A‑Shares Open The Year With Consecutive Gains While Hong Kong Stocks Lag

Since the start of 2026, performance between A‑shares and Hong Kong equities has diverged markedly. A‑shares recorded 16 consecutive trading‑day gains and reached fresh highs, whereas Hong Kong stocks largely failed to participate in the rally, with several leading names erasing most of their New Year advances. This divergence has prompted market participants to question which market’s price action better reflects fundamentals.

China International Capital Corporation (CICC) examines the gap through three lenses—market drivers, historical patterns and structural distinctions—and offers corresponding investment guidance. The A‑share advance is not rooted in a clear improvement in macro fundamentals. High‑frequency indicators such as blast‑furnace utilization and wholesale prices for meat and vegetables remain weak, continuing the soft trend seen in the fourth quarter of 2025. The current rebound is therefore best characterized as excess liquidity seeking scarce return opportunities.

Two dynamics explain the A‑share strength. Structurally, the early‑year gains were concentrated in high‑momentum sectors—commercial aerospace, non‑ferrous metals and brain‑computer interfaces—while small‑caps materially outperformed large‑caps, extending the 2025 pattern of sectoral leadership. The anticipated rotation from high‑valuation names into low‑valuation stocks did not materialize, and traditional consumer sectors remained behind. Contribution analysis indicates that the rally was driven predominantly by valuation expansion rather than by an improvement in corporate earnings. From a funding perspective, reallocation by institutional and retail investors supplied fresh liquidity: margin financing balances reached new highs, daily turnover returned to RMB 3 trillion, and turnover rates climbed to 2.4%, all levels not seen since September 2025. These factors help explain why Hong Kong equities were largely absent from the rebound: the market lacks broad exposure to the hottest domestic sectors (innovative pharmaceuticals being a notable exception, up roughly 13%), and abundant onshore liquidity has a more direct impact on mainland markets.

Hong Kong’s underperformance reflects a combination of structural, funding and cyclical factors. Structurally, the market has limited representation of the current hot sectors, and Hong Kong’s distinctive segments—dividend plays, internet platforms, innovative pharmaceuticals and new consumption—are not uniformly aligned with prevailing investor enthusiasm; innovative pharmaceuticals’ modest weight of about 3% in the Hang Seng Index is insufficient to lift the broader market. On the liquidity side, external support has been constrained: following the Federal Reserve’s easing cycle that began in September, U.S. Treasury yields did not decline materially and in December the 10‑year yield rose, offering limited relief for Hong Kong liquidity. Foreign inflows have slowed, with hedge funds and Asia‑Pacific capital trimming overweight positions. Southbound flows decelerated in the fourth quarter despite a record RMB 1.4 trillion for 2025 overall; average daily southbound inflows in December were only HKD 1.09 billion versus an annual daily average near HKD 6 billion. Contributing factors include persistent A‑share activity, public funds’ benchmark adjustments that reduced Hong Kong overweight, and a stronger renminbi that diminished the relative appeal of Hong Kong dividend assets. Funding demand has also intensified: Hong Kong IPO fundraising reached HKD 285.8 billion in 2025—the largest globally—with HKD 67.4 billion raised in November and December alone, while potential lock‑up expiries in December approached HKD 120 billion, adding to liquidity pressure.

On fundamentals, Hong Kong’s market composition—with a larger share of financials and real estate—renders it more sensitive to credit‑cycle deterioration and weaker economic data, effects that have been more pronounced since the fourth quarter of 2025. By contrast, A‑shares benefit from stronger exposure to technology hardware, export‑oriented manufacturing and PPI‑linked sectors, which have supported earnings resilience and mitigated the impact of cyclical weakness.

Historical patterns also favor A‑shares. Analysis from 2005 onward shows a pronounced calendar effect for mainland equities between the end of the December Central Economic Work Conference and the conclusion of the following year’s Two Sessions. During that window, the CSI 300 averaged gains of 4.6% with a 64% probability of rising, while mid‑ and small‑cap indices averaged roughly 8.5% with probabilities near or above 70%. The Hang Seng Index, by comparison, averaged only 0.5% gains with a 59% probability of rising, indicating a materially weaker seasonal effect for Hong Kong. Sector‑level performance historically favored A‑share segments such as computers, defense and home appliances, which averaged about 10% gains, whereas Hong Kong returns have been more exposed to external capital flows and U.S. Treasury dynamics.

Comparing the two markets across fundamentals, liquidity and structural characteristics highlights complementary strengths and weaknesses. On earnings, sector composition differences imply divergent profit trajectories: A‑share earnings growth for 2026 is projected at about 4%–5%, versus roughly 3% for Hong Kong, with mainland markets benefiting from technology hardware, external demand and PPI tailwinds while Hong Kong faces headwinds from intensified internet competition and cyclical financial and property sectors. On liquidity, A‑shares enjoy a domestic advantage, including the scheduled maturity of long‑term household deposits totaling an estimated RMB 32 trillion in 2026; Hong Kong confronts threefold pressure from slowing southbound inflows, rising IPO and refinancing needs (IPO fundraising could exceed HKD 400 billion in 2026) and uncertain external liquidity conditions. Structurally, the markets are complementary: Hong Kong provides scarce high‑dividend assets, major internet platforms, innovative drug developers and new‑consumption brands that offer unique allocation value, while A‑shares present deeper exposure to technology hardware and cyclical manufacturing supported by industrial policy and domestic substitution trends.

Investment positioning should be guided by the credit cycle. In AI and the broader technology chain, hardware offers greater short‑term certainty than applications, with A‑shares positioned to capture benefits from compute infrastructure and domestic substitution; Hong Kong application‑side opportunities warrant attention over a longer horizon and may require industry breakthroughs or a more accommodative monetary backdrop. Dividend sectors remain useful for balanced allocation and volatility hedging, with Hong Kong’s dividend yield advantage representing long‑term value despite near‑term headwinds from renminbi strength and insurance allocation timing. Cyclical sectors merit focus in the first quarter as demand transmission from U.S. fiscal and monetary stimulus could create trading windows, with delayed PPI upside offering tactical entry points; A‑shares are better positioned in resource and external‑demand chains such as non‑ferrous metals, chemicals, machinery and home furnishings. In consumption, fundamentals are generally weak amid credit‑cycle volatility; investors can either pursue short‑term trading to capture volatility or adopt a long‑term value approach by selecting companies with durable competitive moats and depressed valuations, concentrating on sub‑segments where supply consolidation is evident, such as dairy.