Why Wall Street's Leading Hedge Funds are Ramping Up Exposure to Chinese Stocks

2024 has been a year full of significant hurdles for Chinese stocks and shares. Back in February, a $2 trillion stock rout saw investor confidence in the Shanghai Stock Exchange plummet, while the resounding US Presidential election win for Donald Trump appears to promise a return to steep tariffs on trade. 

Earlier in the year, a Goldman Sachs investor survey at a conference in Hong Kong saw 40% of respondents claim that Chinese equities were ‘uninvestable.’ But a little over six months later, the picture appears to have changed drastically. 

Thanks to a series of stimulus packages set out by the Chinese government to stimulate short-term growth across Beijing’s ailing stock market, global hedge funds have significantly ramped up their exposure to Southeast Asian stocks. 

One source of optimism saw changes to the required reserve ratio (RRR) for major banks in China fall from 10% to 9.5% in a bid to free up more cash to drive economic growth nationally. 

According to a Goldman Sachs note reviewed by Reuters, US hedge raised their investments in US-listed Chinese firms in Q3 2024, with stocks like JD.com (NASDAQ:JD) and GDS Holdings (NASDAQ:GDS) leading the way. 

In total, we saw around 25% of US long-short equity funds holding a long position in at least one of China’s ADRs (American Depository Receipts) by the beginning of the fourth quarter. 

But could Wall Street’s newfound interest in Chinese stocks fall flat as Donald Trump’s second term as President looms? Let’s take a deeper look at how US interest in China is set to endure the tests that lie ahead: 

Finding Value in US-Listed Chinese Firms

Of the stocks that benefited the most from China’s fresh emphasis on driving growth domestically, eCommerce giant JD.com attracted some 47 hedge funds for a net increase of 26 funds improving their ownership in Q3 2024. 

By October 4, 2024, JD’s growth for the calendar year stood above 72%. However, market corrections and a brief dip of almost 20% in the wake of Trump’s election victory have pushed this impressive growth rate lower. 

Likewise, data center firm GDS’s annual growth has doubled its market capitalization moving into December 2024. 

Among Wall Street’s biggest players seeking to gain exposure to Chinese stocks was renowned short-seller Michael Burry, who significantly raised his holdings in eCommerce firm Alibaba (NYSE:BABA) from 155,000 shares in the second quarter to 200,000 by Q3. 

Burry also doubled his stake in JD.com, increasing his holdings from 250,000 to 500,000 shares as well as taking a 67% larger stake in Baidu. 

With many leading Chinese stocks on Wall Street still sitting far lower than their historical highs, there’s hope among hedge funds that some of the nation’s most innovative companies can turn their fortunes around off the back of the government’s new stimulus pledges. 

However, there appear to be fresh challenges ahead as enthusiasm for this new wave of governmental spending appears to have fallen short of initial expectations. The arrival of Donald Trump, who’s threatening heavy tariffs on Chinese imports could weigh heavy on the faith of hedge funds too in the coming months. 

Will Tariffs Drive Hedge Funds Away? 

President-elect Donald Trump has vowed to impose tariffs on international trade as one of his first Executive Orders upon entering the White House. Although the severity of the threat and the precise rates are unlikely to be known until the documents are signed, Trump has indicated that a 25% tariff on all imports from Canada and Mexico will be put into place while China will face an additional 10% tariffs above any existing rate beginning on January 20th. 

Trump is famously sceptical of China but has suggested that severe tariffs will be in place until the nation can prevent the flow of illegal drugs into the United States.  

The news has caused hedge funds to revise their holdings in China, with reports of cuts of up to 80% of peak holdings even despite the stock market rallying 20% off the back of Beijing’s stimulus news. 

As a result, the MSCI China Index has shed much of its September growth amid the ongoing uncertainty. 

However, Chinese firms already reportedly looking to counteract the tariffs by opening offshore factories and exploring new markets, it appears that the nation’s leading stocks are preparing a contingency plan should Trump’s proposed tariffs disrupt US trade. 

This could see Chinese stocks grow in their appeal to opportunistic hedge funds, and we could see more investors add innovative and adaptive domestic stocks to their portfolios. 

With the help of a prime brokerage for hedge funds, we may even see institutional investors utilize global market access to buy directly into stocks looking to go offshore to beat the tariffs. 

What Does the Future Hold for Chinese Stocks?

The long-term prospects of Chinese stocks will become clearer on January 20, 2024 as Donald Trump takes office for the second time. Although the fallout of the second term of the returning President is all but certain to spark volatility throughout Chinese markets, the nation’s focus on stimulus, short-term growth, and a wider market recovery could see new opportunities for proactive hedge funds to embrace. 

Although the road ahead is set to be challenging for Chinese firms, there’s optimism among investors that Beijing has turned a corner since the alarming $2 trillion in sell-offs experienced at the beginning of 2024.