Today’s financial markets are less welcoming to new capital than they used to be, as every week of 2025 has delivered wave after wave of uncertainty for investors. In the first quarter, both participants and the economy as a whole had to contend with the implications of Liberation Day in April 2025, when President Trump introduced new trade tariffs to be implemented with most of the United States' trading partners.

Then came the retaliations to these tariffs, with China becoming the spotlight in these back-and-forth talks, considering it is one of the United States’ biggest trading partners, not to mention a strategic player in global trade.

With this in mind, some investors could not live with the uncertainty that might arise from Chinese stocks, so they left the scene altogether.

However, after weeks of talks and new developments, it looks like just the opposite would have been the right call.

Short sellers have been closing their Chinese stock positions across the board, which is a clear sign of capitulation and/or profit-taking. Considering that the outlook today is looking much better than it did in the past, it might be time to consider names like the iShares MSCI China ETF (NASDAQ: MCHI), PDD Holdings Inc. (NASDAQ: PDD), and even Baidu Inc. (NASDAQ: BIDU) for the coming months ahead.

A Diversified ETF Makes the Most Sense

When global investors, especially institutions and other sophisticated players, look to gain exposure in a new area or even a country, it makes sense for them to start showing their tracks in an exchange-traded fund (ETF) first. This is likely why up to $898 million in institutional capital made its way to the China ETF as of the most recent quarter.

This new inflow shows the rest of the market that there is still hope and optimism ahead for Chinese markets despite the heightened uncertainty and tensions these trade negotiations bring. Speculators might think that these sophisticated players know something that the rest of the market doesn’t.

While they might be right, a more sensible approach might be to compare the remaining downside potential that can be priced in versus the potential upside available from these Chinese baskets today. Investors can detect a recent shift in bearish sentiment by seeing the risk-to-reward ratio favorably tilted in favor of the bulls.

A massive 22.8% decline in the China ETF’s short interest is a clear sign of a potential rotation underway and another check that justifies a fantastic setup for the bulls to start taking advantage of today. That would be sufficient for those looking for a diversified way to get back into the China scene. However, there are better options available for risk-takers.

PDD Holdings Stock: A Tail Risk Trade

Now that shares of PDD Holdings have fallen to a low of 65% of their 52-week highs, investors may wonder whether the worst-case scenario is already priced into the company today. The answer is likely a resounding yes, even if being part of China’s retail sector exposes it to major structural changes with new trade tariffs being implemented.

The story bears a resemblance to that of the broader China ETF in terms of the stock’s price being close to already pricing in these potential downfalls in the business model, leaving investors with a major opportunity to catch a “turnaround” or “tail risk” trade focused on the upside.

This is where the new $1 billion stake taken by institutional allocators from UBS Asset Management confirms this view; as of mid-May 2025, these investors justified buying a large amount of one of China’s leading retail stocks despite the rest of the market thinking trade tariffs would be doom in the making for this company.

In addition to this buying, Wall Street analysts still see a consensus price target of up to $144.5 per share on PDD Holdings, calling for as much as 43.7% upside from where it trades today to crystallize the sort of upside that bold bulls can expect in this contrarian bet.

Baidu Offers Blue-Chip Status

If going with a retail company like PDD seems too risky, investors can also consider Baidu, one of China’s blue-chip technology companies with a track record for being a pivotal player in the nation’s internet and communications services.

Some even liken Baidu to Alphabet Inc. (NASDAQ: GOOGL) of China. With a $29.5 billion market capitalization, being such a key player in the world’s second-largest economy seems like an obvious bargain. That view seems to align with some of the recent activity happening with the other names on this list as well.

Over the past month, up to 21.2% of Baidu’s short interest left the scene to show another rotation into a more bullish sentiment for the company’s future. More than that, as it only trades at 74% of its 52-week high, it offers investors a similar setup to that of PDD Holdings.

In fact, Alicia Yap, an analyst from Citigroup, decided to reiterate her Buy rating on Baidu stock as of late May 2025, leaving a valuation target of up to $138 per share, daring Baidu to rally by as much as 60.5% from where it has fallen to today.

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