As of December 13, the annual cumulative transaction of Southbound funds through Stock Connect has exceeded 10 trillion yuan, surpassing the total for last year, with an overall increase of nearly 50%. The latest data from Wind shows that $Hang Seng Index (800000.HK)$the total transaction amount for the entire year of 2024 has already exceeded 31 trillion Hong Kong dollars.

This also means that southbound capital accounts for about one-third of the transaction share in the current Hong Kong stock market, becoming the "backbone" of the Hong Kong stock market.

Ten years of connectivity, southbound capital inflow breaks records again.

As of the time of writing, the net purchase of southbound capital for the year has reached 751.819 billion yuan, with a net inflow scale increasing by about 136% compared to last year's total, setting a new annual inflow record. This year continues the record of net purchases for 10 consecutive years since its launch, which is already certain.

An annual net inflow increase of 136% also ranks among the top three in history. Especially considering that the accumulated net inflow of southbound capital into Hong Kong stocks has reached about 3640 billion Hong Kong dollars, such a massive base still allows for large-scale inflow, which continues to highlight the "determined" stance of domestic funds towards increasing shareholding in Hong Kong stocks.

Reflected in the market, the liquidity increase brought by southbound capital also plays a decisive supporting role for the Hong Kong stock market in 2024.

From the inflow trend, during the second quarter when the Hang Seng Index was languishing below 20,000 points, southbound capital continued to buy high intensity in Hong Kong stocks. The average monthly net inflow from March to June exceeded 80 billion Hong Kong dollars. In contrast, the monthly net inflow peak of southbound capital in 2023 was only about 75.5 billion Hong Kong dollars.

It is worth noting that Hong Kong stocks surged sharply in September under the influence of expectations for incremental policies, but soon faced consecutive pullbacks in October and November. During this period, southbound funds once again took action to "support the market," net buying approximately 83.8 billion and 125 billion Hong Kong dollars, respectively. The 125 billion Hong Kong dollars in November set a new monthly inflow high in nearly four years.

Behind the record inflow of funds are continuously released policy dividends.

Among them, the landing expansion of ETF collaboration in both markets this year has solidified the foundation for the continuous inflow of southbound funds.

On April 19, 2024, the China Securities Regulatory Commission announced five optimization measures for cross-border connectivity between the two markets, further loosening the eligibility criteria for stock ETF products.

On July 22, the HKEX and the Shanghai and Shenzhen exchanges announced the latest ETF collaboration symbol list according to the new standards, officially implementing the expansion of eligible ETFs, with 6 new stocks added to the Hong Kong Stock Connect (a total of 16).

The report shows that as of the end of November, the total market value of eligible Exchange Traded Funds (ETFs) on the Hong Kong Stock Exchange exceeded 300 billion Hong Kong dollars.

Julia Leung Fung-yee, CEO of the Hong Kong Securities and Futures Commission, stated that the Hong Kong ETF market achieved multiple new milestones this year, due to the steady growth of eligible ETFs under the market connectivity mechanism and the establishment of new ties between Hong Kong and the Middle East.

Heavily increasing holdings in financial and consumer stocks, Alibaba has ‘entered the connect’ with over 80 billion yuan in funds raised.

As of last Friday, in terms of the structural flow of southbound funds, Finance, Non-essential Consumer, and Energy have become the top three industries for capital inflow this year. The inflow scales reached 174.344 billion HKD, 122.624 billion HKD, and 64.925 billion HKD respectively.

In contrast to last year’s focus on defensive industries such as Electrical Utilities, Telecommunications, and Energy, the southbound funds in 2024 are starting to pay more attention to growth-oriented and cyclical aggressive industries.

However, for industries like Pharmaceuticals and Real Estate that are still in the cyclical trough, southbound funds have not been "buying the dip," and the proportion of the market value held has decreased.

In terms of individual stocks, there have been some changes in the top ten holdings of southbound funds. $TENCENT (00700.HK)$ 、$CHINA MOBILE (00941.HK)$Continue to remain in the top two, with an additional purchase of 50.62 million shares and 0.471 billion shares during the year.

However, $HSBC HOLDINGS (00005.HK)$ and $MEITUAN-W (03690.HK)$ faced continuous selling throughout the year, and the ranking of heavy positions has also declined compared to last year.

In particular, Meituan, according to Wind data, has seen a net outflow of 29.939 billion HKD from southbound funds in the past year, while HSBC Holdings ranked second with an outflow of only about 8.9 billion HKD.

In addition, Bank Of China and Alibaba have taken over and became the top ten heavily weighted stocks for southbound funds. On September 10, Alibaba was included in the first trading day of the Hong Kong Stock Connect, receiving a net buy of nearly 8.5 billion HKD from southbound funds, with a total inflow exceeding 80 billion HKD for the year.$CHINA SHENHUA (01088.HK)$and$SMIC (00981.HK)$,

It should be noted that while the net inflow of southbound funds has been increasing year by year, with a further growth trend, the current Stock Connect list is still concentrated on large-cap core technology stocks, weighted blue chips, and industry leaders, and has yet to form a comprehensive coverage of the Hong Kong stock market. Data shows that as of August 31, 2024, 544 stocks included in the southbound trading investable range account for 20.7% of the total number of Hong Kong stocks and 85.9% of the total market capitalization.

As a result, the market's heated discussion on the pricing power of southbound funds for Hong Kong stocks is mostly concentrated at the individual stock level, while the influence of funds on large cap Hong Kong stocks and industry popularity still needs to be strengthened.

HKEX announced in November that several optimization measures for the mutual market access are currently under preparation, including the introduction of block trades in the Shanghai and Shenzhen-Hong Kong Stock Connect, the inclusion of REITs in the Shanghai and Shenzhen-Hong Kong Stock Connect, and the incorporation of RMB stock trading counters into the Hong Kong Stock Connect.

On December 12, the Hong Kong Securities and Futures Commission published a quarterly report stating that Hong Kong's capital markets have been benefiting from the successful mutual market access mechanism with the mainland since the third quarter. Since the optimization made in February, southbound investment under the cross-border wealth management connect has increased by over 60%.

Looking ahead, as the mutual market access between the two places progresses, the symbols under the Hong Kong Stock Connect will continue to benefit from the influx of incremental capital driven by policy dividends, and the influence of southbound funds in the Hong Kong stock market may rise to a new level.

Editor/new