Hong Kong's asset revaluation enters a new stage

External disturbances are being desensitized, and relative expectations have improved. Under the new round of tariff negotiations, China's relative advantages are rising; multiple factors such as the deregulation of the U.S. financial sector, interest rate cuts by the Federal Reserve, the expansion of stablecoins, and adjustments to the duration of government bonds support the further decline of the U.S. dollar index, while global liquidity continues to ease. There is a discrepancy in the speed and intensity of domestic policy implementation. The "anti-involution" measures are being intensified, negative pressures on internet e-commerce are easing, and there are positive changes in real estate policies. Some foreseeable pressures in the third quarter have relatively eased, and the timing for the third round of the Hong Kong stock market rally may be earlier than we previously expected, with the market likely to reach new heights in the second half of the year. Core Viewpoints In the second half of the year, prioritize industries with improving prosperity + low valuations, as technology is at the intersection. The Hang Seng Index may break resistance levels with just a risk sentiment adjustment in the short term, and the Hang Seng Tech has greater recovery potential. In specific sub-sectors, we recommend prioritizing industries with improving prosperity + low valuations. 1) In the internet sector, sub-sectors such as e-commerce and local services show signs of bottoming out, with valuations already relatively reasonable; the gaming sector has high prosperity and offers good value; 2) The prosperity of coal, cement, and cyclical products may accelerate bottoming out due to the "anti-involution" measures; 3) Social services, textiles and apparel, and aviation airports are in a phase of low valuations + high prosperity; 4) The new consumption sector in Hong Kong, which has a high concentration, still shows high prosperity, and after a pullback, it presents a better entry opportunity. We emphasize focusing on the Hong Kong tech sector, which is at the intersection of prosperity recovery + low valuations, and its market capitalization accounts for nearly one-third of the overall Hong Kong stock market, making it more suitable for institutional investors to "cut high and buy low." There is no need to be overly pessimistic about the sustainability of funds, AH premium space, and fundamental support. The southbound trading proportion has reached 40%, and the importance of foreign capital should not be underestimated. This round of foreign capital has participated in the revaluation of Hong Kong stocks under the demands for repatriation and diversification, playing an important role especially in the AI market and IPOs. However, this round has not seen a significant inflow like in 2017-2018, and some investors are concerned about the sustainability of funds. The proportion of southbound funds in the trading of Hong Kong Stock Connect stocks has reached 40%, combined with the trading share of Chinese institutions in Hong Kong, the pricing power of Chinese capital has significantly increased in most Hong Kong Stock Connect companies (excluding those listed in both Hong Kong and the U.S.). The importance of foreign capital is different from the past. According to our calculations, active public funds may provide an incremental increase of around HKD 180 billion, while non-active public funds are the main force in southbound trading (accounting for about 90%), which may still have an incremental increase of around HKD 400 billion. The long-term central AH premium is below 25%, and the weakening of the U.S. dollar drives the cyclical convergence of the premium. The recent rebound of the AH premium to 27% is mainly due to the temporary strengthening of the U.S. dollar. The 20% dividend tax on Hong Kong stocks is not the sole basis for the AH premium. Not all investors face tax differences when investing in both AH markets; apart from public funds, most investors do not have significant tax differences between the two markets. Additionally, not all companies have stable dividends and are suitable for DDM model pricing. In the long run, more insurance funds increasing their allocation to Hong Kong stocks and non-dividend companies listing in Hong Kong will help lower the central premium. In the short term, we estimate that the AH premium may drop to 26% or even lower within the year, considering that this is only the beginning of the U.S. dollar weakening cycle, and the AH premium still has further downward space in the future Corporate profits are improving, and the Hong Kong stock market is supported by fundamentals. The market performance of Chinese assets from last year to this year cannot simply be attributed to liquidity expansion; the trend improvement in corporate profits (ROE and EPS) is an important support for the upward shift in the central tendency of the Chinese equity market after the "9.24 market" last year. In 2025, the MSCI China Index EPS is expected to rise for the third consecutive year, with market expectations for continued recovery in EPS and ROE in 2026. The Hong Kong capital market is undergoing profound changes. The Hong Kong market bears three responsibilities: enterprises going overseas, capital repatriation, and the internationalization of the Renminbi, with its importance significantly increasing in recent years. Recent policies have frequently emerged to support Hong Kong in consolidating and enhancing its status as an international financial center, which has far-reaching significance. Looking ahead, two long-term investment themes are highlighted: 1) Large Finance: Under the catalysis of Renminbi internationalization and stablecoins, the Hong Kong stock and bond markets are expected to expand; market trading activity may align more closely with other developed markets. Therefore, the fundamental outlook for Hong Kong's financial industry may trend towards improvement. With global financial conditions easing, the financial sector's dynamic PB in major overseas markets is at a near 10-year high, leaving room for Hong Kong's financial sector. 2) Technology: Global funds are overweighting U.S. tech stocks while still under-allocating to China. Technology possesses unique growth potential that transcends cycles and is a core asset in the consensus for both domestic and foreign investment in the Hong Kong stock market. Main Text Negative factors are improving faster than expected, and the market may reach new heights in the second half of the year. In our mid-year outlook, we pointed out that some foreseeable changes, such as the end of the tariff suspension period, the release of first-half performance results, and the increase in U.S. Treasury issuance tightening liquidity, could influence the market's performance in the third quarter through risk premiums, profit expectations, and risk-free interest rates. Whether it is further policy support from China or monetary easing from the Federal Reserve, both are more likely to occur from the end of the third quarter to the fourth quarter. Therefore, we made three judgments about the Hong Kong stock market in the second half of the year: 1) Tariff disturbances are desensitizing, and the importance of fundamentals is rising. 2) The third quarter will exhibit high volatility, with structural trends as the main line, while the fourth quarter will be more favorable. 3) The Hong Kong stock market has greater revaluation space and still presents relative performance opportunities. After the Hang Seng Index broke through 24,000 points in early June, the sustainability and momentum of its continued upward movement have somewhat slowed, which is largely in line with expectations. In just one month from June to July, the market also experienced some significant marginal changes. These changes, whether external or internal factors, are mostly more optimistic than we previously anticipated, and the suppression of market performance by the aforementioned negative factors has relatively eased. The timing for the third round of the Hong Kong market rally may be earlier than we previously expected, with the Hang Seng Tech Index being the main driving force, and the market is expected to reach new heights in the second half of the year. External disturbances are desensitizing, and relative expectations have improved. Since July, following adjustments to U.S. tariff policies, China's relative advantages have actually increased. 1) China's export competitiveness has improved. The U.S. has raised tariffs on 9 of its top 20 importing economies, while the total tariff level on China remains temporarily unchanged at 30% for the reciprocal + fentanyl tariffs If tariffs on the EU, Brazil, Canada, and Mexico are fully implemented while maintaining the current tariffs on China, the tariff levels imposed on China since Trump 2.0 would be roughly on par with those of the EU. Considering that the RMB has depreciated over 10% against the euro since Trump took office, China's export competitiveness has actually improved. 2) Recent US-China negotiations have conveyed positive signals. On the 11th, the foreign ministers of China and the US met in Kuala Lumpur and "agreed that the meeting was positive, pragmatic, and constructive." According to the Huatai Macro team’s forecast, it is estimated that US tariffs on China will ultimately remain at 30%-40%, with little change in tariff expectations. More importantly, the focus is on when the "shoe will drop," and thus the market is gradually becoming desensitized to tariff issues. The negative pressure from tightening US dollar liquidity in the third quarter may be lower than market expectations, and looking ahead, global liquidity is expected to be more accommodative. One of the risks facing equity assets in the third quarter is the tightening of financial liquidity due to large-scale bond issuance following the resolution of the debt ceiling. The US Treasury expects to net issue $554 billion in bonds in the third quarter of this year (calendar year, same below). We estimate that the final bond issuance scale may approach $1 trillion, but the short-term impact may be less than in the same period of 2023. 1) Bond issuance scale: The net bond issuance in the third quarter mainly consists of two parts: one is the need for bond financing due to deficit growth, and the other is to fill the gap in the TGA account. Recently, the rapid growth of tariff revenues has reduced the deficit level during the same period. The US deficit from 2025 to now ($626.4 billion) is lower than that of the same periods in 2023 and 2024 (which were $971.6 billion and $763.3 billion, respectively). Extrapolating the decline in the first half of the year seasonally, there may be an additional $450 billion deficit in the third quarter. The TGA account currently has a remaining balance of $312.1 billion, and the Treasury plans to replenish it to $850 billion by the end of September, resulting in a gap of $537.9 billion. 2) Structurally, the Treasury is motivated to issue more short-term debt. Bessenet stated that long-term debt issuance should not be increased at the current interest rate levels [1]. Currently, the term premium on US Treasuries has risen. Assuming US Treasury rates rise to 5%, all else being equal, the Hang Seng Index may see a pullback of around 5.3-5.7%. Compared to the potential liquidity tightening in the US in the third quarter, the outlook suggests that global liquidity remains quite ample and may further ease. The growth rate of broad money supply in major global economies has continued to rise this year and currently stands at a high of 7.8%. Looking ahead, multiple factors such as financial deregulation in the US, continued interest rate cuts by the Federal Reserve, expansion of stablecoins, and adjustments in the duration of government bonds will support further downward movement of the US dollar index, indicating improved global financial conditions and continued ample US dollar liquidity. Asian currencies, especially the RMB, have further appreciation potential, enhancing the attractiveness of the Hong Kong stock market. Improvement in Domestic Policy Environment, Easing Profit Pressure Expected There is a discrepancy between expectations and the speed and intensity of domestic policy implementation. Large-scale central fiscal policies have yet to take effect, but given the already low market expectations for policies, recent intensification of "anti-involution" and potential changes in real estate policies may create a gap in expectations. While large-scale fiscal efforts are the foundation for overall growth (GDP) improvement, structural policies are also expected to enhance corporate profitability (ROE). We continue to monitor the effectiveness of these policies and remind investors to pay attention to investment opportunities during the unfolding of expectations. Similarly, the 2023 "China Special Valuation" market has also brought excess returns through corporate profit and shareholder return reforms. The technology sector, which accounts for one-third of the Hong Kong stock market's market capitalization, has previously underperformed due to profit expectation pressures, but recent negative factors suppressing the profit outlook for technology companies have improved. 1) The "takeout war" profit pressure on leading internet companies may ease ahead of schedule. On the 18th, the State Administration for Market Regulation held discussions with major takeout platform companies, requiring rational competition among these platforms. Previously, the market expected this competition to continue until the end of 2025 or 2026. 2) New catalysts have emerged in the AI market. Last week, the U.S. approved NVIDIA to sell H20 chips to China, which is expected to further enhance domestic corporate capital expenditure speed, coupled with important events like Kimi K2 open-source, leading to new catalysts in the AI market. These internal and external changes have reduced the level of negative pressure in the market for the third quarter. At the same time, the liquidity in the Hong Kong stock market remains ample, providing certain protection against downside risks and supporting a rebound after the easing of pressures. Therefore, overall, the market in the third quarter may still be in a high volatility state, but the timing of trend emergence may occur earlier than we previously expected. Preferred Sectors for the Second Half: Improving Prosperity + Undervalued Industries, Greater Recovery Space for Hang Seng Technology In terms of space, 1) Hang Seng Index: In the short term, only a risk sentiment adjustment is needed, and the index may break through resistance levels. Assuming U.S. Treasury yields rise to 4.7% and Chinese bond yields remain unchanged, the estimated increase in the 10-year risk-free rate used by Hong Kong stocks, calculated based on the proportion of trading via the Hong Kong Stock Connect (currently reaching 40%), is not expected to be significant. If the equity premium returns to the year's low of 5.7%, The forward valuation of the Hang Seng Index is expected to rise from 10.6 times to 10.9 times. By the end of the year, the market's dynamic EPS will switch to the 2026 forecast, and under the market's consensus earnings expectations, the forward center of the Hang Seng Index may be higher. Scenario analysis can be seen in Figure 10. Hang Seng Technology: Greater room for recovery. The Hong Kong stock technology sector is currently in a phase of economic recovery + low valuation, and with a large market capitalization, it is more suitable for institutional investors to position themselves. The dynamic PE of the Hang Seng Technology Index is below the average of 23.8X since July 2020, and the ERP is above the average of 1.8%. In the past, due to some negative pressures on the fundamentals, the Hang Seng Technology sector was temporarily overlooked by the market during previous sector rotations. At the aforementioned risk-free interest rate level, assuming the equity risk premium of the Hang Seng Technology Index falls to the lowest point of 1.6% during the first half of the year DeepSeek market, the dynamic valuation may rise from the current 15.7 times to 19.8 times. If we conservatively assume that the equity risk premium only recovers to the June low (before the "takeout war"), the valuation of the Hang Seng Index could be raised to 17 times. Similarly, by the end of the year, the dynamic EPS will switch to the 2026 forecast, and even if the valuation remains at the current level, the index has a high upward potential. If the risk premium adjusts, the potential will be even greater, as shown in Figure 11. In terms of sector selection, the market in the second half of the year may present a "high cut low" trend, with a preference for industries that show improvement in prosperity and have valuation cost-effectiveness: 1) Internet direction, such as e-commerce and local life, although the current prosperity still has a downward trend, the sector has previously accounted for many negative expectations, and the valuation level is already relatively reasonable. The gaming sector maintains a high level of prosperity, and its valuation level is also low, providing cost-effectiveness. 2) Coal, cement, and cyclical products may accelerate their bottoming out due to the "anti-involution" trend. 3) Social services, textiles and clothing, and aviation airports are currently in a phase of low valuation + high prosperity, which may present structural opportunities. 4) The previously concentrated Hong Kong stock new consumption sector still has high prosperity, but the sector's valuation pricing is also relatively sufficient, and a pullback presents a better entry opportunity. Several important issues in the Hong Kong stock market, the answers need not be too pessimistic Is substantial foreign capital inflow necessary for support? The southbound trading proportion has reached 40%, and the importance of foreign capital should not be viewed in a rigid manner. In this round, foreign capital has participated in the Hong Kong stock market trend, which has now turned into inflow. We point out that the so-called "de-dollarization" does not mean that all funds are leaving the United States, but rather that overseas funds (mostly in Asia and Europe, including China's own offshore funds) that are overweight in dollar assets have demands for repatriation and diversification. Since the end of 2023, the correlation between the Hong Kong stock market and the U.S. stock market has been less than 20%, making it the sixth largest stock market globally, and with freely flowing capital, it is an important venue for accommodating this portion of diversified funds. Against the backdrop of a weakening dollar and the domestic real estate adjustment entering its later stage, foreign capital is no longer flowing out of the Hong Kong market: 1) According to EPFR, foreign capital has flowed in $2.07 billion since 2025 vs. $3.15 billion in 2024, with active foreign capital outflow of $6.29 billion and passive foreign capital inflow of $8.36 billion; 2) From the perspective of international intermediaries' holdings, foreign capital has also increased its holdings in the two phases of the Hong Kong stock market since March and April (increased by 0.8% and 0.1% respectively). Structurally, during the tech rally at the beginning of the year, foreign capital reduced holdings in dividends and innovative drugs (-0.5%, -0.2%), while increasing holdings in AI technology and new consumption (0.8%, 1.1%), with the trend further strengthening since April; 3) From the perspective of the USD/HKD exchange rate, the DeepSeek rally at the beginning of the year ignited investment enthusiasm in tech stocks, and subsequently, under the condition that the Hong Kong-U.S. interest rate spread did not widen, Hong Kong has repeatedly triggered strong-side convertibility guarantees under the linked exchange rate system; 4) Foreign capital, as an important cornerstone investor, has participated in Hong Kong stock IPOs, accumulating subscriptions of over $21 billion, accounting for half of the cornerstone investor subscription amount. Against the backdrop of the renminbi no longer depreciating and even having expectations of appreciation, we are not pessimistic about the demand for foreign capital to diversify its allocation in Chinese assets. The fact that foreign capital has not flowed in on a large scale like in 2017-2018 does not mean that the market lacks upward momentum; the current southbound trading proportion has reached 40%, and the analysis of the importance of foreign capital should not be rigid. The proportion of southbound funds in the trading of Hong Kong Stock Connect targets has reached 40%. If we also consider the trading ratio of Chinese-funded institutions in Hong Kong, the pricing power of Chinese-funded institutions has significantly increased. When studying pricing issues, better data would be the inflow of various types of funds; if that is not available, we can look at trading proportions. We do not recommend discussing pricing issues based on shareholding proportions, as only the funds participating in trading can affect prices. Although the southbound trading proportion is less than 30% in the overall Hong Kong stock market, under the Hong Kong Stock Connect company perspective (where the denominator only considers companies participating in the mutual connectivity, i.e., companies that can be traded southbound), the southbound trading amount proportion has recently reached 40%. While data on the trading amount of individual stocks southbound is not available (only the top ten companies are disclosed), considering that the overall Hong Kong Stock Connect has reached 40%, and the average trading volume proportion of companies listed in both Hong Kong and the U.S. is currently around 30%, we can reasonably infer that, except for companies listed in both markets where ADR trading volume remains high and pricing is still primarily driven by foreign capital, the core pricing power of most Hong Kong Stock Connect companies has now shifted to Chinese-funded institutions From the results, even though there has not been a significant inflow of foreign capital in this round, Hong Kong stocks have still gained more than 20% since the beginning of the year. The main driving factor for the rapid rotation of Hong Kong stock sectors in this round also comes from southbound funds. The current trading structure of Hong Kong stocks is different from historical situations and cannot be approached with a rigid mindset. In the future, actively managed equity public funds may provide over HKD 180 billion in incremental funds, while private equity, insurance, and individual investors, with a southbound holding ratio of 90%, may have nearly HKD 400 billion in increments. The overall incremental amount in the second half of the year is slightly lower than in the first half but still above historical levels. For actively managed equity public funds, the future scale of increasing allocation to Hong Kong stocks is about HKD 180 billion: 1) From the perspective of existing stocks, there are a total of 2,259 actively managed equity funds in the market that can invest in Hong Kong stocks (i.e., funds that explicitly state "Hong Kong stocks" in their investment scope or have Hong Kong stocks in their holdings), with a total scale of about RMB 1.7 trillion, and the investment value of Hong Kong stocks accounts for 28.7% of their holdings. Under an optimistic assumption, if the investment proportion in Hong Kong stocks expands to the upper range of 50%, there would be an allocation space of HKD 394 billion. Under a neutral assumption, if the investment proportion increases by 5 percentage points, there would be an allocation space of HKD 92.3 billion; 2) Currently, there are still some funds whose investment scope is not directly labeled "Hong Kong stocks" but still allocate to Hong Kong stocks. Therefore, from an incremental perspective, if actively managed equity funds that do not explicitly label "Hong Kong stocks" in their investment scope clearly increase their allocation to Hong Kong stocks to 5% in the future, it would correspond to an allocation space of about HKD 90 billion. Considering that the current holdings of actively managed equity public funds in Hong Kong stocks account for slightly over 10% of the total southbound holdings, the incremental funds from insurance, private equity, and individual investors may be even more important. Excluding price changes, in the first half of the year, actively managed equity public funds and other types of funds increased their allocation to Hong Kong stocks by HKD 54.2 billion and HKD 492.2 billion, respectively. Based on the trend line extrapolated from mid-2017 to the present, excluding the price changes of the Hang Seng Hong Kong Stock Connect, there is still an incremental amount of HKD 392.4 billion for non-active public funds by the end of 2025. Is there still room for downward movement in AH premium? Long-term central tendency below 25%, with a weaker dollar driving cyclical convergence Year-to-date, the Hang Seng Index has risen over 20%, leading global capital markets. Along with the significant rise in Hong Kong stocks, the AH premium has continued to narrow, from nearly 50% at the beginning of the year to the current 27%, reaching a low since 2020. Recently, the A-share market has begun to show significant catch-up gains, and investors are paying attention to whether there is further room for the AH premium to decline. The core reason for the AH premium is that shares in the two markets cannot be arbitraged, with the underlying factors being differences in investor structure and trading systems. Different types of investors consider different factors when developing pricing models, and differences in trading systems can also affect how investor expectations of valuation reflect in market prices, leading to different pricing. As for the apparent influencing factors we often discuss regarding the AH premium, such as exchange rates and interest rates, these arise based on these two types of differences. We believe that the theoretical long-term central tendency of the AH premium should be below 25%. Using a 20% dividend tax on Hong Kong stocks to estimate the AH premium central tendency at 25% is overly simplistic and lacks sufficient basis. 1) Not all investors face tax differences when investing in AH in both markets. Public funds investing in H-shares through the Hong Kong Stock Connect will face a 20% tax rate, but the tax rate for A-share investments will decrease with the holding period. This is the main source of the difference. Other types of investors, such as insurance companies, have tax exemption policies in both markets; local Hong Kong and foreign investors face a 10% dividend tax on H-shares, while mainland investors in A-shares face a tax rate of 0-20% (exempt after one year, 10% for 1 month to 1 year, and 20% for less than 1 month; considering that the turnover rate of A-shares is close to 300%, the proportion of investors who can be completely tax-exempt is estimated to be very low). 2) Not all companies listed in both AH markets pay dividends and are suitable for discounting using the DDM model. For those stocks that do not or rarely provide dividends to investors, the dividend tax does not constitute a major pricing influence. In the medium to long term, more insurance capital investing in Hong Kong stocks, as well as more non-dividend companies listed in both markets, will help lower the central level of the AH premium. Since 2020, the AH premium seems to have a lower limit of 25%, largely due to cyclical factors. In recent years, the central trend of the market has been declining, U.S. Treasury yields have risen, the dollar has strengthened, and disturbances in U.S.-China relations and the Russia-Ukraine situation have all led to greater pricing pressure on Hong Kong stocks, with price clearing being more thorough. Since September 2024, the aforementioned factors have eased, and the AH premium has begun to decline continuously. If we look back a few more years, from 2014 to 2018, the central tendency of the AH premium was 27%, with a lower limit of 13%. The recent factors constraining the continued decline of the AH premium are not the dividend tax, but rather the short-term rebound of the dollar index We estimate that the AH premium is expected to further decline to 26% or even lower within the year. The two important indicators affecting the cyclical rise and fall of the AH premium are the US dollar index and the dynamic PE of the Hang Seng Index. The former encompasses factors such as interest rates, exchange rates, and geopolitical risk aversion sentiment, while the latter mainly reflects whether there is unilateral pressure in the market. If the ERP falls and drives the dynamic PE of the Hang Seng Index to rise slightly to 11 times (currently 10.7 times), and the US dollar index further declines to 96 (currently 98), the AH premium may fall to 26%. Considering that this is only the beginning of the US dollar weakening cycle, the Huatai Macro team estimates that the dollar is overvalued by 15-20%, corresponding to an equilibrium level of 79-83 for the DXY dollar index, indicating that there is further downside potential for the AH premium in the medium to long term. Is there fundamental support for the rise of Hong Kong stocks? The earnings of Chinese enterprises are improving. In 2025, the EPS of Chinese listed companies will rise for the third consecutive year. EPS is a core indicator for measuring equity investment returns. The EPS of the MSCI China Index had a compound annual growth rate of 15.7% from 2002 to 2014, but only -2.94% from 2015 to 2022. Between 2002 and 2014, the average ROE of the MSCI China Index was 15.4%, while the trend declined to around 10% from 2015 to 2022. The lack of growth in earnings per share for listed companies in recent years explains why it has been difficult for the index to rise; however, once there is a phase of expected EPS improvement, the market can rebound quickly, as seen in 2017 and 2020-2021. Since 2023, both ROE and EPS have slightly rebounded, confirming the trend for 2024, with FactSet consensus expecting further improvement in 2025 and 2026 The market trend from last year to this year cannot simply be attributed to liquidity expansion; the trend of improving corporate earnings is the fundamental support for the upward shift of the Chinese equity market's center after the "9.24 market" in 2024. EPS growth is highly correlated with nominal economic growth, but they do not completely align. Ignoring the structural changes in the stock market and the improvement in corporate profitability could easily lead to missing out on nearly a year of exponential market performance. While nominal economic growth is important, the actual profitability of companies and the heightened awareness of shareholder returns are even more crucial for equity pricing. On one hand, market expectations for trading naturally change earlier than actual fundamentals; on the other hand, the industry structure of listed companies and the composition of economic sectors, as well as the profitability of listed companies compared to other small and medium-sized enterprises, are not entirely the same. Especially for the Hong Kong stock market, the industries that have been rotating favorably since the beginning of the year have indeed shown significant improvement in their own prosperity. Looking ahead, as the mid-year earnings reporting period ends in August, market expectations for the second half of the year will gradually shift towards 2026, with expectations for further recovery in Hong Kong stock earnings in 2026. According to Bloomberg's consensus expectations for individual stock performance, the median EPS growth rate for Hang Seng Stock Connect constituent stocks falls within the range of 5-10%, with nearly 40% of stocks having an EPS growth rate greater than 10%. The expected growth rates for the AI industry chain, consumer goods, and pharmaceuticals are all at relatively high levels. The Hong Kong capital market is undergoing profound changes, guiding two major investment themes. Policies are fully supporting Hong Kong in consolidating and enhancing its status as an international financial center. In mid-November 2024, China Securities Regulatory Commission Chairman Wu Qing delivered an important speech on the prospects of China's capital market, stating that he would fully support Hong Kong in consolidating and enhancing its status as an international financial center. Against the backdrop of the increasing importance of the Hong Kong market, systematic changes are quietly taking place, covering five major areas: the stock market, insurance, banking, financial innovation, and market ecology. In terms of the stock market, policies are focused on enhancing liquidity, optimizing listing systems, and improving corporate governance to expand the market while enhancing quality. Additionally, the Hong Kong Securities and Futures Commission recently stated that it will continue to actively cooperate with mainland regulatory agencies to promote the inclusion of RMB stock trading counters into the Stock Connect, a measure expected to further boost trading activity in Hong Kong stocks and assist in the internationalization of the RMB; In the fields of insurance and banking, measures are also frequently introduced, such as relaxing capital access for Hong Kong and Macau, shortening the asset holding period of the CIES program, and launching cross-border payment channels to achieve real-time remittances for people's livelihood scenarios; In terms of financial innovation, Hong Kong has enhanced its global attractiveness by implementing reforms in the GEM sector, relaxing the mutual recognition sales ratio of funds between the mainland and Hong Kong, and establishing a legal framework for the "Stablecoin Regulation." In terms of market ecology, Hong Kong's capital market has made significant progress in promoting connectivity with the mainland and cooperation in financial technology. Since April 2025, numerous meetings centered around the Lujiazui Financial Forum have supported and promoted Hong Kong's role as a "super connector" for cross-border investment and financing for mainland enterprises, deepening cooperation between Hong Kong and the mainland in technology, finance, and professional services, aiming to fully leverage Hong Kong's capital market as a bridge for the internationalization of the Renminbi. The Hong Kong market has three responsibilities: enterprises going global, capital repatriation, and Renminbi internationalization. Since 2024, policies related to the institutional construction, capital allocation, and trading convenience of Hong Kong's capital market have been frequently introduced, which are important measures to enhance Hong Kong's competitiveness as an international financial center amid a complex global situation. As an important capital market in the Greater China region, the Hong Kong market has three responsibilities: 1) Enterprises going global: Listing in Hong Kong can assist enterprises on their path to internationalization. 2) Capital repatriation: The Hong Kong stock market is an important option for accommodating de-dollarization and diversified allocation. 3) Renminbi internationalization: Hong Kong is the world's largest offshore Renminbi hub, and the continuously improving dual-currency trading system and expansion of underlying products support the path of Renminbi internationalization. Enterprises going global: The Hong Kong stock market is an important platform for connecting international capital and serving enterprise globalization. With policy support, many large A-share companies have listed in Hong Kong for a second time, covering multiple high-end manufacturing and service industries such as new energy, consumption, and electronic manufacturing. Listing in Hong Kong is not merely a financing act but an important opportunity for enterprises to expand international recognition and gain strategic financial resource support for internationalization. Capital repatriation: An important market for accommodating de-dollarization and capital repatriation. The demand for allocation of non-dollar assets globally continues to rise, and the Hong Kong market, with its large capacity, low correlation with U.S. stocks, and free flow of capital, has become an important front for accommodating de-dollarized funds. In addition, the valuation of Hong Kong stocks is at a low level, making them more cost-effective compared to U.S. stocks and other assets from the perspective of PB ROE. With expectations of Renminbi appreciation, the Hong Kong stock market can serve as an important platform for international capital to diversify dollar asset allocation. Compared to developed stock markets, the development of safe assets in Hong Kong, such as bonds, is insufficient. In May 2025, the Hong Kong Legislative Council passed the "Stablecoin Regulation Draft," establishing a comprehensive licensing system that requires stablecoin issuers to maintain 100% reserves in high liquidity assets consistent with their pegged currencies, covering cash, bank deposits, short-term government bonds, and repurchase agreements. The introduction of this regulation further increases the demand for the expansion of high liquidity and safe assets in Hong Kong Internationalization of the Renminbi: An Important Platform for Building the Underlying Asset Pool. As the world's largest offshore Renminbi market, Hong Kong's role in the internationalization of the Renminbi is evolving from a "payment and settlement center" to a "Renminbi asset trading hub." One of the important steps in the internationalization of the Renminbi is to have an appropriate scale of available offshore Renminbi investment assets. In June 2023, the Hong Kong Stock Exchange officially launched the "Hong Kong Dollar - Renminbi Dual Counter Model," allowing the same stock to be traded and settled in two currencies, which is an important part of promoting the development of Hong Kong's Renminbi ecosystem. Investors can directly buy and sell Hong Kong stocks using Renminbi, reducing exchange rate risk and expanding offshore Renminbi asset allocation options. In addition to the stock market, Hong Kong will continue to focus on expanding and building more offshore Renminbi assets. Two Main Lines: Large Finance and Technology are the Core Assets of Differentiated Layout in Hong Kong Stocks The expansion of Hong Kong's capital market and the increase in trading activity help open up the development prospects of Hong Kong's financial industry. The expansion of the Hong Kong market includes not only stocks but also the development of the bond market. Since the beginning of this year, the financing activity of Hong Kong stocks has significantly increased, and the expansion of the stock market is evident. As of 2025, the IPO financing in the Hong Kong stock market has reached HKD 107.1 billion, with refinancing of approximately HKD 173.8 billion, both exceeding the total levels for the entire year of 2024 (HKD 88 billion, HKD 104.2 billion). Based on linear projections for the entire year, the scale of IPOs and refinancing may reach above HKD 190 billion and HKD 310 billion, respectively. In terms of the bond market, the internationalization of the Renminbi and the underlying reserve requirements for stablecoins necessitate the expansion of Hong Kong's bond market capacity. At the "Bond Connect Annual Forum 2025," the CEO of the Hong Kong Securities and Futures Commission, Ashley Alder, stated that measures will be taken to expand the range of participating institutions in the southbound trading, including adding brokerages, insurance companies, wealth management, and asset management companies, optimizing offshore Renminbi bond repurchase operations, and allowing bonds to be re-pledged during the repurchase period, further injecting new momentum into Hong Kong's bond market. Four major factors contribute to the sustained activity in market trading volume. The turnover rate of Hong Kong stocks for the entire year of 2024 is expected to be less than 70%, still lower than that of major developed financial markets globally, such as the United States (96%) and Japan (117%). According to the Huatai Multi-Financial Report "Hong Kong Stock Exchange: Value Reassessment Under the Expectation of Renminbi Appreciation" (May 21, 2025), four major factors may help sustain the trading activity in the Hong Kong market. 1) Historically, Renminbi appreciation is usually accompanied by an increase in Hong Kong stock ADT; 2) The potential interest rate cuts by the Federal Reserve within the year and the low HIBOR also help enhance the overall liquidity of the Hong Kong market and boost trading activity; 3) The continuous activity of IPO financing in Hong Kong stocks over the past 24 years is expected to elevate the ADT center in the long term; 4) The participation of southbound funds, which have a higher turnover rate, in Hong Kong stocks is continuously increasing. In the context of a weakening US dollar in the medium term, global financial conditions are loosening, which is favorable for the large financial sector. Currently, among the major global stock markets, the financial sector index dynamic PB has mostly reached the median level since 2014, with Switzerland, the United States, Germany, and Taiwan, China, even approaching the highest levels in nearly a decade. However, the valuations of the financial sectors in China's A-shares and Hong Kong stocks have not yet recovered to historical averages, indicating room for revaluation Technology is the core asset of the consensus on the allocation of domestic and foreign capital in the Hong Kong stock market. If the important way to enhance global productivity in the future is through advancements in AI technology, then the companies most likely to win in this arena are more distributed across two markets, namely the US stock market and the Hong Kong stock market. Currently, global capital is betting more on the former, significantly overweighting it, while the bets on the latter are clearly insufficient. Since 2021, leading technology stocks in the US have shown large-scale excess performance compared to leading technology stocks in Hong Kong. Even after the emergence of DeepSeek, the market capitalization of leading technology stocks in Hong Kong is still less than 10% of that in the US, significantly lower than the 17.1% when ChatGPT attracted global attention at the beginning of 2023. The innovation and monetization of industrial technology is a long process, and we are still in the early stages of application diffusion, with the technology race yet to determine a winner or loser. However, considering the unique advantages of China's technology industry in massive data, the Internet of Things, internet infrastructure, and robotics manufacturing, as well as the unique cyclical attributes of the technology sector, we believe that in the medium to long term, global funds can bet more on the Chinese market. Risk Warning and Disclaimer The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk