Hong Kong stock short-squeeze trades and pair trading co-occur, while U.S. stocks regain momentum from AI trading

Summary

This week, the head of the PBOC, Pan Gongsheng, said that foreign exchange reserves will continue to increase the proportion of assets allocated in Hong Kong, driving a sharp rebound in Hong Kong stocks for the second consecutive week. Although the percentage of open short positions to market value in Hong Kong stocks has already edged down from the mid-June peak to 2.43%, it is still near a level more than three standard deviations above the historical average. With internal and external disturbance factors gradually easing, there is expected to be significant room for further pullback in the future.

However, recent Hong Kong stocks also show fairly clear pair trading signals. In the short term, we still recommend focusing on directions with higher fundamentals certainty and event catalysts, including: innovative drugs, airlines, robotics, and metals with strong industrial attributes.

This week’s US market AI trade momentum has noticeably returned. SK hynix’s ADR listing in the US saw its share price rise, which validates that the AI hardware industry chain remains hot. Meta’s expansion of data centers and Amazon’s fundraising via debt issuance both confirm that tech giants’ capital expenditures still have resilience, effectively easing market concerns that investment in the AI space may slow down in terms of timing.

We expect US stocks to maintain a choppy upward trend afterward, and we recommend focusing on: software, defense, energy infrastructure, and financial sectors.

Foreign exchange reserves will continue to increase the proportion of assets allocated in Hong Kong

According to the PBOC’s official website, on July 7, the People’s Bank of China, the Hong Kong Monetary Authority, and the Hong Kong Securities and Futures Commission jointly announced 11 further measures to deepen cooperation between Hong Kong and the Mainland financial markets. The measures aim to improve the construction of Hong Kong’s fixed income and money markets, and support arrangements for Hong Kong’s offshore RMB hub.

In his speech, Pan Gongsheng, Governor of the PBOC, said that the PBOC will work with the Hong Kong local government and financial authorities to build, consolidate, and develop Hong Kong as a financial center. In the speech, he mentioned that China’s foreign exchange reserves will continue to increase the proportion of assets allocated in Hong Kong, injecting more momentum into the development of Hong Kong’s capital market.

This remark was first mentioned by Governor Pan at the 18th Asian Financial Forum in 2025. After that, Hong Kong stocks entered the second round of gains since September 24. Within 45 trading days, the Hang Seng Index rose by nearly 30%.

According to the annual report of the State Administration of Foreign Exchange, China’s foreign exchange reserves in terms of currency structure show more diverse and more diversified characteristics compared with the global average. From the perspective of return rates, between 2010 and 2019, the average return rate on China’s foreign exchange reserves investments reached 3.2%. In Hong Kong’s stock market, the TTM dividend yield of the Hang Seng High Dividend Yield Index is currently as high as 6.0%, clearly offering a stronger return advantage.

Short squeezing trades and pair trading unfold together in Hong Kong stocks

Over the past two weeks, the sectors that led the rally in Hong Kong stocks were those with the highest percentage of open short positions to market value, such as healthcare (4.07%), discretionary consumption (3.03%), and technology (2.83%).

Overall, while the percentage of open short positions to market value in Hong Kong stocks has already fallen slightly from the mid-June peak to 2.43%, it is still near a level more than three standard deviations above the historical average. With internal and external disturbance factors gradually easing, we expect there to be significant room for further pullback in the future.

However, since the overall rebound of Hong Kong stocks on June 29, the A/H premium index has widened by 2.1%. In particular, the premium rates of H-share underlying stocks that have a premium have narrowed noticeably in recent periods, including Qiming Information Technology, Gigadevice, and CATL, among others. Combined with signs that the RMB exchange rate strengthened again over the past two trading days and sustained net outflows from southbound ETFs (累计流出已达125.6B元 since March 5), we also highlight that pair trading may affect H shares.

In the short term, we still recommend focusing on directions with higher certainty in fundamentals and event catalysts, including: 1) innovative drugs (earnings with resilience + share repurchase support + overseas BD); 2) airlines (peak travel season + falling oil prices); 3) robotics (catalyst from Optimus expected mass production); 4) metals with strong industrial attributes (high growth in earnings + easing of rate-hike expectations).

This week, US stocks’ AI computing power main trade re-activated, and market risk appetite rose in tandem

Information technology, energy, and communication services sectors led the gains, and the Philadelphia Semiconductor Index rose 2.7%.

On its first day, SK hynix’s US stock ADR listed and closed up 12.8%. Strong oversubscription and performance provide solid confirmation that AI momentum trading has continued. In early July, Meta signaled plans to sell part of its surplus computing capacity, which triggered market concerns about tech giants slowing capital expenditures and caused pronounced volatility in the semiconductor sector.

But recently, market sentiment has turned again. Meta announced that it will invest C$13 billion in Canada to build new data centers, sending a strong signal that capital expenditure intention has not decreased and is even increasing. Meanwhile, Amazon filed US dollar bond issuance documents with the SEC this week to start issuing eight-maturity bonds. According to reports from Bloomberg, CNBC, and other media, the total issuance size of Amazon’s bonds in this round is about $25 billion.

Although there are disagreements in the market in the short term about the sustainability of AI capital expenditures, the actual actions of leading manufacturers have not shifted toward conservatism. The narrative of an AI compute arms race still holds, becoming a key fundamental basis supporting the continuation of this momentum trade.

With AI hardware and cloud computing capital expenditures in US stocks mutually reinforcing each other, earlier concern sentiment may be gradually digested, and momentum-trade characteristics may continue

As of July 10, the dynamic PE of the S&P 500 (20.4x) and the Nasdaq-100 (23.3x) expanded by 0.9 and 2.4 percentage points respectively from last week, still remaining at relatively low levels compared with the June 2 peak. At the same time, the projected earnings growth rates of the Nasdaq-100 and MAG8 through year-end were revised upward again by 0.36 and 0.08 percentage points, respectively, compared with last week.

Given the current valuation levels and the trend of ongoing upward earnings revisions, we believe that in the short term US stocks will maintain a choppy upward pattern. We recommend focusing on:

1. software that may see additional fund inflows;

2. defense with high demand certainty as geopolitical risks become more entrenched;

3. energy infrastructure benefiting from data center construction and electrification transformation;

4. the financial sector (banks and Fintech) benefiting from the dual drivers of capital returns and regulatory improvement.

Source of this article: Citic Securities Research

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