Southbound funds buying interest heats up, technology stocks pull back, attracting capital inflow

Why Are Southbound Funds Increasing Their Tech Stock Holdings Against the Market Trend?

Text | Chen Mingkang

Editor | Wu Haishan

Amid market volatility triggered by Middle East conflicts and tech stock sell-offs, Chinese stock investors seem to be bottom-fishing. In February, southbound capital flows further increased to about HKD 91.5 billion, up from HKD 63.3 billion in January. This round of capital rebound occurred as the offshore market weakened—February’s Hang Seng Index fell 2.8%, and the Hang Seng Tech Index declined over 10%. The sell-off in tech stocks appears to have prompted southbound investors to buy on dips.

In February, sector capital flows showed changes. The communication services, consumer discretionary, and information technology sectors became the main sources of capital inflows, replacing the previously dominant financial sector. The materials sector, which performed best in 2025, experienced profit-taking for the second consecutive month, leading to the largest outflows, while capital inflows into financials also slowed.

This image may be AI-generated

Despite the Hang Seng Tech Index having fallen about 26% from its October high last year and technical bear markets deepening, mainland investors continued to increase their holdings of Chinese internet giants in February. Tencent attracted about HKD 21.2 billion in February, ranking first, despite its stock price dropping 14.5%. The tech giant is accelerating the integration of AI models and platform with OpenClaw’s intelligent agent framework. Xiaomi, Meituan, and Alibaba also ranked highly among the top buy-in stocks.

The dip-buying behavior is similar to last year, when a similar capital inflow occurred during the correction, preceding the DeepSeek rally and driving a rebound in 2025 after the U.S. announced tariffs for the first time. However, since the beginning of the year, this strategy faces a more challenging environment. With the Middle East conflict escalating in March, tech stocks have continued to come under pressure.

After Tencent and Alibaba released their latest earnings reports, their stock prices once dragged down the MSCI China Index, reflecting market skepticism about whether increasing AI investments can deliver clear returns. Market sentiment remains cautious due to Trump postponing his China visit; the Federal Reserve’s hawkish stance and the ongoing Middle East conflict have led to outflows from industrial metals stocks, with the materials sector falling 9.5%. Some AI momentum from Chinese cloud giants is shifting toward pure AI companies like MiniMax and Zhipu, which may be less burdened by traditional business constraints. However, Alibaba Cloud plans to raise prices for AI and cloud computing products by 5%-30% starting mid-April, which could support profit margins and accelerate AI monetization in the future.

Northbound trading volume hit a record high in January and remained high in February, indicating renewed foreign interest in A-shares. Before the two sessions in March, market activity heated up as investors sought clearer policy signals. Amid global market volatility, the benchmark indices of A-shares showed resilience, with the CSI 300 index roughly flat in February, while small-cap stocks continued to outperform large caps, with the CSI 1000 index rising about 3.7%.

Exchange rate movements may provide support, as a strengthening RMB could boost northbound capital flows. Besides exchange rate factors, overseas investors may focus on policy signals—such as the set GDP growth target of 4.5%-5%. Geopolitical developments could also attract attention.

(Author is a Bloomberg industry research analyst. The views expressed are solely personal and do not represent the stance of this publication.)