Investors turn to Chinese stocks as alternative to crowded AI trades

Investors seeking to diversify away from crowded artificial-intelligence trades in Japan and South Korea are increasingly looking at bullish derivatives on Chinese shares, Bloomberg reported Sunday. China's drive to bolster its domestic technology sector has rekindled interest, the report said.

Major international banks say their trading desks are seeing rising interest in call options and swaps tied to China's CSI index family. Demand has been concentrated in mid- and small-cap stocks, which investors believe offer more direct exposure to the nation's budding AI ecosystem.

Supporting the trend are capital-market reforms, China's pursuit of technological self-sufficiency, and an improving profit outlook for hardware makers. Technology now ranks as the largest sector within the CSI 300 and has also increased its weighting in the CSI 500 and CSI 1000 indices.

UBS has pointed to the CSI 500 as an alternative way to play AI for investors who want to move away from other Asian tech markets. The bank's trading desk noted that as of August 30, the biggest weekly derivatives flow across Asia came from bullish positioning on China's CSI benchmarks, including substantial long swaps on the CSI 300 and CSI 500.

Barclays, too, has observed greater activity in call spreads on mainland indexes, with investors betting on a gradual rise rather than an abrupt jump.

This renewed interest persists even as concerns linger over the state of China's economy and the effectiveness of government backing. The CSI 1000 is still about 16% off its May peak, after recording its steepest monthly drop since 2016 in July.

Cheaper options are also adding to the allure. Implied volatility has eased back to roughly its one-year average, lowering the price of bets on future upside.

U.S.-based investors are also getting involved. On Friday, a substantial block of bullish call options on the KraneShares CSI China Internet ETF (NYSE:KWEB) was bought, reflecting a wager that the fund could climb back to its earlier-year levels.

The move points to a growing belief among some investors that China's distinct tech ecosystem can offer AI exposure without increasing already-heavy positioning in other parts of Asia.