Source: Quan Shang Guo , Author: Shi Qian

This morning, the Hang Seng Tech Index's increase once exceeded 10%, the Hang Seng Index rose over 6% at one point, and the H-share Index rose over 7% at one point. As of the midday close of the Hong Kong stock market, the Hang Seng Index surged by 6.00%, the Hang Seng Tech Index rose by 8.72%, and the FTSE China A50 Index futures surged over 9% in the afternoon.

So what exactly happened?

Industry insiders revealed that during the holiday, the Hong Kong stock market was mainly dominated by foreign capital. The sharp rise this time was due to foreign capital replenishment, and it may be purely done by long-only funds. In addition, it is understood that short covering may also be one of the main driving forces. Since the beginning of this year, the approximately $3.7 billion profit from shorting China concept stocks has completely evaporated, now facing an unrealized loss of about $3.2 billion.

Too fierce

On the morning of October 2nd, the Hang Seng Tech Index once surged more than 10%, the Hang Seng China Enterprises Index rose 7% at one point, large financial stocks, mainland real estate stocks, and network technology stocks all soared! Longfor Group, Bilibili-W surged over 20%, Meituan-W, Ali Health surged over 15%, Ping An Insurance rose by over 14%, Postal Savings Bank of China rose by over 11%.

In the afternoon opening, the ftse china a50 index futures rose more than 9% at one point, hitting a new high since July 11, 2022. Although the afternoon stock gains have narrowed slightly, they still show very strong performance.

In contrast, most major stock indexes in the Asia-Pacific region fell. The Nikkei 225 Index fell 1.65% at midday to 38013.76 points. Sony dropped 4.2%, while Nippon Electric Works, Fujitsu, and Fast Retailing fell by more than 3%. The Korea Composite Index fell 0.26% to 2586.43. The Australia S&P/ASX 200 Index fell 0.08% to 8202 points. The New Zealand S&P/NZX 50 Index rose 0.1% to 12479.22 points.

The strength of the market can also be seen in the money market. According to the latest Hong Kong Interbank Offered Rate (HIBOR) published by the Hong Kong Association of Banks, the overnight rate is 4.98226 basis points. The one-month HIBOR related to mortgage rates is 4.34476 basis points, up for 8 consecutive days, reaching a one-month high. It can be said that the outbreak of the stock market has also intensified the market's demand for funds.

Shift of foreign capital

Given the general weakness in external markets, why is the Hong Kong stock market so strong?

Insiders revealed that during the holidays, the Hong Kong stock market was mainly dominated by foreign capital. The sharp rise this time is due to the replenishment by foreign investors who were previously bearish on Chinese assets, possibly driven by pure long funds. Before the surge in the Hong Kong stock market, many hedge funds were actually bottom fishing. In this process, a clear switch between highs and lows can be observed, such as the plunge in the Japanese and Indian stock markets, which may indicate that some funds are moving from relatively high positions to lower Chinese assets.

In addition, short covering may be underway. According to the latest report from S3 Partners, following the introduction of a series of stimulus economic policies in China, the Chinese stock market rebounded significantly, and short trading of Chinese concept stocks listed in the U.S. has receded. The approximately $3.7 billion profit from shorting Chinese concept stocks so far this year has completely evaporated, facing around $3.2 billion in unrealized losses.

Data shows that investors shorting Alibaba and JD.com have suffered the greatest losses, while those shorting Nio, Li Auto, Xpeng, and PDD are still profitable. S3 expects that if the stock market continues to rise, there will be massive covering of short positions, which will further boost stock prices.

Major banks are also beginning to see positive prospects for stocks in various industries.

According to the latest report by Goldman Sachs, mainland consumer stocks have rebounded strongly by an average of about 32% in the past week following the announcement of loosening measures by the People's Bank of China and the September Political Bureau meeting. The report points out that boosting consumption is one of the key points. According to the bank's latest release, the "China Plus After-2024 Conference Non-Essential Consumption Journey" shows that direct stimulus measures such as the old-for-new policy have achieved initial positive effects. The consumption vouchers introduced in Shanghai are driving the development of consumption services such as dining, sports activities, and indirectly supporting the real estate market, employment, and stock market, which may bring better wealth effects and confidence.

Currently, the bank predicts limited upside potential (especially in sales) due to the need to see further policy implementation and consumer confidence recovery. The bank expects the average sales growth in 2025 to be 9%, compared to 10% in 2024. In terms of valuation, even after the strong rebound in the past week, the bank sees that most industries are still at the lower end of the 5-year or 10-year average levels.

Citi also upgraded the ratings for NIO Inc and XPeng.

Editor/Lambor