How much foreign capital is involved in this round of asset revaluation in China?

How Much Foreign Capital is Participating in This Round of China's Asset Revaluation?

In January of this year, the debut of the DeepSeek large model sparked discussions in the market about the development process of AI technology in China, leading to a round of asset revaluation in the capital market dominated by the AI wave. With the technology industry acting as a catalyst, foreign investment banks have recently expressed optimism about Chinese assets, and global funds may be focusing their attention on Chinese equity assets. So, what is the scale of foreign capital inflow in this round of revaluation, and what is the structure of the returning foreign capital? This article will analyze this.

Recently, foreign capital has been gradually returning to the Chinese market. For a considerable period, due to the complex and fluctuating macroeconomic environment in China, there has been a rare and sustained net outflow of overseas funds amid rising risk aversion.

In the A-share market, since Q2 2023, northbound funds have seen a rare significant outflow of over 200 billion yuan from A-shares, with approximately 138.5 billion yuan flowing out in Q4 2024 alone, marking the highest single-quarter outflow in history. However, against the backdrop of multiple favorable factors such as the catalysis of the technology industry, positive policy direction, and recovery of fundamental expectations, foreign capital may be returning in phases and participating in this round of China's asset revaluation. In the context of the cessation of daily net inflow data disclosure for the Stock Connect, we analyzed in "How to Track Foreign Capital Sentiment Under the New Background? — Analysis of Foreign Capital Behavior Series 4-20240902" that we can fit high-frequency indicators significantly related to foreign capital to obtain short-term fluctuations of the Stock Connect, and combine them with the historical long-term trend of the Stock Connect to comprehensively estimate the distribution characteristics and high-frequency tracking indicators of foreign capital similar to northbound funds. Backtesting results show that the foreign capital tracking indicator has an approximately 80% success rate in predicting the direction of weekly changes in the Stock Connect. The latest high-frequency data shows that from January 13 to February 21, northbound funds estimated a total net inflow of nearly 20 billion yuan, indicating that the previously significantly outflowing northbound funds may have phased back into A-shares.

In the Hong Kong stock market, we previously used the international intermediary custody funds in the Hong Kong Stock Exchange's central clearing system as a proxy indicator for foreign capital in "How to Distinguish the Composition of Northbound Funds? — Analysis of Foreign Capital Behavior Series 1-20240412."

Since the beginning of 2024, similar to the situation faced by A-shares, foreign capital has also continued to flow out of the Hong Kong stock market overall, while the inflow of southbound funds has largely offset the outflow of foreign capital. As of March 4, 2025, foreign capital has cumulatively flowed out over 730 billion Hong Kong dollars since the beginning of 2024, while the cumulative inflow of the Hong Kong Stock Connect during the same period has exceeded 1 trillion Hong Kong dollars.

From recent data, it appears that the extent of foreign capital outflow from the Hong Kong stock market may have narrowed in phases after the Spring Festival, and even briefly turned into a net inflow. From February 5 to February 18, foreign capital flowed into the Hong Kong stock market by approximately 18 billion Hong Kong dollars, while the cumulative inflow of the Hong Kong Stock Connect during the same period was about 56 billion Hong Kong dollars. This indicates that, similar to northbound funds, there may also be signs of phased foreign capital returning to the Hong Kong stock market, but comparatively, the participation of southbound funds in this round of revaluation is higher.


Structurally, the inflow of foreign capital is mainly dominated by short-term flexible foreign capital, while long-term stable foreign capital may also see a return. In this round of revaluation of Chinese assets, there is a phase of foreign capital inflow. Specifically, which type of foreign capital has a higher level of participation? Since the Stock Connect only discloses quarterly data, the Hong Kong Stock Exchange provides more frequent data, so we mainly rely on Hong Kong stock data to reflect the current situation of foreign capital inflow into the Chinese market.

In "How to Distinguish the Composition of Northbound Funds? - Analysis of Foreign Capital Behavior Series 1-20240412," we analyze the historical trading behavior of all funds based on the data from the Hong Kong Stock Exchange's Central Clearing System and further break down foreign capital into stable foreign capital with a long-term allocation and flexible foreign capital with a short-term speculative nature. From the perspective of the proportion of different types of funds in the market capitalization held by the custodians of the Hong Kong Stock Exchange, stable foreign capital remains the main investment force in the Hong Kong stock market, but its proportion is gradually decreasing. As of March 4, 2025, the proportion of stable foreign capital has decreased by 4.5 percentage points from 48.3% at the beginning of 2024 to 43.8%.

Meanwhile, the proportion of flexible foreign capital and Stock Connect has increased by 1.2 percentage points and 5.1 percentage points, respectively, during the same period. Observing the inflow of different foreign capitals since the Hong Kong stock market rally began in mid-January, we find that the returning foreign capital is mainly composed of short-term flexible foreign capital. As of March 4, 2025, flexible foreign capital has cumulatively flowed in approximately HKD 13 billion since January 15, while stable foreign capital has also seen a certain degree of outflow narrowing after the Spring Festival, and even briefly turned to net inflow, with a total net inflow of about HKD 10 billion from February 5 to February 18.

This time, foreign capital's participation in the Hong Kong stock technology sector is relatively high, but there may be differences with southbound funds in terms of general consumption and dividends.

To further observe the participation of foreign capital in Chinese assets, we compare and analyze the similarities and differences in the inflow direction of foreign capital and southbound funds from the perspective of Hong Kong stock industries and individual stocks. Specifically, we take the period after the Spring Festival, when the DeepSeek news significantly fermented, as a time node to observe the allocation of various funds in Hong Kong stocks. As of March 4, 2025, from the industry perspective, on one hand, in terms of industries attracting foreign capital inflow, software services and technology hardware are the directions with higher foreign capital inflow Among them, stable foreign capital inflow into software and services was HKD 6.5 billion, flexible foreign capital inflow was HKD 27.2 billion, and southbound funds inflow was about HKD 12.5 billion. In addition, stable foreign capital also flowed into technology hardware amounting to HKD 10.1 billion. On the other hand, in terms of industries with foreign capital outflow, foreign capital mainly flowed out of retail (stable foreign capital - HKD 5.4 billion, flexible foreign capital - HKD 34.5 billion, same below), banking (-HKD 17.6 billion, -HKD 4.6 billion), and automotive (-HKD 14.9 billion, HKD 1.5 billion), which are general consumption and dividend industries. Meanwhile, the Hong Kong Stock Connect saw inflows of HKD 57.9 billion, HKD 26.4 billion, and HKD 12.5 billion in these industries, respectively, with relatively high inflow scales.

From the perspective of individual stocks, the significant outflow of foreign capital from the retail sector is mainly due to the reduction in holdings of Alibaba, with foreign capital flowing out of Alibaba amounting to about HKD 41.6 billion, which is relatively high in scale. Among them, stable foreign capital and flexible foreign capital flowed out HKD 14.6 billion and HKD 27 billion, respectively. In addition, foreign capital also significantly flowed out of Hong Kong-listed bank stocks, while southbound funds flowed into Alibaba by about HKD 56 billion, and there were also considerable inflows into several bank stocks. Analyzing from the perspective of net inflow of individual stocks, foreign capital flowed into Tencent Holdings by about HKD 26.8 billion, which is relatively high in scale, with stable foreign capital and flexible foreign capital flowing in HKD 5.2 billion and HKD 21.5 billion, respectively.

In summary, representing foreign capital in Hong Kong stocks, we believe that in this round of revaluation of Chinese assets, there is a certain scale of foreign capital that may have returned to the Chinese market in stages, primarily consisting of short-term flexible foreign capital, while long-term stable foreign capital has also seen some stage-wise return, but there is still considerable room for inflow. In terms of industries, foreign capital may have a higher recognition of the Hong Kong stock technology sector. We believe that the current expectations for foreign capital return in the Chinese market are relatively low. With the domestic macro and micro fundamentals improving and the A-share market recovering, incremental foreign capital is expected to continue flowing into the Chinese market in the future. For more details, see "Three Potential Expectation Gaps in 2025 - 20250301."

This round of the spring market may have already passed the halfway point. The current rise of DeepSeek indicates that China's technological innovation has made significant breakthroughs, which may inject new momentum into the development of the country's fundamentals. Under this catalyst, the A-share and Hong Kong stock markets are thriving.

Regarding the short-term market rhythm, we have already pointed out in "Will There Be a Spring Market? - 20250111" that the spring market of 2025 will not be absent, focusing on three major catalytic factors: policy catalysts, liquidity easing, and fundamental improvement. The successful convening of this week's Two Sessions further clarifies the strength and direction of steady growth, while technology-related industrial policies reignite market enthusiasm, leading to a noticeable upward trend in various indices of the A-share and Hong Kong stock markets. As of March 6, the maximum increase of the entire A index since January 13 has reached 13%, and the Hang Seng Index has increased by 31%, with 33 days of gains. Comparing with history, the average maximum increase of the entire A index in previous spring markets since 2005 is 23%, with an average of 42 days of increase. From the perspective of the upward time and space, this round of the spring market may be entering its later stage.

From a longer-term perspective, the 2025 government work report proposes a GDP growth target of 5% and a CPI growth target of 2%. At the same time, policies are further strengthened and made more effective, with the budget deficit rate for 2025 rising to around 4%, new special bonds expanding to 4.4 trillion yuan, ultra-long special government bonds increasing to 1.3 trillion yuan, and the issuance of special government bonds scaled at 500 billion yuan, significantly increasing fiscal expenditure intensity compared to previous years. With the policy strengthening, the signal for steady growth is clear, which may gradually promote the repair of macro and micro fundamentals in the future. Based on the combination of the shift in policy tone + bull-bear cycle rules + market sentiment hitting bottom, we judge that this round of the market since September 24, 2024, is a reversal rather than a rebound, and the A-share market in 2025 is expected to enter a new phase driven by fundamentals. For more details, see "Kunpeng's Waves Begin Here - 2025 A-share Outlook - 20241116" and "The Bull is Still Here - Re-discussing the Nature of the September 24 Market - 20250118."

The technology sector empowered by AI+ is the main line in the medium term, and the concept of China's "Seven Giants" in technology is accelerating its rise. The 2025 government work report has clearly pointed out the need to "stimulate the innovative vitality of the digital economy" and "continuously promote the 'Artificial Intelligence +' initiative, better integrating digital technology with manufacturing advantages and market advantages, supporting the widespread application of large models, and vigorously developing new generation intelligent terminals such as smart connected new energy vehicles, artificial intelligence smartphones and computers, intelligent robots, and intelligent manufacturing equipment."

We believe that the development of China's technology industry has a solid foundation in terms of policy support, technological development, and human capital accumulation. The recent breakthrough progress of the Deepseek large model reflects the strong momentum of China's technological innovation. The dual benefits of policy and technology, combined with the recovery of the industrial cycle, support the unfolding of the technology main line market. Chinese technology stocks may be 迎来价值重估. Looking at the experience of the rise of the "Seven Giants" in U.S. technology stocks, they cover cutting-edge technology fields such as hardware devices, software services, semiconductors, artificial intelligence, and cloud computing. They not only dominate the technology industry but also have a significant impact on the U.S. stock market. Currently, the rise of Chinese technology companies has favorable conditions in both the macro environment and the stock market institutional environment. Against this backdrop, the concept of China's "Seven Giants" in technology has favorable conditions in terms of policy and funding, and fields expected to emerge for China's technology "Seven Giants" in the future include AI applications, semiconductors, and high-end manufacturing, as detailed in the "Strategy Special - China's Technology 'Seven Sisters' Awaiting 'Marriage' - 20250217."

In addition, the internal and external demand for mid-to-high-end manufacturing is supported, with significant supply advantages, and prosperity is expected to continue. Currently, China's high-end manufacturing has advantages such as industrial cluster advantages, engineer dividends, and technological accumulation, while both internal and external demand are supported. In terms of external demand, emerging countries have strong demand and a high dependence on China, which may be a new growth area for China's mid-to-high-end manufacturing exports. In terms of internal demand, the 2025 policy for replacing old consumer goods with new ones will be strengthened and expanded, and related fields such as home appliances and durable consumer goods are expected to continue benefiting.

Sectors such as consumer pharmaceuticals and real estate, which have expectation gaps, should be given attention. It is noteworthy that in the short term, driven by the AI concept, market investment enthusiasm for TMT, machinery, and other related sectors is high. In the long term, it may require continuous realization of fundamental expectations to digest valuations, thereby supporting the technology manufacturing sector to enter a phase driven by fundamentals. In contrast to the technology sector, we believe that consumer pharmaceuticals and real estate are currently still undervalued and underweighted, and there may be significant expectation gaps.

The 2025 government work report proposed "vigorously boosting consumption, improving investment efficiency, and comprehensively expanding domestic demand," indicating that expanding domestic demand is a primary task. Among them, consumption is an important part, and the report proposed "implementing special actions to boost consumption," arranging for 300 billion yuan of ultra-long-term special government bonds to support the replacement of old consumer goods with new ones, which is expected to drive the growth of social retail sales by about 0.9-1.2 percentage points.

At the same time, regarding real estate, the report proposed "continuing to push the real estate market to stop falling and stabilize." We believe that with policy efforts, the fundamentals of real estate and consumer pharmaceuticals are expected to show more positive changes. Currently, from the perspective of valuation and allocation, the expectations for real estate and consumer pharmaceuticals have already dropped to a low level. As of March 6, 2025, the real estate PB (LF) is 0.7 times (at the 7.6% percentile from low to high since 2013), the pharmaceutical PE (TTM, same below) is 31.5 times (28.2%), and the food and beverage PE is 20.2 times (15.9%). From the perspective of fund allocation, in Q4 2024, the proportion of real estate holdings in the top stocks of funds relative to the CSI 300 is an overweight of 0.0 percentage points, at the 64% percentile since 2013, the proportion of pharmaceutical holdings is an overweight of 4.4 percentage points, at the 15% percentile since 2013, and the overweight proportion for food and beverage is -0.6 percentage points, at the 9% percentile. In the future, as policy efforts promote the recovery of domestic demand, the fundamentals of consumption and real estate are gradually stabilizing, and sector valuations are also expected to return to the mean.

Risk Warning: The implementation progress of stable growth policies is not as expected, and the domestic economic recovery is not as anticipated.

Authors of this article: Wu Xinkun, Yu Peiyi, Lu Jiarui from Haitong Securities, source: Haitong Strategy, original title: "【Haitong Strategy】How Much Foreign Capital Participates in the Current Round of China's Asset Revaluation? (Wu Xinkun, Yu Peiyi, Lu Jiarui)".

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