(The views expressed here are those of the author, Founder and

CEO of Emmer Capital Partners Ltd.)

By Manishi Raychaudhuri

HONG KONG, July 24 (Reuters) - Surging investment into

Hong Kong by mainland Chinese investors is increasing market

liquidity and depth while strengthening the island's position as

a gateway to China. Short-term headwinds could slow this capital

flood, but market innovation and the push for diversification

are likely to propel this trend over time.

The Stock Connect programme, launched by the Hong Kong,

Shanghai and Shenzhen exchanges in November 2014, enabled

mainland Chinese investors to trade selected stocks listed in

Hong Kong - the so-called "Southbound Stock Connect" - while

also facilitating flows in the opposite direction. The Connect

programme was expanded between 2017 and 2023 to include bonds,

ETFs and interest rate swaps.

Since 2015, the first full year of the programme's

operation, onshore trades through the Southbound route have

grown at an impressive 32% compound annual growth rate. In fact,

Southbound's share of average daily turnover grew from 1.6% in

2015 to 18% in 2024, according to data from the Hong Kong

Exchange (HKE).

WHAT EXPLAINS THE EXUBERANCE?

Onshore investors have consistently bought more through

Southbound than they have sold, resulting in net inflows every

year since the programme began. The flows were healthy but

somewhat volatile until 2023, after which they skyrocketed. Net

inflows more than doubled in 2024, and that figure has been

nearly matched in just the first six months of 2025.

What explains this appetite for Hong Kong-listed stocks?

Geographic diversification is clearly a strong motive, as

mainland Chinese investors have limited avenues for owning

overseas assets.

Investors may also seek to gain exposure to companies in key

sectors that are under-represented in domestic markets, such as

technology or insurance. For example, leading Chinese internet

platforms Tencent ( TCTZF ) and Alibaba ( BABA ), insurance market leader AIA and

global bank HSBC are not listed on onshore indices.

However, many of stocks popular among mainland investors are

listed both onshore and in Hong Kong, again raising the question

of why capital is increasingly flooding into the latter. The

answer may simply be price.

Many of these dual-listed stocks trade at far cheaper

valuations in Hong Kong than in Shanghai or Shenzhen. The

average premium of onshore "A-shares", tracked by the Hang Seng

AH Premium Index, was only 3.2% prior to the commencement of the

Stock Connect programme.

This figure jumped to 34.1% soon after, as international

money flowed into mainland Chinese equities through Northbound

Connect, inflating valuations. The premium remains elevated,

though it has declined recently.

IMPACT ON HONG KONG

The influx of capital has increased the Hong Kong equity

market's liquidity and depth, making it increasingly attractive

for local companies seeking new listings and for onshore Chinese

companies seeking additional listings.

Indeed, in the first half of 2025, Hong Kong has been the

world's largest IPO market, with $14 billion of issuance, easily

outstripping Nasdaq, which was in second place with just over $9

billion.

At the same time, the Stock Connect programme has also

strengthened Hong Kong's position as an offshore renminbi hub,

as the HKE has argued, and driven robust cross-border regulatory

cooperation, involving regular meetings and exchange of ideas.

RAPID ROTATION

The flip side of the onshore money avalanche could be

increased volatility in Hong Kong markets, especially given that

the trading style of mainland Chinese investors has historically

been characterised by rapid transition from one sector or theme,

to another.

For example, onshore investors flocked to the internet

platforms Alibaba ( BABA ) and Tencent ( TCTZF ), and technology giant Xiaomi ( XIACF ),

throughout 2024 and early 2025, only to sell significant volumes

this past May and June.

It is also possible that some common preferences among

onshore Chinese investors, such as the attraction to high

dividend yields, could begin to affect the relative performance

of stocks in Hong Kong. CNOOC, China Construction Bank and China

Mobile - all characterised by low growth but high dividends -

have remained Southbound favourites this year, based on monthly

"Top 10" lists.

SHORT-TERM HEADWINDS

What could derail this exuberance? The potential weakening

of the renminbi could be one headwind, as it would make

HKD-denominated stocks more expensive for mainlanders.

Additionally, improved performance among mainland markets

could also discourage Chinese investors from overseas

diversification. In 2025 so far, Hong Kong's Hang Seng index is

up 23.8%, dwarfing the Shanghai Composite's 5.5% gain. A

reversal of return prospects could obviously reverse the

direction of flows.

Finally, U.S.-China geopolitical tensions are a perennial

bugbear. Hong Kong permits money to be moved in and out of the

city without many restrictions, which exposes it to risks from

such political conflicts. Any adverse political outcome could

make Chinese investors more inclined to keep their capital

onshore.

However, most of these potential headwinds are likely

short-term phenomena, and ultimately, the long-term direction of

travel is clear.

Mainland Chinese savings represent a gigantic pool of still

mostly untapped capital. Total deposits at the end of June 2025

were RMB 320 trillion ($44 trillion), according to PBOC reports.

And total overseas portfolio investments in March 2025 were

only $1.58 trillion, less than 4% of households' domestic

deposits.

The need for greater diversification among mainland Chinese

investors thus remains significant, meaning the surge of capital

into Hong Kong markets may just be getting started.

(The views expressed here are those of Manishi

Raychaudhuri, the founder and CEO of Emmer Capital Partners Ltd.

and the former head of Asia-Pacific Equity Research at BNP

Paribas Securities.)

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(Writing by Manishi Raychaudhuri; Editing by Anna Szymanski)