Hong Kong stock market short-squeeze trading and Pair Trading coexist, while US stocks regain AI-driven momentum trading

Author: Citic Securities Research

Abstract

This week, the People’s Bank of China governor Pan Gongsheng stated that foreign-exchange reserves will continue to increase the proportion of asset allocation in Hong Kong, driving a sharp rebound in Hong Kong stocks for the second consecutive week. Although the open short position as a percentage of market cap in Hong Kong stocks has already edged down from its mid-June peak to 2.43%, it is still close to levels around three standard deviations above the historical mean. With both internal and external disruption factors gradually easing, we expect there will be substantial room for further pullback in the future.

However, Hong Kong stocks have also shown relatively clear signs of pair trading recently. In the short term, we still recommend focusing on areas with higher fundamental certainty and event catalysts, including: innovative drugs, airlines, robots, and metals with strong industrial attributes.

This week in the US, trading momentum around the AI theme has significantly returned. SK Hynix’s share price rise following its US stock listing confirms the sustained heat in the AI hardware supply chain. Meta’s expansion of data centers and Amazon issuing debt to raise funds both indicate that tech giants’ capital expenditures remain resilient, effectively alleviating market concerns about a slowdown in AI spending cadence.

We expect US stocks to maintain a choppy uptrend pattern afterward, and recommend paying attention to: software, defense industry, energy infrastructure, and financial sectors.

Foreign-exchange reserves will continue to increase the asset-allocation proportion in Hong Kong

According to the PBoC 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, aiming to improve the development of Hong Kong’s fixed-income and money markets, and to support arrangements for Hong Kong as an offshore RMB hub.

During his speech, PBoC Governor Pan Gongsheng said that the PBoC will cooperate with the Hong Kong local government and financial regulators to build, consolidate, and develop Hong Kong as a financial center. In his remarks, 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 markets.

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

According to the annual report of the State Administration of Foreign Exchange, China’s foreign-exchange reserves in terms of currency composition show higher diversification and dispersion compared with the global average. From a yield perspective, the average return on China’s foreign-exchange reserve investments reached 3.2% between 2010 and 2019. In the Hong Kong stock market, at present the TTM dividend yield of the Hang Seng High Dividend Yield Index is as high as 6.0%, showing a clearly strong return advantage.

Short-squeeze trading and pair trading are played out together in Hong Kong stocks

In the past two weeks, the sectors that led Hong Kong stocks were those with the highest open short position as a percentage of market cap, such as healthcare (4.07%), discretionary consumption (3.03%), and technology (2.83%).

Overall, although the open short position as a percentage of market cap in Hong Kong stocks has already edged down from the mid-June peak to 2.43%, it can still be said to be near levels around three standard deviations above the historical mean. With internal and external disruption factors gradually easing, we expect there will be substantial room for pullback going forward.

But since the overall rebound in Hong Kong stocks on June 29, the A/H premium index has expanded by 2.1%. In particular, the premium levels of recently re-priced H-share underlying names with a premium have narrowed noticeably, including Lianqi Technology, Zhaoyi Innovation, CATL, and others. Combined with recent signs of RMB appreciation over the past two trading days and continued outflows from Southbound ETFs (cumulative outflows of 125.6 billion yuan since March 5), we also flag that pair trading may affect H shares.

In the short term, we still recommend focusing on areas with higher fundamental certainty and event catalysts, including: 1) innovative drugs (resilient performance + buyback support + overseas BD); 2) airlines (peak travel season + falling oil prices); 3) robots (catalyst expected from Optimus mass production); 4) metals with strong industrial attributes (high growth in earnings + easing expectations for rate hikes).

This week, US stock AI compute capacity has seen renewed trading momentum, and market risk appetite has risen in parallel

Information technology, energy, and communication services led the gainers, with the Philadelphia Semiconductor Index up 2.7%.

SK Hynix’s US-listed ADR rose 12.8% on its first day of trading. Oversubscription and strong performance provide strong confirmation that AI-momentum trades have continued. At the beginning of July, Meta previously signaled the sale of some excess compute capacity, triggering market concerns that tech giants’ capital expenditures may slow down, and volatility in the semiconductor sector notably increased.

However, market sentiment has reversed again recently. Meta announced that it will invest 13 billion Canadian dollars in Canada to build new data centers, sending a strong signal that capital expenditure willingness has not decreased and may even increase. Meanwhile, this week Amazon filed with the SEC for a US dollar bond issuance, launching the issuance of bonds across eight tenors. According to media including Bloomberg and CNBC, the total issuance size in this Amazon bond offering is approximately $25 billion.

Although there are disagreements in the market in the short term about the sustainability of AI capital expenditures, the real actions of leading companies have not turned toward conservatism. The narrative of a compute arms race remains intact, serving as a key fundamental basis supporting the continuation of this momentum trading cycle.

With two main lines—US AI hardware and cloud-computing capital expenditures—mutually confirming each other, earlier concerns may gradually be digested, and momentum-trading characteristics may persist

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

Combining current valuation levels and the trend of continuous upward revisions to earnings, we judge that US stocks in the near term will maintain a choppy uptrend pattern, and we recommend watching:

1. software, which may see additional inflows of capital;
2. defense industries with high demand certainty as geopolitical risk becomes prolonged;
3. energy infrastructure that benefits from data center construction and electrification/energy transition;
4. the financial sector driven by dual catalysts of capital returns and regulatory improvements (banks and Fintech).