Yu Xiangrong, Chief Economist for Greater China at Citigroup: Foreign investors now view 'Chinese assets as unavoidable'

Citigroup’s Chief Economist for Greater China, Yu Xiangrong, said at the China Chief Economists Forum that 2025 is a pivot year as foreign investors shift from viewing China as 'uninvestable' to seeing 'Chinese assets as unavoidable', driven by breakthrough technologies (cited example: DeepSeek) and demonstrated strategic resolve in international relations. He noted that the conclusion of the 14th Five-Year Plan and Made in China 2025 has led foreign institutions to judge China’s strategic targets as largely met, prompting a reassessment of China’s core competitiveness. The implication for allocators is a potential structural reweighting toward Chinese assets and greater focus on China’s multi-year policy framework.

Analysis

Market structure: Foreign sentiment shifting from “avoid” to “must-have” for Chinese assets favors large-cap AI/cloud/platform names, semiconductor suppliers, and on‑shore A‑shares/HK secondary listings. Expect foreign ownership of on‑shore equities to rise by ~0.5–1.5 percentage points over 6–12 months, pressuring valuations higher and compressing implied volatility in China ETFs while lifting RMB gently (~1–3% appreciation) if flows accelerate.

Risk assessment: Key tail risks are sudden regulatory reversals, fresh US export controls, or a geopolitical shock—each could trigger 20–40% drawdowns in China tech within days. Time horizons: immediate (days) = sentiment-driven spikes in spot/vol; short (1–3 months) = allocation flows and re-rating; long (1–3 years) = structural capex cycle (Made in China 2025 completion) driving revenue share gains for domestic champions.

Trade implications: Priority winners are China AI platforms, fabs, and domestic cloud providers; losers include exposed exporters if RMB rallies and real estate/developers. Tactical execution: overweight A‑shares/China tech via ETFs and 3–9 month call spreads to limit cash and gamma risk; hedge with 6–12 month downside protection sized to 25–50% of net long equity exposure.

Contrarian angles: Consensus understates continued regulatory/phasing risk and potential for front‑loaded flows to reverse if US rates spike or capital controls tighten. Unintended consequence: rapid RMB appreciation (2–4% in 3 months) would compress export margins and favor domestically‑oriented industrials over exporters.

Key Decisions for Investors

• Establish a 2–3% notional long position in MCHI and a 1–2% notional long in KWEB within 0–6 weeks to capture re‑rating; fund cost by selling 4–6 week covered calls at ~5% OTM if IV remains elevated.
• Implement a relative‑value pair: long 2% notional ASHR (A‑shares access) vs short 2% notional EEM for 6–12 months to express China re‑weighting while hedging broader EM risk; rebalance if spread moves >3%.
• Buy 3–6 month call spreads on KWEB (10%–20% OTM) sized to 1–1.5% notional to play AI/DeepSeek momentum with defined downside; use strikes to cap max loss to ~50–60% of premium.
• Trim China property/developer exposure by 50% immediately (reduce to <1% portfolio weight) and allocate proceeds to industrials/semiconductor suppliers; if developer credit CDS widens 200bp, consider a tactical short on top‑5 H‑share developers.
• Hedge tail risk: buy 6–12 month puts on MCHI 15% OTM sized to cover 25–50% of net long China equity exposure, or alternatively allocate 1–2% to 12‑month long CNH via CYB with stop‑loss if CNH weakens >2% within 30 days.