The divergence between the two indexes has become the most extreme since the dotcom bubble burst in 2000, according to a 90-day correlation measure.
Global investors are seizing on China’s dramatic advances in artificial intelligence to pour funds into the Hong Kong market at a time when Trump’s trade wars and erratic policy making are undermining confidence in the US economy.
Hong Kong’s US$6 trillion ($7.99 trillion) bourse stands to benefit because it has become the preferred home for Chinese tech listings, while also being one of the world’s most liquid equities markets.
“We have been waiting for this moment for many years,” said Thomas Ip, executive director at Gaoyu Securities. “Trump’s policies have created so much uncertainty for the US stock market. As angst grows, the smart money will come to Hong Kong where valuations are cheaper and the policy environment is better.”
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Signs point to this historic outperformance continuing, despite Trump increasing tariffs on Chinese exports. Analysts are upgrading the nation’s stocks at the same time as they cut US shares. While anxiety grows over the outlook for American tech giants, inflows into Hong Kong by mainland Chinese investors are climbing to record levels.
The catalyst for the rally in the Hang Seng Index was the shock arrival of DeepSeek and its cheap AI model just days after Trump entered the White House. Whether planned by Beijing or not, the breakthrough undermined Trump’s claim the US was the global AI leader and immediately blew a US$1 trillion hole in the US stock market.
Until that point, China had barely featured in the AI revolution sweeping the world, partly due to US curbs on chips produced by companies like Nvidia considered essential to power machine learning and complex tasks.
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Not uninvestible
“If at the beginning of the year, someone told me that China would emerge as a strong contender in the global AI race, I would not have believed it,” said Kok Hoong Wong, head of institutional equities sales trading at Maybank Securities in Singapore.
The realisation that China had succeeded in developing AI systems to rival the US despite heavy restrictions was a dramatic wrench to a narrative that had benefitted US equities investors for the better part of two years.
Suddenly China, which many had claimed was “uninvestible”, was hot, and US tech was not. As funds poured into Chinese tech stocks and the Nasdaq 100 Index faltered, Chinese companies fell over themselves to announce their own AI advances and huge spending on the critical technology.
Alibaba Group Holding, which has been the biggest beneficiary of the tech rally with an almost 70% surge since Jan 17, unveiled an open-sourced AI model and pledged to invest more than US$53 billion on AI infrastructure.
“Since February, we have begun to adjust our exposure to the US market in favor of the European and Chinese markets,” said Mabrouk Chetouane, who is head of global market strategy at Natixis Global Asset Management.
The rally comes despite persistent concerns over the health of China’s economy. Consumer inflation fell below zero last month, while factory deflation extended into a 29th month, signaling weakening demand. A property crash has yet to bottom out. There is growing urgency for the government to stimulate growth. And, of course, there are questions over Trump’s future policies toward Beijing.
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“Geopolitics is the biggest overhang,” said Calvin Zhang, a senior portfolio manager at Federated Hermes in Pepper Pike, Ohio.
Still, President Xi Jinping’s shift toward the tech sector shows this time is different, according to George Efstathopoulos, a portfolio manager at Fidelity International.
In a pivotal moment, Xi last month gathered high-profile tech leaders in Beijing and told them it was ok to “get rich first” again, signalling the era of crackdowns on the industry was over. Alibaba’s Jack Ma, who virtually disappeared from view in recent years, was among the gathering.
“The moment we started seeing the Chinese officials embracing private tech companies,” that marked a “new chapter,” Efstathopoulos said. “For the first time, as far as I can remember when it comes to Chinese equities, we haven’t” sold the rally, he added.
China’s assault on US dominance in AI is only intensifying. Last week, Chinese startup Manus claimed to have vaulted ahead of leading developers in the US which have been racing to develop sophisticated AI agents that can carry out more complex tasks on a user’s behalf.
‘Maleficent 7’
Bullish predictions for Chinese shares are piling up just as fast as analysts lower their expectations for US stocks. Citigroup upgraded China to overweight this week, while downgrading its view on US equities.
The downbeat view on the US from Citi echoed that at HSBC Holdings, where strategists cut US equities to neutral on Monday, saying they see “better opportunities elsewhere for now”.
Goldman Sachs analysts called the big US tech stocks the “Maleficent 7” instead of “Magnificent 7” as they slashed their target for the S&P 500 on Tuesday.
“It’s all about confidence”, said Louis Luo, head of multi-asset investment solutions Greater China at aberdeen Investments. “For China, investor confidence is coming back. In the US, it’s fading.”
The outperformance by Hong Kong’s stock market is a rare reversal. In the six years through December, the US gauge jumped 120%, compared with a 33% plunge in the Hong Kong benchmark.
It’s also a boon for Hong Kong status as a financial hub, which came under fire amid concerns over new national security laws, China’s slowdown and dwindling initial public offerings. Such was the malaise that the city was dubbed the “ruins of an international financial centre” on Chinese social media.
Deals are now picking up again as companies seek to profit from the rising market. EV maker BYD, which has been stealing ground from Tesla in markets across the world, raised US$5.6 billion last week in Hong Kong’s biggest share sale in nearly four years.
Speculative activity is increasing, with the city’s retail investors seeking margin loans worth more than US$353 billion to bet on red hot IPOs so far this year.
There is little sign right now the fevered trading will end soon. Chinese investors bought a net HK$29.6 billion ($5.08 billion) of Hong Kong shares on Monday, the most since trading links between the city and the mainland exchanges began in 2016, according to Bloomberg-compiled data.
For US equities investors, the pain may only be beginning.
“Whatever market we consider, investors are looking for two fundamental elements: corporate earnings growth, and economic and financial visibility,” said Natixis’ Chetouane. “These two factors are deteriorating in the US and stabilising in China.”
Chart: Bloomberg
