In Depth: The Key Ingredients to Sustain Hong Kong’s Stock Rally

China’s efforts to revive its economy and rescue its troubled property sector led to a surge in the Hong Kong stock market in April and May, boosting investor confidence [para. 1]. However, the rally has since slowed, and future gains will depend on various factors, including the strategies of policymakers and U.S. interest rates [para. 2].

The Hang Seng Index (HSI) surged by 21%, jumping from 16,224 on April 19 to 19,636 on May 20. This marked a stark contrast to its three-year slide from just over 30,000 in January 2021 [para. 3]. Foreign investment banks shifted to a positive outlook on the Hong Kong market in February when the HSI was around 16,000. Deutsche Bank AG forecasted the index would rise to 21,500 by year-end. The HSI, a weighted index of the 82 largest and most liquid companies in Hong Kong, mostly Chinese mainland firms, also received an upgraded rating from UBS Group AG in April, predicting it would reach 20,600 by year-end [para. 4][para. 5].

Investment inflows into the mainland stock market via the Stock Connect program doubled compared to last year, reaching 83 billion yuan ($11.7 billion) in the first five months of this year [para. 7]. Analysts attribute this influx to various policies announced by Beijing this year, such as a new rescue package for the real estate sector [para. 8].

The Politburo reiterated its commitment to expanding domestic demand, urging measures to renew and upgrade company equipment and consumer goods. It also emphasized that local governments, real estate developers, and financial institutions must ensure the delivery of housing projects [para. 9][para. 10]. China’s central bank announced a program in mid-May, committing 300 billion yuan in cheap loans to help financial institutions purchase completed but unsold homes, turning them into affordable housing [para. 11]. This clear signal from the Chinese government about its willingness to increase leverage to mitigate real estate market risks has prompted foreign investors to adopt a more optimistic outlook [para. 12].

Despite the initial surge, the HSI started trending downward from late May, closing at 17,472 on Wednesday, down 11% from its May 20 high [para. 13]. The market correction is seen by some analysts as a necessary pause after an overheated rally [para. 17]. Future market direction will be influenced by outcomes from two key meetings in July: the third plenum of the Communist Party’s 20th Central Committee and a subsequent Politburo meeting [para. 15].

UBS’s decision to upgrade Chinese stocks to overweight was based on improved growth momentum and early signs of recovery in consumption [para. 18]. Karen Hizon from UBS noted that European investors have shown a greater appetite for returning to Chinese stock markets compared to U.S. investors, suggesting potential for further upside given low current holdings [para. 19].

Finally, the Hong Kong market’s performance is also intertwined with U.S. interest rates due to Hong Kong's currency peg with the U.S. dollar. The U.S. Federal Reserve has held rates steady since July after 11 rate hikes. Analysts argue that the high interest rate environment in the U.S. and the slower-than-expected pace of rate cuts may hinder further gains in the Hong Kong market [para. 21][para. 23]. [Contact reporter Qing Na and editor Nerys Avery for more information] [para. 25].