“Profitability Effect” Continues to Grow — Hong Kong Stocks Driven by Dual Capital Inflows

The Hang Seng Index has recently continued climbing to new year-to-date highs, registering an overall increase close to 28%, placing Hong Kong stocks among the top performers across major global markets. A key driver behind this performance has been a surge in net southbound capital flows, which have approached HKD 800 billion this year—nearing the full-year total for 2024 and potentially setting a new record. At the same time, foreign investors are reevaluating Chinese assets, and Hong Kong-listed equities, being offshore RMB assets, stand to gain.

Since the beginning of 2025, rising geopolitical tensions and ongoing tariff disputes have added pressure to global economic growth. In contrast, China’s economic trajectory has remained steady and resilient, making it an increasingly important contributor to global recovery. This shift in relative performance has prompted overseas capital to reassess the appeal of Chinese investments.

During a press briefing held on July 22 by the State Council Information Office, Jia Ning—Director of the Balance of Payments Department at the State Administration of Foreign Exchange—stated that foreign investment in onshore equity markets has generally trended positively. In H1 2025, foreign investors increased their holdings of mainland-listed stocks and funds by USD 10.1 billion, reversing the net selling patterns seen in the prior two years. Notably, USD 18.8 billion of net purchases were recorded in May and June, reflecting a rising preference among global capital allocators for exposure to China’s markets.

Data from the Korea Securities Depository (KSD) indicate that as of July 15, Korean investors' combined trading volume in A-shares and Hong Kong stocks exceeded USD 5.4 billion in 2025, making China the second-largest investment destination behind the United States.

This resurgence of foreign capital highlights a rebalancing of global asset allocation frameworks. Fidelity International noted on July 10 that rising U.S. debt and trade uncertainty are prompting international investors to shift away from traditional safe havens like the dollar and U.S. Treasuries—paving the way for increased exposure to Asian markets.

A recent CICC report projected that RMB-denominated assets may benefit from monetary system diversification and fragmentation, which could redirect more capital toward China’s capital markets. With their offshore status, Hong Kong equities are especially well positioned to absorb these inflows.

Yi Xiaobin, Head of Equity Investment at Shunshi Investment, explained to Securities Times that foreign investors are pivoting toward Chinese assets due to high valuations and mounting risks in U.S. equities. Concurrently, China's stabilizing economy and attractive valuation levels are drawing renewed attention. Themes such as artificial intelligence, new consumption trends, and innovation in pharmaceuticals are also driving mainland interest in Hong Kong-listed stocks.

Wind data as of July 24 show that net southbound flows into Hong Kong equities have reached HKD 799.845 billion—just shy of 2024’s full-year total of HKD 807.869 billion. Since the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programs were introduced, cumulative southbound inflows have neared HKD 4.5 trillion.

The structure of Hong Kong’s equity market is being reshaped by this capital trend. CICC reported that the pricing influence of southbound funds has steadily grown, now accounting for 35% of turnover. A significant portion of the inflows has come from individual investors via ETFs and active trading platforms. Net flows into Hong Kong equity ETFs available to mainland investors reached RMB 37.5 billion in H1 2025, rising 10% quarter-on-quarter. Insurance allocations have also increased.

Looking to H2 2025, CICC estimates that fund inflow velocity will hinge on profitability performance. Together, southbound flows, foreign investment, and corporate buybacks may contribute HKD 300 billion in incremental liquidity to Hong Kong’s equity market.

Bao Jingang, Fund Manager and Senior Analyst at Rongzhi Investment, told Securities Times that Hong Kong’s valuation discount versus A-shares is attracting more interest. Investors are focusing on large-cap tech names, high-dividend stocks, and emerging consumption sectors. Breakthroughs by firms such as DeepSeek and the inclusion of leading AI stocks—like Alibaba—in the Stock Connect program have enhanced sentiment. Falling interest rates in mainland China and supportive central bank instruments, such as RMB swap facilities, have provided tailwinds for dividend-oriented assets in Hong Kong.

He Li, General Manager of Zhiyu Zhishan Investment, emphasized that the nearly HKD 800 billion in net southbound inflows reflects a convergence of favorable valuations, improved market access, growing investor confidence, and sector appeal—particularly in tech and consumer industries. He noted that the Hang Seng Index’s rolling P/E ratio stands at 11.37, making it attractive relative to global benchmarks. With ongoing capital inflows, supportive macro policies, and sector-driven gains, Hong Kong equities continue to build momentum.

The impact of these inflows is evident in recent performance metrics. Wind data through July 24 show year-to-date gains of 27.95% for the Hang Seng Index, 28.53% for the Hang Seng Tech Index, and 26.99% for the Hang Seng China Enterprises Index. All industries posted positive returns, led by healthcare (+62.10%), financials (+51.28%), and communication services (+48.01%). The IT sector rose by 42.55%, and energy advanced by 32.28%, while industrials, discretionary, and materials each exceeded 20% growth.

Individual outperformers in the Hang Seng Index include China Biopharma, Chow Tai Fook, and China Hongqiao—with year-to-date increases surpassing 100%. Hansoh Pharmaceutical, Meituan-W, and CSPC Pharmaceutical rose over 80%, while shares of WuXi AppTec, Xiaomi Corporation-W, Zijin Mining, SMIC, and China Life Insurance advanced more than 50%.

Looking forward, Yi Xiaobin believes many Hong Kong-listed firms still offer relatively low price-to-book and P/E ratios, indicating further growth potential. He expects high-dividend equities to remain attractive amid improving liquidity and steady policy support.

He Li added that capital flows, government backing, and improving earnings will continue to bolster the market, though volatility may persist. Over the medium term, as anti-competition policies take effect and profit margins stabilize, earnings recovery for Hong Kong-listed corporates is likely to follow.

Bi Kai, Portfolio Manager for BlackRock’s "Zhuoyue Yuanhang" and "Hong Kong Stock Connect Vision" funds, commented that despite several periods of fluctuation this year, market profitability has stayed firm. With geopolitical tensions easing and tariff disputes moving into negotiations, both A-shares and Hong Kong stocks have gained traction, and investor confidence is returning. Bi also pointed to several themes worth watching in H2: efforts to boost domestic demand in internet and consumption sectors; technological advancement, including innovation in hardware independence, manufacturing, energy, and food; and export-driven industries with competitive advantages in both domestic and global markets