Mainland Inflows Fuel Hong Kong Market Revival

Chinese investors have poured a record sum into Hong Kong equities this year, reinforcing the territory’s growing dependence on capital from the mainland and giving its stock market a much-needed boost after years of underperformance.

So far in 2025, around HK$820bn (US$104bn) has flowed into Hong Kong via Stock Connect, surpassing the full-year total of HK$807.9bn for 2024. The cross-border trading scheme, which links Hong Kong with stock exchanges in Shanghai and Shenzhen, has now become a lifeline for the city’s financial sector.

The pace of investment highlights a broader shift. As economic uncertainty and falling yields depress returns at home, Chinese investors are increasingly looking to deploy capital offshore, using Hong Kong as a conduit that still operates within the boundaries of Beijing’s capital controls.

“Domestic investors are now waking up to the opportunity offshore,” said Jason Lui, head of Asia-Pacific equity and derivative strategy at BNP Paribas. “If you’re a Chinese institutional investor, there are very few places to go. Hong Kong stands out.”

Vincent Che, head of equities at Ping An of China Asset Management (Hong Kong), pointed to mainland bond yields at historic lows. “From an allocation perspective, it’s a straightforward decision to increase your exposure to Hong Kong,” he said.

The Stock Connect scheme, launched in 2014, was designed to give Chinese retail and institutional investors controlled access to foreign capital markets. Mainland residents with at least Rmb500,000 (about US$70,000) can use the programme to invest in Hong Kong-listed shares, including Chinese technology giants that are not available on mainland exchanges.

Southbound flows have now reached HK$4.5tn in total, with more than a third of that arriving over the past two years alone. Daily turnover on the Hong Kong exchange is increasingly shaped by mainland demand. In 2019, southbound transactions accounted for less than 10 per cent of trading on most days. Today, that figure sits closer to 25 per cent.

One key driver has been renewed interest in China’s leading tech firms. Shares in Alibaba, Baidu and Tencent have rallied this year following the release of a highly publicised artificial intelligence model by start-up DeepSeek, and tentative signs that Beijing may be easing regulatory pressure on the sector.

With these companies listed in Hong Kong, and with access to US markets curtailed, Stock Connect has become one of the only viable channels for Chinese investors to gain exposure to the country’s technology sector at scale.

That inflow of capital has helped reverse a post-pandemic slump in Hong Kong equities. The Hang Seng Index has risen more than 15 per cent since January, outperforming most regional benchmarks. Analysts say the recovery is driven as much by policy as by fundamentals.

In January, China’s central bank governor Pan Gongsheng used a major financial conference in Hong Kong to reaffirm Beijing’s commitment to the territory. He said China would support more high-quality firms to list and issue bonds in the city and pledged to increase the share of the country’s foreign exchange reserves allocated through Hong Kong institutions.

Those comments followed an announcement last year from the China Securities Regulatory Commission, which outlined steps to strengthen financial ties with the territory and encourage more mainland firms to seek Hong Kong listings.

The results are already visible. Hong Kong’s pipeline of planned initial public offerings is at a record high, fuelled by a steady flow of mainland firms looking to secure offshore capital while remaining within reach of Chinese regulators.

“The Hong Kong stock exchange has become the main platform for mainland companies to raise international funds,” said David Tsai, a partner at law firm Clifford Chance.

That shift has helped to restore investor confidence, particularly among fund managers who had stepped back from Chinese equities after the government crackdown on large private businesses and a prolonged downturn in the property sector.

“The longer-term outlook for Hong Kong has improved,” said James Wang, head of China equity strategy at UBS. “We are no longer hearing the kind of rhetoric about whether China is investable. That conversation has moved on.”

Still, the dynamic is not without its tensions. While the flow of capital has revived the market, it has also reinforced the perception that Hong Kong’s future is now more closely tied to Beijing than to other global financial hubs.

Drew Thompson, senior fellow at the S Rajaratnam School of International Studies in Singapore, said the city is increasingly functioning as a dedicated financial clearing house for China rather than a pan-Asian investment centre.

“Hong Kong becoming the undisputed platform for Chinese capital markets and renminbi settlement is clearly positive for the Chinese economy, and vital for foreign firms doing business with China,” he said.

“But the revival we are seeing is being driven by efforts to integrate Hong Kong more fully into China, not by opening it up further to Asia or the West.”

That integration is unlikely to slow. With mainland investors seeking diversification, and with Beijing eager to funnel outbound capital through a controlled mechanism, Stock Connect is set to remain central to Hong Kong’s market identity.

Policymakers in the territory have welcomed the inflows, but remain alert to the risk that overreliance on mainland capital could limit market autonomy or expose the city to sudden shifts in Chinese policy.

For now, though, the tide is lifting most boats. After years of underperformance, Hong Kong is once again attracting international attention, not just as a gateway to China, but increasingly as an extension of it. Investors may yet come to see that as both opportunity and constraint.