Hong Kong stocks experience extreme volatility! Southbound trading challenges foreign capital—where is the real bottom?

Ask AI · What is the core driver behind the divergence in pricing power between foreign capital in Hong Kong stocks and Southbound funds?

The process of “digging the bottom” in the Hong Kong stock market is painful and repetitive.

Author | Po Lang

Editor | Xiao Bai

Recently, the fantastical trend in Hong Kong stocks has left many investors calling it, “I can’t make sense of it.”

In particular, certain core tech assets—such as the Hang Seng Tech Index—have kept sinking without any clear “floor,” deeply trapping a number of investors.

Half is seawater, half is fire

That said, objectively speaking, although Hong Kong stocks have performed generally in the recent period, internally they are extremely polarized—so much so that it can be described as half seawater, half fire.

On one side, the sectors represented by the Hang Seng Tech Index repeatedly broke new lows during the consolidation; on the other side, the Hang Seng Index’ high-dividend and dividend-bonus Hong Kong Stock Connect segment has shown very strong resilience, hitting new highs while strengthening against the trend.

This kind of sharply contrasting price action means that while the Hang Seng Index moves down in tandem, the overall trend is relatively smooth.

(Source: Choice data)

The core reason behind this divergence lies in the different pricing power held by foreign and domestic capital.

Research by 广发证券 (GF Securities) analyst Liu Chenming shows that Southbound funds hold pricing power in the dividend and semiconductor fields; in addition, dividends have hedging characteristics. This has supported the outperformance of Hong Kong’s high-dividend stocks against the market over the past period.

By comparison, the constituent stocks of the Hang Seng Tech Index are still led in pricing by foreign capital.

Foreign capital is highly sensitive to companies’ earnings expectations and offshore liquidity. In the context where downside factors in the retail business have not fully played out and AI infrastructure-related earnings have not yet been realized in a substantive way, foreign capital tends to reduce positions to hedge risk, leading to a deeper drawdown in the tech sector.

Data shows that since the October 2025 peak, the Hang Seng Tech Index’s largest drawdown has been close to 30%. At the same time, Hang Seng Tech’s 2026 profit forecasts have also been substantially lowered.

However, foreign capital may still be holding fast to some China core assets. At present, there are already several companies in the Hong Kong market showing AH-share negative price premiums.

(Source: Choice data)

Are Middle East funds really rushing in for a massive bargain hunt?

As Hong Kong stock valuations enter the bottoming-out zone, rumors have recently circulated about Middle East funds massively adding to Hong Kong stocks. Can those claims really hold up on the data level?

It cannot be denied that a small portion of foreign capital has indeed been returning to Hong Kong stocks recently. However, according to Xingye Securities analyst Zhang Qiyao, the inflows are not Middle East funds.

On the one hand, the data shows that active funds representing overseas long-term capital are still withdrawing from the Hong Kong market in March. On the other hand, he believes that if sovereign wealth funds were to allocate China on a large scale, that would be a long-term strategy and difficult to complete in the short term. Moreover, Middle East local capital is facing domestic return-demand needs, which does not support the claim of large-scale outflows.

GF Securities analyst Liu Chenming also believes that currently, the trajectories of interest rates, exchange rates, and foreign capital flows do not show any signs of abnormal transfers of systematic hedging funds.

Industry participants are more inclined to believe that the foreign capital returning recently is likely more flexible capital such as Asia-Pacific hedge funds “buying the dip” in Hong Kong stock markets where pessimistic valuations are relatively well priced.

As for Middle East funds actually participating in Hong Kong stocks, so far it is still primarily focused on cornerstone investments in the primary market IPOs. This kind of layout is a long-term strategic asset allocation, rather than to respond to short-term hedging demands in the secondary market.

What are Southbound funds buying—those with a firm stance?

In sharp contrast to foreign capital’s wavering, Southbound funds’ stance is much more steadfast.

During the period of a sharp pullback in Hong Kong stocks, even amid intensifying external geopolitical conflicts, while Southbound funds’ trading volatility has increased, overall they still maintain net inflows.

(Source: Wind)

Wind data shows that as of March 26, 2026, Southbound funds totaled inflows of 28 billion Hong Kong dollars for the week, and totaled inflows of over 66 billion for the month.

(Source: Wind)

So what exactly are Southbound funds buying?

Trading data for the top actively traded stocks shows that Tencent and Xiaomi are far ahead of other targets in terms of net buy amounts.

In particular, Tencent Holdings has attracted the most Southbound funds’ preference since the beginning of this year, with total inflows of over 49 billion Hong Kong dollars into the stock. In addition, Xiaomi Group has net inflows of over 23 billion.

Also, China National Offshore Oil, Meituan, and Alibaba have net inflows of more than 7 billion.

Overall, Southbound funds’ positioning is still “defense + growth.”

In the list of net sell-offs since the beginning of this year, China Mobile ranks first with net sells of 15.3 billion; next are Semiconductor Manufacturing International Corporation and Zijin Mining, with net sells of 5.7 billion and 4.7 billion, respectively.

Based on March data as geopolitical conflicts intensify from outside, Tencent Holdings remains the most welcomed by Southbound funds. In addition, China National Offshore Oil, which has hedging characteristics, has had net inflows of 7 billion since March, accounting for 88% of total inflows so far this year.

On the net sell side, since March, Semiconductor Manufacturing International Corporation has been sold by Southbound funds by nearly 4 billion. Under continued selling pressure, the stock has fallen nearly 22% during the period.

However, judging from cross-border ETF subscription and redemption data, since March 5, cross-border ETFs have faced ongoing redemptions.

(Source: Wind)

Among them, the products with leading net sells are basically Hong Kong stock index products, which further contributes to the weakness in Hong Kong stocks. Going forward, it will be necessary to observe the direction of this capital, because only when the funds shift to sustained large net inflows is it more likely to drive a reversal in the Hong Kong stock market trend.

(Chart compiled by: 市值风云 APP; Source: Wind)

How much longer does the stock market still need to “dig the bottom” in Hong Kong?

For investors who have been enduring it, the question on everyone’s mind is simply: when will the turning point arrive?

Industry institutions believe that late March is an important window for observing Hong Kong stock sentiment.

On one hand, in March this year there is massive pressure from the release of restricted shares. On the other hand, the earnings report disclosure period is also concentrated around this time. As the overhang pressure from restricted-share releases clears and earnings “shoe drops,” sentiment may be expected to improve.

However, at the macro level, the current market’s expectations for the Federal Reserve cutting rates in 2026 have become extremely pessimistic, driven by the Iran–Israel conflict pushing up crude oil prices and increasing worries about inflation. This will further tighten global capital liquidity, which is a negative for Hong Kong stocks.

At present, Hong Kong’s internet sector is in a highly sensitive state where “rumors fly and birds scatter.” Any small change can easily trigger large swings in stock prices.

For example, in recent times, the TACO transaction and an article in the Economic Daily titled “Should the food delivery battle end?” caused the Hang Seng Index to experience a sharp surge at one point. It looked like a turnaround, but it soon reverted to a weak trend for adjustment.

Overall, the process of “digging the bottom” in Hong Kong’s stock market is painful and repetitive, and a reversal will require clearer and stronger catalysts—such as a more explicit “anti-involution” signal, an improving outlook for fundamentals, breakthrough progress in AI, and a relaxation of the Iran–Israel conflict, etc.

Last but not least, it is worth mentioning that according to GF Securities, currently short-selling trading volume as a share of total turnover in Hong Kong stocks is around 12%, already reaching a historically high level, leaving relatively limited room for further upside.

A high short-selling ratio does not necessarily imply that the market will rise or fall. But in such an extreme condition, once the market’s outlook improves, extremely high short positions could instead trigger a short-squeeze, thereby amplifying the market’s rebound strength.

Note: Unless otherwise stated, all data in this full text is as of 2026-03-26.

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