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Hong Kong stocks have surpassed its mainland peers by the largest margin in nearly 20 years as money is poured from China due to concerns about its enthusiasm for domestic economy and territorial tech stocks.
The Benchmark Hangsen Index is up 16.4% this year, compared to a 1.2% decline in the CSI 300 index in mainland China. This is the biggest outperformance since 2008.
The rally was boosted by the rise of Deepseek, a Chinese startup that claims that artificial intelligence is progressing with far less computing power than its US rivals.
After President Donald Trump’s “liberation day” tariff announcement in April, territorial stocks, which fell sharply than mainland stocks, were helped by easing tensions in the US/China trade war.
The rally will bring money from mainland China to Hong Kong at a record high level.
“The majority of the strong outperformance from Hong Kong this year is driven by the southbound flow (from the mainland),” said James Wang, head of UBS’s China Equity Strategy.
“Many of this has been driven by AI trade,” he adds, referring to a higher percentage of Hong Kong’s AI stocks more than the mainland.
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Wei Li, China’s multi-asset investment director at BNP Paribas, said Hong Kong’s outperformance “is also derived from fundamental differences in market composition.”
“The heavy weighting of the Hangsen Index on the global fluid sector (such as technology and finance) allowed us to leverage the federal pivot and take advantage of the new appetite for Chinese tech stocks.”
Chinese technology companies such as Tencent and Alibaba are listed in Hong Kong and the US, but not in the mainland. Alibaba was first available to mainland investors in September after upgrading its listing in Hong Kong.
The February meeting between Chinese President Xi Jinping and the country’s technology companies was considered positive on both mainland and Hong Kong stocks, but in particular in the latter.
Tai Hui, Chief Asian Market Strategyman at JPMorgan Asset Management, said:
China’s economy has been hit hard by the collapse of the real estate market and the trade war with the US, helping Hong Kong outperform.
“There was general concern about China’s weak domestic economy,” said Andrew Tilton, president of the Asia-Pacific economy and head of EM economic research at Goldman Sachs.
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Hong Kong is likely to benefit from moving from US stocks to other markets, and from further Fed rate cuts later this year, Jpmorgan’s Hui said.
“Hong Kong collects capital from both Chinese and international investors,” Hui added, adding that it is easier for foreign investors to buy stocks in cities than in mainland China.
According to UBS’s King, the international money flowing to Hong Kong appears to come from short-term investors such as hedge funds, rather than from long-term market participants such as pension funds.
“I’m not saying there’s still a massive influx of long money that’s still coming back to the Chinese stock market,” he added. “Investors have been burned in China for quite some time.”
