WuBlockchain republished a research note from CICC that asks a simple question about Hong Kong equities: who is the market’s “smart money”?
The note says Hong Kong stocks have moved out of sync with surrounding markets, including A-shares, through 2026. It describes a clear seesaw pattern. In the first half of the year, South Korean stocks and A-share technology names kept strengthening while Hong Kong lagged and saw outflows. After tech shares pulled back in late June, Hong Kong rebounded and funds returned.
CICC says this was not unique to 2026. It points to a similar pattern in 2025 and even earlier periods. Domestically, Hong Kong stocks were strong in the first half of 2025 alongside sustained southbound inflows, then southbound buying slowed after A-shares gained traction in the second half. Externally, overseas money also adjusted Hong Kong exposure as the appeal of markets such as Japan, India, and South Korea shifted.
Why Hong Kong shows a stronger capital seesaw effect
CICC argues the core reason is that Hong Kong is an offshore market. Because it lacks a deep local capital base, it has to compete with other markets for investor attention. When different pools of money rebalance across markets, the effect becomes visible very quickly in Hong Kong. Lower trading activity in the local market also magnifies the impact of flow changes.
That leads to the key question in the note: what drives different investor groups, and which flows carry forward-looking value for market direction?
After reviewing the relationship between southbound flows, foreign flows, and market performance since 2016, CICC lays out three main conclusions.
- Southbound flows are strongly tied to market performance, but they also show some “smart money” traits. Inflows often slow after a large rally and speed up when Hong Kong stocks fall or underperform A-shares. Compared with insurers, actively managed mutual funds and ETFs are more likely to follow the market.
- Active foreign money usually accelerates into Hong Kong only after performance and earnings expectations improve, making it a lagging indicator. Passive foreign money is smaller and more exposed to redemptions and subscriptions linked to non-China markets, so its signal is weaker.
- Flow signals matter more when China’s credit cycle is unstable or overseas liquidity is tightening. In those periods, faster southbound inflows often suggest a rebound may be near, while faster active foreign inflows tend to line up with weaker returns later on. The reverse also applies: a sharp slowdown or reversal in southbound flows can point to a market topping process, while faster active foreign outflows often reflect prior weakness.
CICC says short-term changes in flows matter more than long-run structural inflows when it comes to pricing. It therefore looks at two dimensions: changes in flow momentum, defined as the difference between average daily net inflows over the past month and the past three months, and changes in relative returns, defined by the Hang Seng Index’s one-month performance versus other markets.
Southbound flows: strongly linked to the market, but more contrarian at the margin
At the broad level, the note says southbound flows and Hong Kong stock performance move closely together. Years with larger southbound net inflows also tended to be strong years for the Hang Seng Index. In 2017, southbound net inflows reached HK$339.9 billion and the Hang Seng rose 36%. In 2024, net inflows were HK$807.9 billion and the index gained 18%. In 2025, net inflows climbed to HK$1.4 trillion and the Hang Seng rose 28%.
The reverse was also true in weaker years. In 2018, when the Hang Seng fell 14%, annual southbound net inflows were only HK$82.7 billion, the lowest level since 2015.
The same pattern appeared more clearly when Hong Kong outperformed A-shares. From October 2020 to February 2021, post-pandemic policy support drove a recovery in the household credit cycle, consumption, and property. During that stretch, the Hang Seng sharply outperformed the Shanghai Composite and the 30-day moving average of southbound inflows reached a record HK$15.6 billion. A similar episode appeared from April 2024 to April 2025. After the “924” policy shift and the China asset re-rating linked to DeepSeek in early 2025, Hong Kong stocks outperformed A-shares by 30 percentage points, while the 30-day moving average of southbound inflows rose to HK$12 billion, the second-highest reading on record.
But CICC says marginal changes in southbound flows do not simply amount to trend chasing. The note argues that southbound money often slows after a strong rally and picks up when Hong Kong stocks fall or lag A-shares. In April 2021, excess returns of the Hang Seng over the Shanghai Composite kept rising, yet southbound flows turned net negative. The market later shifted into underperformance. In October 2024, the Hang Seng again pulled ahead of the Shanghai Composite quickly, but southbound inflows slowed.
On the downside, CICC points to several moments when southbound buyers stepped in. In November 2022, the Hang Seng dropped sharply and lagged the Shanghai Composite, but southbound inflows accelerated. The note says a similar pattern appeared in December 2024, followed by a gradual market bottom.
The report says its quantitative work backs this up. The correlation between southbound flow momentum and the Hang Seng’s relative return against the Shanghai Composite over the prior one to two months is about -0.1. In other words, when Hong Kong underperforms A-shares, southbound investors tend to buy faster; when Hong Kong outperforms, buying tends to cool. When southbound inflow speed sits in the top 20% of history, the Hang Seng has gone on to rise an average 1.7% over the next 20 trading days. When southbound momentum shifts from accelerating to slowing, the Hang Seng usually weakens after three to five trading days and then falls an average 1.6% over the following 20 trading days. CICC says that pattern suggests some ability to add exposure at lower levels and take profit at higher ones.
Insurers, active mutual funds, and ETFs behave differently
Within southbound flows, CICC separates insurers from active mutual funds and ETFs.
The note describes insurers as the main long-term buying force. It says insurers also tend to increase allocation when Hong Kong stocks fall sharply and cut back after significant gains, with dividend-paying sectors likely the main target. Citing the Insurance Asset Management Association of China, the report says insurers held RMB 810.5 billion in Hong Kong stocks at the end of 2024, while the balance of Stock Connect investment in Hong Kong equities stood at roughly RMB 762.2 billion. Assuming insurers add to equity assets in a 1:4 Hong Kong-to-A-share ratio, CICC estimates their Hong Kong Stock Connect balance rose to RMB 1.2 trillion in the second quarter of 2026, equal to 25% to 30% of southbound holdings.
On sector direction, the note says southbound money has steadily added high-dividend sectors such as telecom and energy, which matches the long-duration liability profile of insurers. On timing, insurers appear to buy more in down markets and less after rallies. CICC estimates the correlation between insurers’ quarterly net inflows and quarterly Hang Seng returns at around -0.4. During the period from the third quarter of 2021 to the first quarter of 2022, Hong Kong stocks fell, yet estimated insurer net inflows still exceeded HK$80 billion. In the fourth quarter of 2022 and the third quarter of 2024, after market gains, insurers cut exposure in stages and at times shifted into net outflows.
Active mutual funds and ETFs look different. CICC estimates the correlation between their quarterly net inflows and same-quarter Hang Seng returns at 0.4, suggesting they follow the market more closely. The note says active mutual funds respond to subscriptions and redemptions, relative performance, and portfolio decisions by managers, so improving market conditions tend to bring in both investor subscriptions and increased fund exposure. ETFs are also shaped by subscriptions, launches, and changes in investor risk appetite, which means stronger markets usually attract larger inflows.
CICC notes that southbound net inflows surged to HK$1.4 trillion in 2025, but have reached only about HK$370 billion so far in 2026, less than half the level seen in the same period a year earlier. It estimates that active mutual funds and ETFs explain 60% of that year-on-year decline and are likely the main drag. Insurers, by contrast, have delivered steady net inflows of around HK$25 billion per quarter on average over the past five years, with that pattern still intact in 2025 and 2026. According to the report, most of last year’s increase and this year’s pullback came from active mutual funds and ETFs. Active mutual funds moved from HK$50 billion of inflows in the first half of 2025 to HK$76 billion of outflows in the first half of 2026, while ETFs went from inflows to HK$74 billion of outflows.
Foreign money: active funds lag, passive money says less
For overseas investors, CICC starts with MSCI data showing that among funds benchmarked to its emerging-market index, active funds account for roughly three-quarters of assets and passive funds the remaining quarter. Because active money dominates in scale, and because passive flows often reflect broader emerging-market allocation rather than a deliberate China call, the note argues that active foreign money is the more useful series to watch.
CICC says active foreign money is usually a lagging indicator for both market performance and earnings expectations, often by one to two quarters. After late April 2017, active foreign funds turned into buyers of Hong Kong stocks, but by then the Hang Seng had already rebounded 13% from its late-2016 low and earnings expectations had started to improve. Those funds then brought in about $5 billion in cumulative inflows, yet the Hang Seng topped out in early 2018 and the money did not turn into outflows until May 2018.
The report gives another example from 2020 and 2021. Starting in November 2020, active foreign money returned to Hong Kong more quickly, but the Hang Seng had already rebounded about 12% from its March 2020 low and earnings expectations were already moving higher. Cumulative inflows reached about $25 billion, even though the index had peaked in February 2021. Flows kept coming until September 2021, roughly half a year after the market high. CICC says short-lived active foreign inflows in early 2019, early 2020, and early 2023 also all happened after rebounds and earnings upgrades had already started.
Its quantitative work points in the same direction. Changes in Hong Kong flow momentum relative to other markets show correlations of 0.4 and 0.3 with relative returns over the prior one to two months. That suggests active foreign money raises exposure only after Hong Kong has already outperformed. CICC links this behavior to the way global active funds allocate against regional benchmarks. To beat an index spanning multiple markets, managers naturally tilt toward the sub-markets that have already been stronger.
The note cites EPFR data to show how that process played out recently. Because Chinese stocks underperformed South Korean equities and Taiwan stocks, global emerging-market active funds cut their allocation to Chinese stocks from 27.8% in September 2025 to 18.8% in June 2026. Over the same period, their allocation to South Korea rose from 11.0% to 21.6%, while their Taiwan allocation climbed from 17.1% to 23.6%.
Passive foreign money, in CICC’s view, carries much less signal. Since mid-2020, passive foreign flows have kept moving into Hong Kong stocks, with cumulative inflows of roughly $120 billion, but they did not stop the market’s three-year stretch of choppy decline from 2021 through 2024. The report says that is because passive flow changes mainly reflect growth in global passive investing. The money first enters emerging-market index products and is then allocated to Hong Kong according to benchmark weights, rather than targeting Hong Kong specifically.
When flow signals matter more
CICC says Hong Kong’s offshore structure makes the market sensitive to capital movement, but flows are still only one driver among many. The usefulness of those signals rises when fundamentals are unclear and external liquidity is not supportive. When the macro trend is obvious, the signal fades.
During a choppy China credit cycle
The note says that when China’s credit cycle is clearly expanding or contracting, the direction of fundamentals is already visible and changes in flows become less informative for forward returns. In those periods, the correlation between southbound flow momentum and the Hang Seng’s returns over the next three months is close to zero. The same is true for active foreign inflows and future Hang Seng returns.
CICC points to several examples. In the second half of 2020, China’s credit cycle kept expanding. Southbound inflows slowed at different points, but Hong Kong stocks still rose. In 2021, the credit cycle turned into contraction. Even with loose overseas liquidity and periods of faster southbound buying, the Hang Seng stayed under pressure. After the “924” policy shift in 2024, the credit impulse improved and both flows and market performance stayed strong for an extended period.
By contrast, when the credit cycle is unstable, flow signals become more useful. In periods when the broad fiscal deficit impulse and private social financing impulse moved back and forth, fundamentals lacked a clear direction and the index traded sideways, CICC estimates the correlation between southbound flow momentum and past Hang Seng returns at about -0.1, but the correlation with future returns at 0.2. That suggests southbound money tends to accelerate into market weakness and is often followed by recovery.
For active foreign money, the note estimates correlations of 0.4 to 0.6 with Hang Seng returns over the prior one to three months, but about -0.3 with future returns. In that kind of environment, the lagging nature of active foreign buying becomes more obvious. If performance has already been strong enough to attract overseas active funds, the market may already be well into its run and later returns may soften. CICC cites the fourth quarter of 2022 as an example: with the credit cycle unstable, southbound flows accelerated before a staged market bottom, while active foreign funds were still selling in line with prior weakness. Hong Kong stocks then rebounded.
During tighter overseas liquidity
The note says flow signals also become more useful when overseas liquidity tightens. In Federal Reserve hiking cycles, faster active foreign inflows can actually be followed by weaker Hong Kong performance, while quicker southbound buying can align with a market bottom. Once liquidity turns easier, both relationships weaken.
CICC estimates that during Fed hiking phases, the correlation between active foreign inflows and the Hang Seng’s one-month forward return is -0.3. In rate-cut phases, that relationship narrows to near zero. For southbound money, the report says the linked exchange rate system and the relatively high share of overseas ownership make Hong Kong discounts to A-shares easier to widen when the Fed is tightening. In those periods, southbound investors show a clearer pattern of buying weakness and trimming strength. CICC estimates the correlation between southbound flow momentum and past one- to three-month Hang Seng returns at roughly -0.5, while the correlation with future three-month relative returns is 0.3. That suggests southbound buying usually speeds up after weakness and is more often followed by better Hong Kong performance. The relationship weakens again in rate-cut phases.
The note says the statistical window for these observations runs from June 2016 to August 2026.
CICC’s read on the current setup
On the current market, CICC says China’s credit cycle is still weak and choppy, while constraints from overseas liquidity are rising. That makes flow signals more important now than in a clearer macro phase.
On domestic credit, the note says China remains in a stage of aggregate fluctuation and structural divergence. In July, the private social financing impulse edged higher, the split between corporate and household credit impulses narrowed somewhat, and the broad fiscal deficit impulse weakened further. Looking ahead, CICC estimates that the broad fiscal deficit impulse may improve modestly in the third quarter, mainly because fiscal financing from January through July ran slowly and increased RMB 1.1 trillion less year on year, leaving room for more effort later. But the report also says the full-year fiscal increase is limited in size and still focused on technology and industrial upgrading, which means any repair is likely to be temporary rather than enough to trigger a full credit expansion.
On overseas liquidity, the note says rate-hike expectations picked up after the Jackson Hole meeting. It cites remarks from Warsh that the economy and labor market still show resilience, financial conditions are not clearly tight, and only a clear and sufficiently fast return of inflation to the 2% target would mean no further action is needed. CICC interprets that as a sign the Fed is unlikely to pivot clearly toward easing in the near term. It also says CME rate futures imply a 60.2% probability of a September Fed hike, limiting the room for Hong Kong valuations to expand on an external liquidity story alone.
In that environment, CICC says the latest flow mix stands out. Southbound inflows slowed over the past month, while active foreign inflows accelerated. Based on the patterns laid out in the report, that means the chance of a large near-term upside move is limited and the market could even weaken, which the note says fits recent market performance.
Positioning view: more trading ranges, more structural opportunities
CICC says Hong Kong stocks are better suited to swing trading and structural opportunities at this stage, and it keeps its base-case Hang Seng range at 26,000 to 27,000. The note says this year’s market path has broadly matched that view. It also says that while many in the market were looking for 30,000 or higher late last year, CICC flagged bottoming characteristics in early July and fading momentum in early August.
The report frames the short-term approach as one based on payoff rather than broad trend confidence. For a sustained medium- to long-term rally, it says the market would still need to see either a recovery in the household credit cycle or a breakthrough from major internet platform companies, which it describes as requiring a “924 moment” or a “DeepSeek moment.”
On tactics, CICC says investors could consider taking profits if Hong Kong stocks rise close to target levels while active foreign inflows speed up versus prior trend and southbound inflows slow. If the market pulls back again and southbound buying re-accelerates relative to trend, allocation could be increased once more.
On sectors, the note says technology should be judged by industry progress, cyclicals by the Fed, and consumption by policy. If technology advances remain limited in the short run, dividend-paying assets can be used to offset portfolio volatility. CICC adds that its internal AI pressure index has dropped meaningfully from earlier extreme levels, suggesting the period of greatest pressure has passed and industry-level fundamental stress is easing, though fresh catalysts are still needed to lift the ceiling on demand. Technology remains its main allocation direction. Outside technology, it says positioning can be balanced somewhat more toward cyclicals, while consumer names may need to wait for fiscal policy developments in the fourth quarter.
The report ends by saying that, in its cross-market and cross-sector probability and payoff framework, insurance, transportation, raw materials, energy, and semiconductors had the highest combined scores in the week of Sept. 4.