares (CHAU) and the Direxion Daily FTSE China Bull 3x Shares (YINN). Despite their relatively smaller market capitalizations—around $2.5 billion for both compared to the nearly $8 billion size of larger ETFs like iShares China Large Cap (FXI)—these two leveraged ETFs have been receiving substantial bullish bets in recent weeks

Notably, traders have been purchasing large volumes of options linked to these ETFs, a clear sign of the growing optimism surrounding China’s economic prospects.

A striking example of this occurred on December 2, when traders bought over 200,000 call options for CHAU with a strike price of $15, expiring in May 2025. The average price of these options was approximately $2.64 per share, representing a total investment of over $55 millionSuch concentrated purchases immediately drew attention to CHAU’s position in the marketSimilarly, from November 29 to December 6, traders accumulated nearly 180,000 call options for YINN with a strike price of $27, expiring in January 2026, at an average price of $9.35 per shareThese actions highlight the growing enthusiasm for Chinese equities and their perceived potential for recovery.

By Monday of this week, both YINN and CHAU saw impressive gains, climbing more than 20% and 10%, respectively

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As a result, the call options tied to these ETFs saw substantial price increases, with the value of YINN and CHAU call options rising to $4.02 and $15.40 per share during the early hours of trading in the U.SEast CoastThese gains amounted to an estimated $138 million in paper profits for those who had bought into these options.

The trading volume for CHAU options typically remains relatively low, with only a few hundred to a few thousand contracts traded dailyHowever, since October, trading activity has noticeably increasedBefore last Monday, the average 20-day option trading volume for CHAU was just 6,150 contracts, while YINN saw about 34,000 contractsSuch large, single-day trades, especially on options that had relatively low trading volumes, have sparked significant market attention.

Over the past few months, foreign investments in Chinese stock ETFs have seen notable fluctuations

At the end of September and into October, there was a surge of foreign capital flowing into Chinese stock ETFs, followed by a more recent outflow in NovemberAnalysts suggest that the sudden influx of bullish options on Chinese ETFs could indicate a renewed optimism among foreign investors regarding China’s assetsThe catalyst for this renewed interest may lie in recent policy signals coming from Chinese government meetings, which have further convinced investors of the country’s commitment to economic stability and growth.

The policy shifts from the Chinese government have helped bolster investor sentimentOn December 9, a key meeting was held to discuss the country's economic work plan for 2025, including fiscal policies, anti-corruption measures, and strategies for boosting economic growthAmong the proposals were plans to implement a more proactive fiscal policy and a moderately loose monetary policy, including increased counter-cyclical measures to support the economy

This signal of economic stability and growth support was seen as a significant factor in the market's positive reaction, particularly for stocks in sectors poised to benefit from such policies.

According to reports from the China Securities Journal, analysts believe that the government’s emphasis on a “more proactive” fiscal policy suggests that there could be room for an increased central deficit in the future, potentially leading to more substantial fiscal spendingMoreover, a “moderately loose” monetary policy could focus on achieving internal balance, possibly paving the way for interest rate cuts or reserve requirement ratio (RRR) reductions.

In addition, Citic Securities’ chief economist, Ming Ming, pointed out that the meeting’s mention of stabilizing both the real estate and stock markets marked the first time the government has explicitly highlighted the importance of the stock market in its 2025 economic goals

This move could provide greater stability for the stock market and boost investor confidence moving forwardIt also reflects the government's increasing recognition of the need to create favorable conditions for both the housing and stock markets, especially as the economy recovers.

Evercore ISI strategist Neo Wang also echoed these sentiments, stating that the government’s unprecedentedly detailed support plan for 2025 has reignited investor enthusiasm for Chinese assetsInvestors are now anticipating a series of powerful fiscal support measures that could be announced during China’s National People's Congress meeting in March 2025. These measures may include a higher fiscal deficit, a larger allocation of special local government bonds, and a plan to issue at least ¥1 trillion in ultra-long-term special government bonds.

The optimism in the markets has been further fueled by an overall trend in Chinese equities, with investors looking to the government’s guidance on economic recovery as a sign of positive momentum for the year ahead

The expected push for fiscal stimulus, coupled with China’s focus on stabilizing its financial markets, has given investors confidence that China’s stock market will continue to show resilience in the coming months.

For many foreign investors, this renewed optimism in Chinese stocks represents a shift in sentimentAfter months of uncertainty, the government's clear policy guidance has helped assuage concerns over the country’s economic trajectoryWith the promise of more active fiscal and monetary support, investors are increasingly confident that the economic recovery in China will gain traction, paving the way for potential gains in the stock market.

In summary, the recent surge in Chinese stocks, fueled by leveraged ETFs and bullish options activity, highlights the growing investor confidence in China’s economic futureThe government's commitment to stabilizing both the housing and stock markets, coupled with strong fiscal and monetary support, is expected to continue driving positive sentiment and market momentum