China’s equity futures market has restored some sense of normalcy after a period of extreme discounts, a sign that relentless bearishness may be fading as policymakers step in to calm investor nerves.

The CSI1000 Index futures settled at 5073.80 Wednesday, returning to a small premium against the underlying small cap index. Just a month ago, the discount had widened to a record -179 points, when market watchers suggested that the feverish selling was largely triggered by hedging needs from holders of a derivatives product called the “snowball.”

The shift reflects a return to buying of futures partly by investors who had earlier sold to cover their positions. Stock trading volumes in China have picked up in recent days, as state-owned funds went on buying sprees in supportive measures.

“During the peak of this kind of snowball worry, a lot of people were just shorting the futures to hedge their losses elsewhere,” said Jason Lui, BNP Paribas head of APAC equity & derivative strategy. “But now (they) have kind of moved halfway back.”

The benchmark CSI 300 Index closed higher for the seventh consecutive session on Wednesday- the longest such streak in more than a year - and turned positive for the year.

Another reason for the futures discount snapping back may have involved hedge fund activity. When they typically buy small stocks in China, they’d also sell small-cap index futures to hedge any potential downside of their purchases.

But policymakers’ intervention and the subsequent rebound in the markets would have forced them to unwind these hedges, further supporting the surge in the futures contracts.

“When the futures discounts normalize, it indicates that the market pessimism is subsiding,” said Jiang Qin, chief researcher at Citic Futures Co. Ltd. “Investors predict that the index is going to the bottom area, and the necessity of using futures to hedge and protect reduces. Hedgers would choose to close their short positions, leading to the convergence of the futures discounts.”

  - Bloomberg