BNY said Chinese equities and the Chinese yuan (CNY) remain heavily under-owned relative to Asia-Pacific (APAC) peers, with cross-border holdings described as very low. It added that CNY is the worst-held APAC currency, although flow data are no longer pointing to aggressive selling, and it framed China as having been de-risked across equities, FX and fixed income.
The bank also said the fundamental backdrop is still not yet clean, citing the need for improvement in data, earnings and policy follow-through. Even so, it pointed to retail flows, a base in ownership and increasing discussion of stimulus as factors that could support a shift in positioning; it added that stabilising fundamentals or credible policy support could prompt a modest rebuild in China exposure from depressed ownership levels.
Current Positioning and Market Dynamics
Given that cross-border holdings are at very low levels, we see a compelling setup taking shape. Foreign ownership of Chinese assets has been systematically reduced, meaning the market is no longer positioned for further bad news. Recent data shows net outflows from mainland equities via Stock Connect slowed to just $2 billion in June 2026, a significant drop from the heavy selling seen earlier in the year.
This widespread underweight position means any positive catalyst could have an outsized impact on the Chinese Yuan. With the USD/CNY currently hovering around 7.35, we believe buying short-dated CNH call options with a September 2026 expiry is a low-cost way to position for a policy surprise. This strategy offers defined risk while capturing potential upside from even a modest sentiment shift.
Opportunities for Rebound and Policy Catalysts
We see a similar opportunity in equity indexes, which have been lagging regional peers. Last month’s official manufacturing PMI came in at 49.9, which, while still contractionary, beat expectations and suggests the worst may be over. Therefore, we are looking at buying call options on large-cap China ETFs to gain leveraged exposure to a potential rebound spurred by stimulus talk.
The key is that the market is priced for continued disappointment, creating an asymmetric risk profile for new longs. Talk of a potential cut to the bank reserve requirement ratio in the third quarter is growing louder, and any credible policy follow-through would likely force under-owned investors to chase the market higher. Historically, similar periods of extreme pessimism in 2016 and late 2022 were followed by sharp, fast rallies once policy support became clear.
