U.S.-listed exchange-traded funds (ETFs) focused on China are gaining bullish momentum due to the rise of artificial intelligence startup DeepSeek, brightening the outlook for Chinese tech shares. Additionally, recent tariff-related news appears less alarming to investors.
Traders have been increasingly bullish in recent weeks, showing heightened interest in the KraneShares CSI China Internet ETF and the iShares Trust-China Large-Cap ETF, the two leading Chinese equity ETFs with a combined value of around $15 billion, according to options data.
The data reveals that the demand for call options in the KraneShares CSI China Internet ETF has surged, outnumbering defensive put options by almost 5-to-1, marking one of the most bullish sentiments in around four years, as per Trade Alert data.
Similarly, there is a notable demand for options on the large-cap-focused FXI, with skew - a measure of the relative interest in calls versus puts - indicating a preference for call options, based on recent Cboe data.
"This increased interest in China's upside has been a significant trend," noted Alex Kosoglyadov, managing director for equity derivatives at Nomura. Investors are optimistic about AI-related stocks, anticipating a sector boom driven by DeepSeek's advancement, potentially giving China an edge in the escalating Sino-U.S. tech rivalry.
Recent gains in FXI and KWEB ETFs, up about 12% and 14% respectively since DeepSeek's late January release of its AI assistant, have reinforced the optimism surrounding China's AI potential relative to the U.S.
"People are increasingly hopeful about China establishing a competitive AI ecosystem to challenge what the U.S. has developed," Kosoglyadov commented on the recent bullish flows into FXI and KWEB ETFs.
Part of this upbeat sentiment could also stem from some relief related to tariffs. While President Trump initially pledged significant tariffs on Chinese goods, the tone has moderated since taking office, potentially easing trade tensions and influencing investors to position themselves favorably in Chinese stocks.
"Investors are ultimately optimistic due to the softened stance on China from the Trump administration compared to the campaign rhetoric," observed Kosoglyadov, reflecting the shifting dynamics impacting investor sentiment.