Unprecedented Southbound Capital Flows Amid Market Divergence
As of September 8, 2025, southbound capital inflows through the Stock Connect program have reached a staggering HKD 1.03 trillion, equivalent to 127% of the total inflows recorded in 2024. Since the program’s inception, cumulative net purchases of Hong Kong stocks have exceeded HKD 4.7 trillion, with this year’s inflows accounting for 21.77% of that total. On September 2 alone, southbound capital recorded a net purchase of HKD 92.81 billion, one of the highest single-day totals in the program’s history.
Despite these record-breaking southbound capital inflows, Hong Kong’s stock market has shown relative weakness compared to mainland A-shares. Since July, A-shares, particularly in the tech sector, have outperformed significantly, with various tech-themed funds seeing substantial NAV increases and the STAR Market index repeatedly hitting new highs. In contrast, the Hang Seng Index has struggled around the 25,000-point level, failing to break through previous highs.
Five Emerging Market Characteristics
A-Shares and Hong Kong Stocks Taking Turns Leading
CICC Research analysis identifies three distinct phases in global capital markets this year. From January to March, Hong Kong stocks outperformed both A-shares and U.S. stocks, driven primarily by AI-related enthusiasm that propelled the Hang Seng Tech Index to significant gains. This phase saw technology and internet companies benefiting from rapid AI development and market excitement about the sector’s potential.
Between April and June, U.S. markets took the lead, particularly technology giants posting better-than-expected earnings that pushed markets to new highs. Hong Kong markets, meanwhile, struggled to recover their March highs, with the Hang Seng Tech Index remaining below previous peaks.
Since July, A-shares have surged ahead, with liquidity-driven rallies in technology sectors outperforming both Hong Kong and U.S. markets, while the latter two have consolidated at higher levels. This alternating leadership pattern suggests that A-shares and Hong Kong stocks are no longer moving in lockstep but rather taking turns driving Asian market performance.
Marginal Improvement in Liquidity Tightness
Since mid-August, the Hong Kong Monetary Authority has actively intervened to support Hong Kong dollar supply and manage liquidity, effectively easing market tightness. As a result, the Hong Kong Interbank Offered Rate (Hibor) has stabilized after rapid increases, returning market rates to more reasonable levels and providing a favorable liquidity environment for Hong Kong stocks.
Simultaneously, Federal Reserve Chair Jerome Powell’s increasingly dovish stance has raised expectations for future rate cuts, contributing to improved global liquidity conditions. These developments suggest that the liquidity constraints affecting Hong Kong markets are showing marginal improvement, which should help reduce financing costs and boost market activity.
Sustained Increase in Hong Kong Market Trading Activity
Recent data shows average daily turnover in Hong Kong markets reaching HKD 357.2 billion, an increase of HKD 76.9 billion week-over-week and placing current trading activity at the 97.4th percentile of the past three years. This indicates historically high levels of market participation and enthusiasm.
According to Wind data, average daily turnover in Hong Kong’s securities market reached HKD 247.3 billion through August 2025, representing an 87% increase over 2024’s average of HKD 131.9 billion. August 2025 alone saw average daily turnover climb to HKD 279.1 billion, a massive 192% increase over August 2024’s HKD 95.5 billion.
This sustained growth in trading volume reflects both increasing market participant attention to Hong Kong stocks and improving market liquidity, laying a solid foundation for the market’s long-term healthy development.
Simultaneous Inflows from Domestic and International Investors
Southbound capital has maintained net purchasing momentum throughout the first nine months of 2025, with buying scale continuously expanding. Industrial Securities analysis indicates this southbound trend is likely to continue, providing substantial liquidity support and reflecting mainland investors’ long-term confidence in Hong Kong markets.
Media investigations have found significantly increased investor interest in Hong Kong stock connect services, with Galaxy Securities reporting that new Hong Kong stock connect account openings in 2025 have already exceeded 2024’s full-year increase.
From the international perspective, China-asset tracking ETFs serve as a good proxy for foreign capital flows. Last week alone, foreign investors net purchased HKD 4.3 billion worth of Hong Kong stocks through such ETFs. Since September 24, 2024, foreign capital has net流入 approximately HKD 110 billion into Hong Kong markets through this channel.
Increased Short-Term Volatility with Structural Market Characteristics
China Merchants Securities (Hong Kong) analysis notes that the global economy remains in a deflationary cycle, with China showing weak recovery momentum that requires further strengthening. Corporate profit growth remains at historically low levels, lacking strong growth drivers. While policy support exists, incremental policy measures remain limited, unable to provide strong market stimulus.
Thus, Hong Kong markets exhibit clear ‘liquidity bull’ characteristics, with market advances relying more on liquidity conditions than substantive profit growth. Although factors such as Fed rate cut expectations, improved Hong Kong liquidity, and AH premium recovery support market rebounds, numerous uncertainties remain.
The lack of compelling market narratives to attract sustained incremental capital, potential global liquidity fluctuations from increased U.S. Treasury issuance, and market expectation volatility around U.S. rate policy implementation and major global political events may all contribute to increased Hong Kong market volatility.
Long-Term Opportunities in Hong Kong Markets
Market volatility has increased significantly since September, with global capital markets facing multiple influencing factors and heightened uncertainty. Meanwhile, anticipated Fed rate cuts have kept market attention focused on monetary policy adjustments, leaving many investors wondering how to position themselves in Hong Kong markets.
Zhang Yidong (张忆东), chief strategist at Industrial Securities, believes Hong Kong markets may see a new round of gains in the fourth quarter. As negative factors gradually dissipate, capital structure continues optimizing, and valuation advantages become more apparent, Hong Kong stocks could welcome a new upward trend.
China Merchants Securities (Hong Kong) maintains an even more optimistic medium to long-term outlook. As supply-demand dynamics improve, China’s economic cycle may approach an inflection point. Technology sector capital expenditure and R&D investment should gradually translate into corporate profits, becoming new growth engines. Once Fed rate cuts begin, simultaneous policy easing in both China and the U.S. should drive continued inflows from both southbound and foreign capital. With Hong Kong stocks representing a global valuation洼地 and the Hang Seng Index trading below historical averages, future fundamental improvements, upward profit revisions, and valuation recovery could drive medium to long-term Hong Kong market advancement.
Strategic Considerations for Investors
For investors deciding between A-shares and Hong Kong stocks, CICC Research offers clear guidance: pursue liquidity-driven opportunities in A-shares, while focusing on quality sectors in Hong Kong markets.
The research suggests that investors seeking to participate in liquidity-driven rallies should focus on A-shares, particularly those with higher risk tolerance and trading orientations. Such markets depend on continuous incremental capital inflows creating positive feedback loops. Investors confident in this dynamic will find more direct exposure in A-shares rather than Hong Kong stocks, which face additional constraints from short-selling and placement activities.
For investors concerned about liquidity-driven sustainability or potential market overheating, Hong Kong markets—particularly quality sectors—offer more stable options suitable for conservative, long-term holders. The contrasting performance between record southbound capital inflows and Hong Kong market performance creates unique opportunities for discerning investors who understand these emerging dynamics.
As global markets navigate uncertain territory, Hong Kong stocks present both challenges and opportunities. The record southbound capital inflows demonstrate strong confidence from mainland investors, while current valuations offer attractive entry points for long-term positions. Investors should monitor liquidity conditions, corporate earnings developments, and policy signals to make informed decisions about their Hong Kong market exposure.