Mainland Chinese investors buy $3.8B worth of Hong Kong stocks

Mainland Chinese investors are taking positions in Hong Kong’s stock market, injecting billions into the city’s equities and reducing their valuation discount to onshore counterparts. Investors are seemingly looking towards the special Asian administration’s markets to lessen the effects of an impending trade war between China and the US.

According to Bloomberg, mainland Chinese investors purchased a record HK$29.6 billion ($3.8 billion) worth of Hong Kong stocks on a net basis in March, surpassing the previous high set in early 2021. 

Southbound trading through stock connect programs, which link mainland exchanges to Hong Kong’s financial markets, accounted for 46% of the average daily turnover in February, a rise from about one-third in February 2024.

Hong Kong stock market inflows record highs

Mainland investors now hold nearly 12% of Hong Kong’s equities, up from less than 5% at the end of 2020, according to Industrial Securities Co. The surge in the capital has led to a reduction in the “A-H premium,” the price gap between mainland-listed shares and their Hong Kong-listed counterparts, to 34%, below the five-year average of 42%. 

Analysts have coined the changes to mainland investors’ differing growth expectations for Chinese companies compared to foreign traders.

“Southbound capital has already seized the pricing power of Hong Kong stocks,” said Wang Sheng, an analyst at Shenwan Hongyuan Securities Co.

Much of the buying frenzy comes against the backdrop of an artificial intelligence market growth spree, which is now China’s most “watched” tech sector. Shares of major mainland technology firms listed in Hong Kong have surged, buoyed by the influence of AI-driven companies such as DeepSeek.

DeepSeek, a Chinese artificial intelligence startup, developed an open-source AI model that became the most downloaded app in the US back in January while reportedly using “downgraded chips” specifically designed for the Chinese market. 

Still, just like any successful business, the company’s rise to fame has prompted competitors to find a way into the company with proposed buyouts.

According to a March 10 Wall Street Journal exclusive, Founder Liang Wenfeng has rejected calls to commercialize DeepSeek’s AI models, choosing to maintain the project’s research-driven ethos. 

He has turned down certain investment offers, particularly from government-linked entities, due to concerns that a closer association with Beijing could hinder global adoption of the company’s AI technology, per sources familiar with the matter.

The US government is considering measures to ban DeepSeek from government devices, while other companies have used its free, open-source technology to power their own businesses.

Markets tumble as economic uncertainty boils up

Hong Kong stocks declined when markets opened today, pulling the benchmark Hang Seng Index below 24,000, following concerns over China’s latest inflation data. The sell-off erased much of last week’s strong gains, with tech stocks and major Chinese firms leading the slump.

The Hang Seng Index dropped 1.8% to 23,783 by the evening Asian hours, cutting into the 5.6% rally recorded the previous week. The Hang Seng Tech Index also fell sharply, losing 3.1%. On the mainland, China’s CSI 300 Index slipped 0.45%, while the Shanghai Composite Index declined 0.5%.

Investor sentiment went up after China’s National Bureau of Statistics released data on Sunday, which reported that the country’s consumer price index (CPI) dropped 0.7% year-on-year in February. The fall marked the first negative reading in the last 13 months, compared to a 0.5% increase in January.

The Producer Price Index (PPI), a measure of factory-gate prices, fell 2.2% year-on-year in February, extending a streak of declines that has persisted for 29 consecutive months since October 2022.

Yet, some economists believe that continued mainland inflows could provide a cushion for Hong Kong’s equities, although not for the long term. “It helps to mitigate some of the lackluster foreign flows,” said abrdn plc investment director Xin-Yao Ng. 

“And it does help that the Hong Kong stocks are generally cheaper than the A-shares. But I wouldn’t bet on it to be sustained capital support for the Hong Kong market,” he added.

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