Original title: China International Capital Corporation: How much Hong Kong stocks did the public fund buy?
Since the beginning of this year, China’s assets, especially in the Hong Kong stock market, have experienced a wave of "gaining momentum" narrative reassessment spurred by DeepSeek, with the Hang Seng TECH Index rising over 40%. During the same period, southbound funds significantly exceeded expectations in their buying activity, especially after March, becoming the driving force behind this round of Hong Kong stock market rebound. Even amidst recent market fluctuations caused by tariff risks, southbound funds have maintained their strength, with a net inflow of 604.08 billion Hong Kong dollars in less than four months since the beginning of the year, which is already three-quarters of last year's total inflow of 807.87 billion Hong Kong dollars, with an average daily inflow 2.5 times that of last year.
In the context where long-term foreign capital from Europe and America has not entered substantially and there seems little possibility of short-term inflows, southbound funds have clearly become the main focus and highlight. Questions such as who is buying and how much room there is left are of great interest to investors. Previously, conclusions were drawn that institutional investors such as public funds and Insurance may not have as much "firepower" as imagined, and may not be the main force behind this round of southbound inflow. Based on the latest disclosed quarterly reports from public funds, updates on their holdings and allocation changes in Hong Kong stocks are provided to offer more details on the movements of southbound funds.
Overall trend: Active equity holdings in Hong Kong stocks have risen to 31%, with more ETFs being added, indicating that active public funds are not the main force behind the southbound inflow.
First, looking at the total scale, the total scale of public funds that can invest in Hong Kong stocks has overall increased, with ETFs growing even faster; the number of newly issued funds has also accelerated. By the end of the first quarter, there were a total of 3,890 public funds available for investing in Hong Kong stocks (excluding QDII) with total assets of 2.47 trillion yuan, an increase of 105 from the fourth quarter, with a quarter-on-quarter increase of 242.6 billion yuan, accounting for 29.5% and 13.1% of all 13,173 non-money-market funds and the total scale of 18.9 trillion yuan, both showing an increase compared to the end of 2024. Among these, 1) there are 2,126 active equity funds (with a total scale of 1.52 trillion yuan, excluding ETFs), which is an increase of 43 from the end of 2024, with assets increasing by 83.4 billion yuan. 2) The scale of Hong Kong stock connect ETFs has grown even faster, reaching a total scale of 178.99 billion yuan for mainland-issued investable Hong Kong stock ETFs by the end of the first quarter, a rise of over 45% from 123.44 billion yuan at the end of the fourth quarter of 2024. In terms of issuance, the number of newly issued public funds investable in Hong Kong stocks in the first quarter saw a slight acceleration compared to the fourth quarter of last year, with 105 new issues, and the scale of new issues has also increased compared to the previous quarter, approximately 68.2 billion yuan (in comparison to 79 new issues and 40.8 billion yuan in the fourth quarter). Active equity funds saw similar trends, with an accelerated issuance speed compared to the fourth quarter, totaling 43 new issues, and new issue scale increasing by 12.4 billion yuan (39 new issues and 11.5 billion yuan issued in the fourth quarter of last year).
Next, looking at the holding situation, there was a significant active increase in holdings in the first quarter, with the holding ratio reaching a new high and overall proportion in the southbound segment improving. The 3,890 public funds mentioned above held Hong Kong stocks worth 650.9 billion yuan, an increase of 32.1% from the fourth quarter’s 492.8 billion yuan. Considering that in the first quarter, the Hang Seng Index and MSCI China rose 15.4% and 19.9%, respectively, it indicates that public funds exhibited significant active reallocation behavior during this period. By the end of the first quarter, the proportion of Hong Kong stock holdings in public funds relative to their total stock investment value had risen to 36.9%, reaching the highest level in nearly five years and significantly higher than the 30.5% at the end of last year. Further examining active equity funds, Hong Kong stock holdings stood at 408.4 billion yuan in the first quarter, an increase of 26.5% compared to 322.9 billion yuan in the fourth quarter of last year, and this rise also exceeded the index's growth rate, with the holding ratio increasing from 25.9% in the previous quarter to 30.8%. During this process, the proportion of public fund holdings in the total southbound holding of 4.25 trillion yuan also rose from 14.6% in the fourth quarter of last year to 15.3%, an increase of 0.7 percentage points; however, the proportion of active equity funds remained unchanged at 9.6%, indicating that during this significant inflow of southbound funds in the first quarter, active equity public funds were not the main force. In contrast, the value of Hong Kong stocks held by mainland passive ETFs increased by nearly 55% from 98.19 billion yuan at the end of last year to 151.13 billion yuan. Meanwhile, according to estimates based on changes in circulating shares, the net inflow of funds into mainland public funds investable in Hong Kong stocks reached 23.43 billion yuan in March, setting a monthly historical high. Therefore, it is likely that many individual or institutional investors are participating through passive funds in the backdrop of this substantial southbound inflow in the first quarter.
Chart: Overview of the number and scale of mainland public funds that can invest in Hong Kong stocks and other public funds.
Chart: As of Q1 2025, there are a total of 2,126 active equity funds that can invest in Hong Kong stocks in mainland China, with a total scale of 1.52 trillion yuan…
Chart: Increased by 43, the overall scale has improved by 83.4 billion yuan.
Chart: The new funds scale (excluding QDII) for Q1 2025 is 68.2 billion yuan, an increase from 40.8 billion yuan in Q4 2024.
Chart: The scale of newly issued actively managed equity funds in Q1 2025 is 12.4 billion yuan, a slight increase from 11.5 billion yuan in Q4 2024.
Chart: As of Q1 2025, the number of available Hong Kong stock funds is 3,890, with a total scale of 2.5 trillion yuan…
Chart: ... Increases by 105 from 4Q24, and the overall scale has also increased to 242.6 billion yuan.
Chart: The holdings of mainland public funds in Hong Kong stocks continue to rise, with the proportion of Hong Kong stock holdings reaching 36.9% in 1Q25, further increasing from 30.5% in 4Q24.
Chart: In 1Q25, active equity public funds hold 408.4 billion yuan in Hong Kong stocks, accounting for 30.8% of the fund's stock holdings.
Chart: As of 1Q25, the market value of mainland public funds' stock holdings accounts for 15.3% of the overall southbound.
Chart: An improvement compared to 14.6% in the fourth quarter of last year.
Chart: The market cap ratio of the top 120 actively managed equity public funds for mainland stocks in the Hong Kong market (1/2).
Chart: The market cap ratio of the top 120 actively managed equity public funds for mainland stocks in the Hong Kong market (2/2).
Chart: ETFs available for investing in Hong Kong stocks in the mainland.Index FundProduct Overview
Chart: After the net inflow of funds into Hong Kong Stocks ETFs in March reached a record high, this number in April had nearly reached 35 billion yuan.
Chart: The amount of Hong Kong Stocks placements in March also set a record high.
Industry Allocation: Internet and Semiconductors are the most favored, while Energy and Utilities have declined the most, leading to increased concentration in individual stocks.
Consumer discretionary and Semiconductors have improved the most, while Energy and Utilities have significantly declined. Compared to last year's fourth quarter, the proportion of old economy Hold Positions has decreased from 29.0% to 20.7%, returning to levels seen at the end of 2020. During the same period, the proportion of new economy Hold Positions has risen to nearly 80%. In detail, the proportion of holdings in e-commerce Internet, Semiconductor products and devices, pharmaceuticals and biotechnology, and media Entertainment has increased significantly. Conversely, the declines are most pronounced in Consumer Services, Energy, and Utilities. In terms of absolute holdings, the highest holdings are in media Entertainment, Consumer discretionary retail, Technology Hardware and Equipment; while holdings in commercial and Professional Services, Medical Care Equipment, and essential Consumer sectors are relatively low. Compared to their historical levels, sectors like Consumer discretionary retail and Semiconductor products and devices are at historical highs; on the contrary, Consumer Services, Energy, and Financial Services are at historical lows.
At the individual stock level, the concentration among leading stocks has significantly increased; Tencent, Alibaba, and Semiconductor Manufacturing International Corporation are the most favored, whereas CNOOC and Meituan have declined noticeably. In the first quarter, mainland public funds heavily invested in Tencent, Alibaba, and Semiconductor Manufacturing International Corporation, both in terms of the number of funds and Market Cap increased the most; conversely, Meituan, CNOOC, and SUNNY OPTICAL saw the largest reductions. In terms of heavily held stocks, Alibaba and Semiconductor Manufacturing International Corporation have also replaced Meituan and Xiaomi in the top three heavyweight stocks. Compared to the end of last year, the number of funds holding Alibaba, Tencent, Semiconductor Manufacturing International Corporation, and POP MART has risen the most, while those holding Meituan, CNOOC, BYD Electronic, and China Shenhua Energy have significantly decreased. Additionally, the concentration of heavyweight stocks has notably increased in the first quarter, with the top three heavyweight stocks accounting for 39.8% of the Market Cap of the top 100 heavyweight stocks, an increase of 5.3 percentage points from the fourth quarter, while the top ten heavyweight stocks' share also rose from 58.0% in the fourth quarter to 64.2%.
Chart: The new economy is the main preference for overall mainland public funds when investing in Hong Kong stocks, with the holding proportion rising sharply from 71.0% in 4Q24 to 79.3%.
Chart: Distribution of GICS Level 1 industries for mainland public funds able to invest in Hong Kong stocks by total Market Cap.
Chart: Consumer discretionary retail and sectors like Semiconductors are at high allocation levels since 2021; while Consumer Services and Energy sectors are at low levels.
Chart: In the overall shareholding structure of southbound funds, the proportion of old economy in 1Q25 decreased from 48.8% to 44.4%.
Chart: In 1Q25, the proportion of discretionary consumer and information technology sectors in public fund investments in Hong Kong stocks significantly increased, while the proportions of energy and finance decreased.
Chart: In 1Q25, southbound funds favored the information technology and discretionary consumer sectors the most, while the proportion of old economy sectors like energy and finance declined significantly.
Chart: In 1Q25, the market cap of the top 10 Hong Kong stocks held accounted for 64.2% of the market cap of the top 100 heavyweight Hong Kong stocks, an increase of 6.2 percentage points compared to 4Q24.
Chart: The market cap of the top 3 heavyweight stocks is 158.4 billion Hong Kong dollars, accounting for 39.8% of the market cap of the top 100 heavyweight Hong Kong stocks.
Chart: In Q1 2025, the three sectors with the highest market cap of mainland active equity public funds holding Hong Kong stocks are Communications Services, Consumer Discretionary, and Information Technology.
Chart: Among the industries held by Hong Kong Stock Connect, Finance and Communications Services maintain the highest proportion.
Chart: The individual stocks with the highest inflow and outflow of southbound funds in Q1 2025 (based on the top ten active stocks in the Connect).
Outlook: How much more space is there for southbound inflows? The relatively certain increase this year is about 200-300 billion Hong Kong dollars, and individual investors are easily influenced by trends.
Since March, southbound funds have become the main force, with a relatively certain increase this year of about 200-300 billion Hong Kong dollars. Since the beginning of this year, the cumulative southbound inflow has reached 604.1 billion Hong Kong dollars, with an average daily inflow of 8.28 billion Hong Kong dollars, nearly 2.5 times last year’s total (the total inflow for the entire year of 2024 is expected to be 807.87 billion Hong Kong dollars, with an average of 3.47 billion Hong Kong dollars per day). If this pace is maintained, this year’s total could approach 2 trillion Hong Kong dollars, which might not be realistic. Combining the latest data from public funds, in the measurable part, the 'bullets' of public funds and institutions like insurance might not be as much as thought. By the end of the first quarter, the holdings of actively managed equity funds in Hong Kong stocks had reached a historical high of 30.8%. Assuming the proportion increases to 35-40% this year (the maximum investment ratio for funds without 'Hong Kong stocks' in the name cannot exceed 50%), considering the current scale of actively managed equity funds of 1.5 trillion yuan, the subsequent space could be about 75-150 billion Hong Kong dollars. As for insurance funds, assuming the equity proportion of their funds increases to 15% and the proportion of Hong Kong stocks in equity increases to 20%, also considering new premium income, we expect an inflow of about 150-200 billion Hong Kong dollars this year.
However, during this round of significant southbound inflows, ETF inflows have been very strong. The net inflow of funds for mainland investable Hong Kong stock ETFs set a record of 23.4 billion yuan in March, and from April to now, it has approached 35 billion yuan. Behind this, there may be many individual investors allocating Hong Kong stocks through ETFs. However, the inflow of individuals and other trading types is strongly driven by sentiment and trends, and historically, there have been many instances of 'buying high and selling low', making it difficult to accurately measure. In summary, overall, we estimate that the relatively certain southbound increase for the remainder of the year is about 200-300 billion Hong Kong dollars, with a total inflow of around 800-1000 billion Hong Kong dollars for the entire year. Additionally, it is important to point out that although the significant inflow of southbound funds has indeed given southbound investors some 'marginal pricing power' at certain times and places, facing short selling and the inability of southbound investors to participate while supply can be infinite through 'lightning placements' (the scale of Hong Kong stock placements in March reached a historical record of 97 billion Hong Kong dollars), it is difficult to have 'absolute pricing power'. Therefore, when the market overly emphasizes pricing power to support optimistic views, it may signify that sentiment has become relatively exuberant.
For the market, we estimate that after the tariff risks began, the Hang Seng Index's 20,500 points incorporated a pessimistic sentiment comparable to the end of 2018. If there are no new risks, it may fluctuate around this position, and indeed, it has been so. As tariffs continue to escalate, we have entered an 'irrational' phase, where the market has gradually 'desensitized' to the figures associated with tariffs and is shifting more towards the real impact on growth, which will be closely related to the subsequent negotiation progress and the domestic policy counteraction. If the tariff negotiations do not progress and tariffs remain at a high of 145%, while the fiscal policy counteraction is weaker than expected, it may drag down Hong Kong stock earnings by 10 percentage points to a negative growth of 7%. Based on this, we estimate
1) In the baseline scenario, not considering the impact of profit downward revisions, corresponds to the Hang Seng Index at 20,500 points.
2) In the optimistic scenario, market sentiment recovers to pre-tariff shock levels, and the Hang Seng Index returns to 23,000-24,000 points.
3) In the pessimistic scenario, the profit growth rate drops to around -7%, corresponding to the Hang Seng Index at approximately 18,000-19,000 points.
In terms of specific operations, if investors have significantly reduced their positions or moved to dividend sectors previously, then at this point, they can buy in batches. However, if their positions and costs are both high, it's advisable to leave more buffer space to cope with potential profit downward pressure. In terms of sectors,
1) Internet Technology, supported by a technology narrative and having relatively small exposure to exports, remains the main line and may rotate with dividend assets.
2) For the remaining broad consumption and pro-cyclical segments, greater dependence on macro policies and overall leverage repair is noted. If fiscal measures can provide support, the pro-cyclical sectors related to domestic demand will have better opportunities.
3) In addition, sectors with greater exposure to exports, such as home appliances, Electric Appliances, and Marine Transportation, need to pay attention to tariff developments, as their income from the USA is relatively higher.
Chart: At the end of 2018, the Hang Seng Index risk premium was 7.7%, corresponding to around 20,500 for the Hang Seng Index.
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