Bulls bet big on China ETF despite deep bear market

Options traders are piling into bullish bets on Chinese stocks, even as major ETFs remain deep in bear market territory. The iShares China Large-Cap ETF (FXI) has fallen 18% year-to-date, while the KraneShares CSI China Internet ETF (KWEB) is down more than 40% from its October record. Yet options activity suggests a growing conviction that the tide may be turning. This contrarian positioning is striking because the earnings yield on Chinese equities, as measured by the forward P/E of FXI (around 9x), now exceeds the 10-year U.S. Treasury yield (approximately 4.5%), reviving the so-called Fed model that compares equity and bond yields. When the earnings yield gap widens, stocks historically become more attractive relative to bonds, especially if earnings hold up. Additionally, buyback yields among Chinese internet firms have ticked higher, providing a floor under share prices even as headline risk persists.

This divergence between price action and options positioning is notable for equity traders. When bearish sentiment is extreme, a contrarian bet can pay off if fundamentals shift. The ongoing concerns over AI valuations and trade tensions have weighed heavily on Chinese equities, but the options market is pricing in a potential rebound. Implied volatility on KWEB options has spiked to 45%, reflecting heightened uncertainty but also the potential for large swings. Breadth indicators, such as the percentage of FXI components trading above their 50-day moving average, have fallen below 20%, a level that often precedes mean-reversion rallies. Sector rotation is also at play: money has flowed from overvalued U.S. tech into beaten-down Chinese internet names, as the forward P/E of KWEB has contracted to 15x from 25x at its peak. Live stock prices and charts on NowPrice show how the market is reacting to these crosscurrents.

Investors should watch for upcoming economic data from China, including GDP and manufacturing PMIs, as well as any developments in US-China trade relations. A sustained move above key resistance levels on the FXI and KWEB could confirm the bullish thesis. Until then, the bear market remains intact, but options traders are positioning for a change. The risk-reward, however, remains skewed: if the Fed model holds and earnings stabilize, the upside could be substantial, but any negative surprise on trade or growth could trigger another leg down. Monitoring the options-implied skew and put/call ratios on FXI will provide clues on whether this bullish bet is a short-term hedge or a long-term conviction.