Chinese investors snap up Hong Kong stocks as flows near record

[HONG KONG] Mainland Chinese investors’ purchase of Hong Kong-listed stocks is approaching an annual record, driving a rally that has made a key benchmark in the city one of the world’s best performers.

Southbound net inflows expanded by another HK$2.7 billion (S$440.8 million) on Tuesday (Jul 22), taking this year’s total to HK$800 billion, a whisker away from 2024’s previous record of HK$808 billion.

The accelerated buying came as the Hang Seng China Enterprises Index gained 24 per cent this year, in a rally fuelled by DeepSeek-led technology breakthroughs, mainland investors’ hunt for quality assets and global funds’ diversification needs. Also driving the southbound flows is a less robust onshore market, where the CSI 300 benchmark has risen 4.7 per cent in the same period.

Southbound flows may exceed HK$1 trillion this year, according to estimates by China International Capital Corp (CICC) analysts including Kevin Liu. They expect the purchases to taper in the current half year as mainland mutual and insurance funds run low on dry powder.

Mutual funds may add only HK$100 billion for the rest of the year before they approach the 50 per cent cap for Hong Kong equity positions that applies to most funds, while insurance firms may buy another HK$200 billion, CICC’s analysts estimate.

The level of mainland investor participation has climbed with the inflows, with southbound turnover accounting for 47 per cent of the Hong Kong market’s year-to-date average and up about 10 percentage points from 2024’s level. Still, there may be room for retail demand to increase, as exchange-traded funds’ turnover was less than 1 per cent of the total last month under the stock link between Hong Kong and the mainland. BLOOMBERG