On February 26, the Hong Kong stock market resumed its upward momentum after a brief one-day pause, with the Hang Seng Tech Index surpassing 6,000 points to hit the highest level since 2022.
During the latest rebound in Hong Kong stocks, southbound capital has continued to increase its participation, playing an increasingly influential role in the market.
Southbound Funds Have Bought Nearly HKD 250 Billion This Year, Fund Holdings in Hong Kong Stocks Reach Record High
On February 25, Hong Kong stocks opened lower due to factors such as the “America First Investment Policy” but managed to rebound and close higher. On that day, southbound funds recorded a net purchase of HK$22.033 billion, the second-highest amount this year. Meanwhile, the proportion of southbound trading volume to the Hang Seng Index’s total trading volume reached 48.68%, approaching half of the market.
The next day, on February 26, southbound funds continued to flow into Hong Kong stocks, helping the market regain momentum after a brief pause. The Hang Seng Tech Index surged by 4.47%, with southbound funds recording a net inflow of HK$10.4 billion, accounting for 46.88% of the trading volume, with trading in leading stocks such as Xiaomi and Tencent exceeding 50% of total transactions.
Looking back to February 17, southbound trading volume hit HK$200.671 billion, surpassing 50% of the Hang Seng Index’s total trading volume for the first time.
Jin Meiqiao, a fund manager at top private equity firm Greenwoods Asset Management, noted in an investor letter that the influence of southbound funds in pricing Hong Kong stocks is growing.
“If HK$800 billion in southbound funds continues to flow into the market each year for the next 2–3 years, Hong Kong stock pricing power will inevitably shift to mainland investors. In Q4 2024, mainland investors’ share of Hong Kong stock trading reached a record 45%, and if this trend continues, it may exceed 50% in 2025,” Jin stated.
As of February 26, the goal of a 50% trading volume share has been achieved, and year-to-date net southbound inflows into Hong Kong stocks have reached HK$249.6 billion, a significant increase compared to previous years.
CSC Financial noted in a recent report that southbound funds will remain a key driver of Hong Kong stocks. He attributed this to differences in funding costs between domestic and foreign investors: with mainland interest rates staying low and US interest rates remaining high, Hong Kong stocks offer a higher return spread relative to Chinese bonds but a lower spread relative to U.S. bonds. This makes mainland capital more eager to enter the Hong Kong market. Given that the U.S. is expected to slow the pace of interest rate cuts, this trend is likely to persist for an extended period.
Public Funds Help Mainland Capital Reclaim Pricing Power
As key institutional investors, mutual funds play a crucial role in southbound capital flows and have significantly contributed to the recent recovery in Hong Kong stocks.
According to data from Eastmoney Choice, as of Q4 2024, the market value of Hong Kong stocks held by mainland mutual funds funds reached a record-high HK$469.2 billion, marking a 1.03% quarter-over-quarter increase and a 38.12% year-over-year surge—both exceeding the performance of the Hang Seng Index and Hang Seng Tech Index over the same period.
The weighting of Hong Kong stocks in mutual funds’ heavy holdings also hit an all-time high. By the end of Q4 2024, public funds’ total stock holdings amounted to 3.22 trillion yuan, with Hong Kong stocks accounting for 14.57%—a new record. This figure has steadily risen from 8.27% in 2020 to 7.82% in 2021, 11.63% in 2022, and 11.50% in 2023.
Some mutual funds have raised their Hong Kong stock exposure to historic highs. For example, the Fullgoal Minyu Shanghai-Hong Kong-Shenzhen Select Fund increased its Hong Kong stock allocation from 87.66% in Q3 2023 to 92.4% in Q4 2024, setting a new record. Similarly, the Harvest Hong Kong Internet Industry Core Assets Fund raised its exposure from 93.03% to 93.58%, also reaching an all-time high.
Chen Cong, fund manager of the Invesco Great Wall Shanghai-Hong Kong-Shenzhen Two-Year Holding Fund, pointed out that today’s market differs significantly from the 2020 wave of southbound investment that sought to seize pricing power.
On one hand, mainland investors now hold a high enough proportion of Hong Kong stocks that the market is gradually becoming a domestic-driven environment. Many institutional investors have become more active in Hong Kong stocks, whether through dedicated Hong Kong stock funds or mutual funds investing via the Stock Connect program. The increasing share of mainland investment is transforming Hong Kong stocks from a purely offshore market into a semi-offshore market, which could help stabilize volatility, especially downside risks.
On the other hand, Hong Kong stock pricing dynamics are increasingly resembling those of A-shares. For instance, purely growth-oriented stocks that would not typically command high valuations in a foreign-investor-dominated market are now able to sustain higher valuations for extended periods due to mainland investors’ preference for growth stocks, a shift underscoring the growing influence of mainland capital in Hong Kong’s pricing structure.
Domestic and Foreign Capital Resonating Together
In addition to the influx of domestic capital through mutual funds, multiple foreign institutions have also turned bullish on Hong Kong stocks, suggesting that global funds’ “rebalancing” could further boost market momentum through combined domestic and foreign capital inflows.
Huatai-PineBridge Fund observed that passive foreign capital has accelerated its entry into Hong Kong stocks, while active foreign outflows have slowed. As of February 19, passive capital inflows—mainly through ETFs—rose from $540 million the previous week to $910 million, primarily targeting Chinese and US.-listed Chinese stocks. Meanwhile, outflows from active funds (mainly long-only funds) have tapered off, with inflows concentrated in China-focused funds.
Goldman Sachs reported that between February 14 and 20, global hedge funds increased their positions in Asian equities to their highest level since 2016, with A-shares and Hong Kong stocks accounting for nearly half of the inflows.
“Underweighting presents an opportunity, and rebalancing is a trend,” Fullgoal Fund noted. It believes that global funds’ “restocking” will inject fresh vitality into Hong Kong stocks—especially in the internet sector—supporting a sustained and well-balanced rally. Currently, southbound pricing power stands at over 40%, and the ongoing synergy between domestic and foreign investors may continue to drive market strength.