China reopening bets hit 'crowded trade' status as fund managers grow nervous

In February, something shifted in the minds of the people who move billions of dollars around the world. For three months running, global fund managers had been pouring money into emerging market stocks, with China leading the charge. But now, one in five of them were calling it—the thing everyone whispers about in markets but rarely says out loud: a crowded trade. Too many people betting the same way. Too much money chasing the same idea.

The numbers told the story. A Bank of America survey of 262 fund managers, representing $763 billion in combined assets, found that allocations to emerging markets, particularly China, had climbed for a third consecutive month. The Shanghai blue-chip index had jumped 14 percent since November, riding a wave of optimism after President Xi Jinping abandoned the zero-COVID policy that had strangled the economy for three years. Investors saw reopening. They saw growth. They moved.

But the survey revealed something more unsettling: for the first time in its 38-year history, a "long China equities" position had topped the list of most crowded trades. This was not a minor milestone. It meant that the collective wisdom of global money managers—the people paid to think three steps ahead—was suddenly worried they had all walked through the same door at the same time.

The concern ran deeper than simple overcrowding. China's reopening was expected to ripple outward, pushing inflation higher across the globe. Two-thirds of the survey participants believed this would happen. The biggest fear, the one that kept strategists awake, was that inflation would stick around longer than anyone wanted—"higher for longer," in the language of markets. This mattered because it meant central banks outside China might have to keep raising interest rates, complicating the economic picture just as investors were getting comfortable again. On the Tuesday the survey was published, U.S. consumer prices came in hotter than expected, validating exactly this worry.

Michael Hartnett, Bank of America's chief investment strategist, framed the tension carefully: China's reopening was good for global growth, yes, but if it fed inflation the way reopenings had elsewhere after the pandemic, it could create real problems for central banks trying to manage their own economies. The math was simple and uncomfortable.

Yet not everyone was ready to call the rally over. Some strategists argued there was still room to run. Société Générale noted that Shanghai stocks were trading at 11.6 times forward earnings with expected earnings growth of 18.8 percent—cheaper than the broader emerging market average of 12.4 times with 6.7 percent growth. Pramol Dhawan at PIMCO pointed out that emerging markets as a whole remained cheap by historical standards and had been heavily sold off in 2022. "We are becoming increasingly positive," he said, particularly on emerging market local debt.

Robert Buckland at Citigroup added another layer: Middle Eastern sovereign wealth funds, flush with petrodollars as energy prices stayed elevated, were likely to deploy capital into China and other emerging markets. These cash-rich investors had real purchasing power in financial markets and were looking to build long-term relationships, not just chase quick gains. The rally, in other words, might have more fuel than the crowded-trade warning suggested.

What emerged was a market caught between two truths. The reopening of China was real, the opportunity was real, and the valuations looked reasonable compared to history. But so was the crowding, the inflation risk, and the possibility that everyone's good idea at once could become nobody's good idea very quickly. Fund managers had moved to an overweight position in emerging markets—46 percent of them, net—but they were doing it with their eyes open, watching for the moment when momentum might break.