Chinese investors dump $2 billion Hong Kong stocks on Wednesday, signaling a tariff war end

Chinese investors pulled back from Hong Kong equities on Wednesday, selling a near-record $2.3 billion worth of shares. The stock dump follows reports coming from the West that China and the US could start negotiating trade policies and reducing tariffs.

Data compiled by Bloomberg shows a net outflow of HK$18.1 billion ($2.3 billion) from Hong Kong stocks through the southbound Stock Connect program, the second-largest single-day selloff on record, trailing only withdrawals seen in February 2021. 

Still, according to Google Finance data, traders taking several exit positions did not dent Hong Kong’s Hang Seng China Enterprises Index, which rose 2.3% before the Asian market closed.

Hong Kong stocks still attract mutual funds

As recently as two weeks ago, Chinese southbound inflows hit a daily record, buoying Hong Kong markets that are still reeling from US President Donald Trump’s tariff threats made on April 2.

According to Marvin Chen, strategist at Bloomberg Intelligence, the latest selloff is likely a profit-taking move after strong inflows in April. 

“With trade tensions potentially easing, currency depreciation expectations may also be easing, so there is less need to shelter in Hong Kong assets,” Chen said.

Mutual funds on the mainland still hold large stakes in Hong Kong-listed companies. According to TX Investment, eight Hong Kong-listed Chinese firms appeared in the top 50 holdings of mainland mutual funds. 

The list includes technology giants such as Alibaba, Tencent, Xiaomi, China Mobile, China National Offshore Oil Corporation, and Semiconductor Manufacturing International Corporation.

“Hong Kong stocks have been trading at a lower valuation than those listed on the mainland and other overseas markets, which has led mainland mutual funds to increase their holdings of Hong Kong stocks,” reckoned Kenny Ng Lai-yin, strategist at Everbright Securities International.

On April 9, when the HK dollar surged to a four-year high against the US dollar, mainland investors traded HK$175.41 billion ($22.6 billion) worth of Hong Kong shares, with a net inflow of HK$35.6 billion. That influx helped the Hang Seng Index reverse a 4.3% intraday drop to close 0.7% higher, narrowly avoiding a bear market.

Outside of Hong Kong, equity markets across Asia followed suit in Wednesday’s session. Japan’s Nikkei 225 climbed 1.89% to 34,868.63, while the Topix index added 2.06% to 2,584.32. 

In South Korea, the Kospi index ended the day up 1.57% at 2,525.56, and the small-cap Kosdaq index gained 1.39% to close at 726.08.

Tech and exporters drive gains up 

On Wednesday, Alibaba Group rose 5.5% to HK$116.00, short-video platform Kuaishou Technology gained 3.5% to HK$51.80, and Xiaomi jumped 6.9% to HK$47.45.

Apparel exporter Shenzhou International Group added 4% to HK$52.55, and Sunny Optical Technology Group, an Apple supplier, saw an uptick of 4.1% to HK$65.45.

According to economists, stimulus and regulatory backing helped drive up Hong Kong’s market by 28% from September to March. The rally coincided with interest rate cuts and a stimulus package rolled out by Beijing in October to shore up the economy.

Further momentum came in January when DeepSeek, a Chinese artificial intelligence start-up, released two cost-effective large language models (LLMs). 

In the same month, Chinese regulators mandated medium and long-term institutional funds, including commercial insurers and the National Social Security Fund, to increase their stock market activity to stabilize markets and counterbalance tariffs from the United States.

On Tuesday, Nvidia announced it expects to take a $5.5 billion hit to earnings due to US export restrictions targeting its H20 chip, a lower-powered model engineered to meet existing Biden-era controls on exports to China.

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