SHANGHAI (Reuters) - China's mainland investors have played an unprecedented role in a rally on Hong Kong's equity market that has pushed the benchmark index to its highest level since 2022.

Mainland investors typically buy or sell Hong Kong-listed shares via the southbound link of the Stock Connect scheme.

WHY IT'S IMPORTANT

Hong Kong's stock market has risen around 15% this year to reach its highest level since February 2022. The rally is fueled by optimism about China's tech sector, particularly the rise of home-grown AI startup DeepSeek.

In contrast to previous rallies, mainland investors have this year taken a pivotal role, underscoring their growing influence in the market. The shift has also led to a narrowing of the premium of the onshore A-shares command over offshore H-shares.

BY THE NUMBERS

Mainland investors bought Hong Kong shares worth a net HK$75 billion ($9.6 billion) this week, the highest weekly volume since January 2021.

Southbound activity accounts for 25% of total market turnover in Hong Kong, a nine percentage-point rise from lows in September 2024, most of it coming from mainland retail and private fund managers, data from UBS shows.

UBS said southbound investors are increasingly trading in Chinese tech stocks, led by investments in Xiaomi ( XIACF ), Tencent ( TCTZF ), and Alibaba ( BABA ).

The Hang Seng Stock Connect China A/H Premium Index is at 131, its lowest since October 2024.

KEY QUOTE

Ximiao Chen, an analyst at Guotai Junan Securities, told a conference on Wednesday the rally in Hong Kong was unprecedented because mainland investors were leading the charge with foreign investors following suit.

"In 2024, the major driver of the Hong Kong market was the initial involvement of foreign investors, while mainland investors were extremely pessimistic about the market," Chen said.

($1 = 7.7783 Hong Kong dollars)