CICC: How much Hong Kong stocks did public funds buy?

Since the beginning of this year, Chinese assets, especially the Hong Kong stock market, have experienced a narrative reassessment triggered by DeepSeek, with the Hang Seng Tech Index rising by more than 40% at one point. During the same period, southbound funds have significantly exceeded expectations in their buying, especially after March, becoming the main driver of this round of Hong Kong stock rebound. Even amidst recent market fluctuations caused by tariff risks, southbound funds have maintained their strength, with a net inflow of HKD 604.08 billion in less than four months since the beginning of the year, which is already equivalent to three-quarters of last year's total inflow of HKD 807.87 billion, with a daily average inflow scale 2.5 times that of last year.

In the absence of significant inflows from long-term foreign capital in Europe and the United States, and with little possibility of short-term inflows, southbound funds have clearly become the main focus. Questions such as who is buying and how much space is left are of great concern to investors. We conducted a detailed analysis in "How Much Space is Left for Southbound Inflows?" and concluded at that time that the "bullets" of institutional investors such as public funds and insurance funds may not be as plentiful as imagined, and they may not be the main force behind this round of southbound inflows. Combining the latest disclosed first-quarter reports of public funds, we update the changes in public funds' holdings and allocations in Hong Kong stocks to provide more details on the movements of southbound funds.

Overall Trend: Active Equity Hong Kong Stock Position Rises to 31%, More ETFs Added, Indicating Active Public Funds Are Not the Main Force of Southbound Inflows

First, looking at the total scale, the total scale of public funds that can invest in Hong Kong stocks has generally increased, with ETFs growing even faster; the number of newly issued funds has also accelerated. As of the end of the first quarter, there were a total of 3,890 public funds in mainland China that can invest in Hong Kong stocks (excluding QDII), with total assets of RMB 2.47 trillion, an increase of 105 funds compared to the fourth quarter, and a quarter-on-quarter increase of RMB 242.6 billion, accounting for 29.5% and 13.1% of all 13,173 non-money market funds and RMB 18.9 trillion in scale, respectively, both of which have improved compared to the end of 2024. Among them, 1) there are 2,126 active equity funds (total scale of RMB 1.52 trillion, excluding ETFs), an increase of 43 funds compared to the end of 2024, with a scale increase of RMB 83.4 billion. 2) The scale of Hong Kong Stock Connect ETFs has grown even faster, reaching a total scale of RMB 178.99 billion by the end of the first quarter, an increase of over 45% compared to RMB 123.44 billion at the end of the fourth quarter of 2024. In terms of issuance, the number of newly issued public funds that can invest in Hong Kong stocks in the first quarter slightly accelerated compared to the fourth quarter of last year, with an increase of 105 funds, and the new scale also rose compared to the previous quarter, approximately RMB 68.2 billion (compared to 79 funds and RMB 40.8 billion in the fourth quarter). Active equity funds have similarly accelerated their issuance speed compared to the fourth quarter, with a total of 43 funds issued, and the new scale increased by RMB 12.4 billion (39 funds and RMB 11.5 billion issued in the fourth quarter of last year).

Secondly, looking at the holding situation, there was a significant increase in active holdings in the first quarter, with the holding ratio reaching a new high, and the overall proportion of southbound funds also increased. The aforementioned 3,890 public funds held Hong Kong stocks valued at RMB 650.9 billion, an increase of 32.1% compared to RMB 492.8 billion in the fourth quarter Considering the first quarter of this year, the Hang Seng Index and MSCI China rose by 15.4% and 19.9% respectively, indicating a significant active allocation behavior by public funds during this period. As of the end of the first quarter, the proportion of Hong Kong stock holdings in public funds has risen to 36.9%, the highest level in nearly five years, significantly higher than the 30.5% at the end of last year. Further examining actively managed equity funds, Hong Kong stock holdings reached 408.4 billion RMB in the first quarter, an increase of 26.5% compared to the fourth quarter of last year (322.9 billion RMB), with the increase also exceeding the index's rise, and the holding proportion rose from 25.9% in the previous quarter to 30.8%. During this process, the proportion of public fund holdings in the overall southbound total of 4.25 trillion RMB also increased, rising by 0.7 percentage points from 14.6% in the fourth quarter of last year to 15.3%, but the proportion of actively managed equity funds remained unchanged at 9.6%, which also indicates that during the significant inflow of southbound funds in the first quarter, actively managed public equity funds were not the main force. In contrast, the value of Hong Kong stocks held by mainland passive ETFs increased by nearly 55% from 98.19 billion RMB in the fourth quarter of last year to 151.13 billion RMB. Meanwhile, according to estimates based on changes in circulating shares, the net inflow of funds into mainland investable Hong Kong stock ETFs reached 23.43 billion RMB in March, setting a monthly historical high. Therefore, behind the significant inflow of southbound funds in the first quarter, there may be many individual or institutional investors appearing through passive fund allocations.

Chart: Overview of the number and scale of mainland public funds and other public funds that can invest in Hong Kong stocks

Source: Wind, CICC Research Department

Chart: As of 1Q25, there are a total of 2,126 actively managed equity funds in mainland China that can invest in Hong Kong stocks, with a total scale of 1.52 trillion RMB…

Note: Data as of March 31, 2025

Source: Wind, CICC Research Department

Chart: An increase of 43 funds compared to 4Q24, with an overall scale increase of 83.4 billion RMB

Note: Data as of March 31, 2025

Source: Wind, CICC Research Department

Chart: The scale of newly issued funds (excluding QDII) in 1Q25 is 68.2 billion RMB, an increase from 40.8 billion RMB in 4Q24

Note: Data as of March 31, 2025

Source: Wind, CICC Research Department

Chart: The scale of newly issued active equity funds in Q1 2025 is 12.4 billion yuan, a slight increase from 11.5 billion yuan in Q4 2024.

Note: Data as of March 31, 2025

Source: Wind, CICC Research Department

Chart: As of Q1 2025, the number of funds available for Hong Kong stocks is 3,890, with a total scale of 2.5 trillion yuan...

Note: Data as of March 31, 2025

Source: Wind, CICC Research Department

Chart: ...an increase of 105 funds compared to Q4 2024, with an overall scale also increasing by 242.6 billion yuan.

Note: Data as of March 31, 2025

Source: Wind, CICC Research Department

Chart: The holdings of mainland public funds in Hong Kong stocks continue to rise, with the proportion of Hong Kong stock holdings reaching 36.9% in Q1 2025, further up from 30.5% in Q4 2024.

Note: Data as of March 31, 2025

Source: Wind, CICC Research Department

Chart: In Q1 2025, the holdings of active equity public funds in Hong Kong stocks amount to 408.4 billion yuan, with the proportion of stock holdings in funds increasing to 30.8%.

Note: Data as of March 31, 2025

Source: Wind, CICC Research Department

Chart: As of Q1 2025, the market value of shares held by mainland public funds accounts for 15.3% of the overall southbound proportion

Note: Data as of March 31, 2025

Source: Wind, CICC Research Department

Chart: An increase from 14.6% in the fourth quarter of last year

Note: Data as of March 31, 2025

Source: Wind, CICC Research Department

Chart: Proportion of market value held in Hong Kong stocks among the top 120 actively managed equity mutual funds in Mainland China (1/2)

Note: Based on Wind consensus expectations; Fund size as of March 31, 2025

Source: Wind, CICC Research Department

Chart: Proportion of market value held in Hong Kong stocks among the top 120 actively managed equity mutual funds in Mainland China (2/2)

Note: Based on Wind consensus expectations; Fund size as of March 31, 2025

Source: Wind, CICC Research Department

Chart: Overview of ETFs and index fund products that can invest in Hong Kong stocks in Mainland China

Note: Based on Wind consensus expectations; Fund size as of March 31, 2025

Source: Wind, CICC Research Department

Chart: Following a record high net inflow of funds into Hong Kong stock ETFs in March, the figure in April reached nearly 35 billion yuan

Source: Wind, CICC Research Department

Chart: The amount of Hong Kong stock placements in March also reached a record high

Source: Wind, CICC Research Department

Industry Allocation: Internet and Semiconductors Most Favored, Energy and Utilities Decline the Most, Individual Stock Concentration Increases

Consumer discretionary and semiconductors have increased the most, while energy and utilities have significantly declined. Compared to the fourth quarter of last year, the proportion of holdings in old economy sectors decreased from 29.0% to 20.7%, returning to the level at the end of 2020. During the same period, the proportion of holdings in new economy sectors increased to nearly 80%. In detail, the holdings in e-commerce internet, semiconductor products and equipment, pharmaceuticals and biotechnology, and media and entertainment have increased significantly. In contrast, consumer services, energy, and utilities saw the largest declines. In terms of absolute holding levels, media and entertainment, consumer discretionary retail, and technology hardware and equipment have the highest holdings; commercial and professional services, healthcare equipment, and consumer staples have relatively low holding ratios. Compared to their historical levels, consumer discretionary retail and semiconductor products and equipment are at historical highs; conversely, consumer services, energy, and financial services are at historical lows.

At the individual stock level, concentration among top stocks has significantly increased; Tencent, Alibaba, and SMIC are the most favored, while CNOOC and Meituan have declined significantly. In the first quarter, mainland public funds heavily invested in Tencent, Alibaba, and SMIC, with the number of funds holding them and their market values increasing the most; in contrast, Meituan, CNOOC, and Sunny Optical Technology saw the largest reductions. In terms of heavily held stocks, Alibaba and SMIC have replaced Meituan and Xiaomi to enter the top three heavy holdings. Compared to the end of last year, the number of funds holding Alibaba, Tencent, SMIC, and Pop Mart has increased the most, while the number of funds holding Meituan, CNOOC, BYD Electronics, and China Shenhua has significantly decreased. Additionally, the concentration of heavy holdings has significantly increased in the first quarter, with the top three heavy holdings accounting for 39.8% of the market value of the top 100 heavy holdings, an increase of 5.3 percentage points from the fourth quarter, and the top 10 heavy holdings' market value increased from 58.0% in the fourth quarter to 64.2%.

Chart: The new economy is the main preference for overall mainland public funds' allocation to Hong Kong stocks, with the holding proportion significantly rising from 71.0% in 4Q24 to 79.3%

Source: Wind, CICC Research Department

Chart: Distribution of the market value of mainland public funds' holdings in Hong Kong stocks by GICS primary industry (by total market value of holdings)

Source: Wind, CICC Research Department

Chart: Consumer discretionary retail and semiconductor sectors are at high allocation levels since 2021; consumer services and energy sectors are at low levels

Source: Wind, CICC Research Department

Chart: In the overall shareholding structure of southbound funds, the proportion of old economy in 1Q25 decreased from 48.8% to 44.4%

Source: Wind, CICC Research Department

Chart: The proportion of consumer discretionary and information technology sectors in public fund investments in Hong Kong stocks significantly increased in 1Q25, while the proportions of energy and finance sectors declined.

Source: Wind, CICC Research Department

Chart: In 1Q25, southbound funds favored the information technology and consumer discretionary sectors, while the proportion of old economy sectors such as energy and finance decreased significantly.

Source: Wind, CICC Research Department

Chart: In 1Q25, the market value of the top 10 Hong Kong stocks held accounted for 64.2% of the market value of the top 100 heavily weighted Hong Kong stocks, an increase of 6.2 percentage points compared to 4Q24.

Source: Wind, CICC Research Department

Chart: The market value of the top 3 heavily weighted stocks is HKD 158.4 billion, accounting for 39.8% of the market value of the top 100 heavily weighted Hong Kong stocks.

Source: Wind, CICC Research Department

Chart: In 1Q25, the three sectors with the highest market value of Hong Kong stocks held by domestic actively managed equity public funds are communication services, consumer discretionary, and information technology.

Source: Wind, CICC Research Department

Chart: Among the industries held by the Hong Kong Stock Connect, finance and communication services maintain the highest proportion.

Source: Wind, CICC Research Department

Chart: 1Q25 Stocks with the Most Inflows and Outflows from Southbound Funds (Based on the Top Ten Active Stocks in the Stock Connect)

Source: Wind, CICC Research Department

Outlook: How Much More Space is There for Southbound Inflows? A Relatively Certain Increment of About HKD 200-300 Billion for the Year, Individual Investors Are Easily Influenced by Trends

Since March, southbound funds have become the main force, with a relatively certain increment of about HKD 200-300 billion for the year. So far this year, southbound inflows have totaled HKD 604.1 billion, with an average daily inflow of HKD 8.28 billion, which is nearly 2.5 times last year's total (the total inflow for 2024 is expected to be HKD 807.87 billion, with an average daily inflow of HKD 3.47 billion). If the current pace is maintained, the total for this year could approach HKD 2 trillion, which may not be realistic. In our mid-March report titled "How Much More Space is There for Southbound Inflows?", we provided a detailed analysis. Combining the latest data from public funds, in the measurable portion, the "bullets" of public funds and institutions like insurance may not be as plentiful as expected. As of the first quarter, the equity holdings of actively managed equity funds in Hong Kong stocks have reached a historical high of 30.8%. Assuming the proportion increases to 35-40% this year (the maximum investment ratio for funds not labeled "Hong Kong stocks" cannot exceed 50%), considering the current overall scale of actively managed equity funds at HKD 1.5 trillion, the subsequent space is about HKD 75-150 billion. For insurance funds, assuming the equity proportion of their funds increases to 15% and the proportion of Hong Kong stocks in equity increases to 20%, also considering new premiums, we expect this could bring about HKD 150-200 billion in incremental funds this year.

However, during this round of significant southbound inflows, the inflow of ETF funds has been very strong. The net inflow of funds into mainland investable Hong Kong stock ETFs set a record of HKD 23.4 billion in March, and has approached HKD 35 billion since April. Behind this, there may be many individual investors allocating Hong Kong stocks through ETFs. However, individual and other trading-type inflows are strongly driven by sentiment and trends, and historically, there have been many instances of "buying high and selling low," making accurate measurement difficult. In summary, we estimate that the relatively certain southbound increment for the remainder of the year is about HKD 200-300 billion, with total inflows for the year around HKD 800-1,000 billion. Additionally, it should be noted that although the significant inflow of southbound funds has indeed given southbound investors "marginal pricing power" during certain periods and in specific areas, facing short selling and the "flash placements" (with the scale of Hong Kong stock placements reaching a historical record of HKD 97 billion in March) that southbound investors cannot participate in while supply can be unlimited, it is difficult to have "absolute pricing power." Therefore, when the market overly emphasizes pricing power to support optimistic views, it may indicate that sentiment has become relatively exuberant. For the market, after the tariff risk began, we estimate that the Hang Seng Index has incorporated a level of pessimism equivalent to the end of 2018 at 20,500 points, and if there are no new risks, it may fluctuate around this position ("How big is the impact of 'reciprocal tariffs'?"). Looking back, this is indeed the case. As tariffs continue to escalate and have entered a "non-rational" phase, the market has gradually become "desensitized" to the numbers of the tariffs themselves, shifting more towards the substantive impact on growth, which will be closely related to the subsequent negotiation progress and the domestic policy countermeasures. If the tariff negotiations do not progress and tariffs remain at a high level of 145%, while the fiscal policy countermeasures are weaker than expected, it may drag down Hong Kong stock earnings by 10 percentage points to a negative growth of 7%. Accordingly, we estimate that: 1) In the baseline scenario, without considering the impact of earnings downgrades, it corresponds to the Hang Seng Index at 20,500 points; 2) In the optimistic scenario, market sentiment recovers to pre-tariff shock levels, and the Hang Seng Index returns to 23,000-24,000 points; 3) In the pessimistic scenario, earnings growth slows to around -7%, corresponding to the Hang Seng Index at around 18,000-19,000 points.

In terms of specific operations, if investors have significantly reduced their positions or shifted to dividend sectors previously, they can gradually buy on dips at this point; however, if their positions and costs are relatively high, it is advisable to leave some buffer space to cope with potential earnings downgrade pressure. In terms of sectors, 1) Internet technology supported by technology narratives and with low export exposure remains the main line, which can rotate with dividend assets. 2) For the remaining consumer and pro-cyclical sectors, they rely more on macro policies and overall leverage repair; if fiscal measures can provide a counterbalance, the pro-cyclical sectors related to domestic demand will have better opportunities. 3) Additionally, sectors with greater export exposure, such as home appliances, electronic equipment, and shipping, which have a higher proportion of income from the United States, need to pay attention to tariff developments.

Chart: At the end of 2018, the Hang Seng Index risk premium was 7.7%, corresponding to around 20,500 points.

Source: Bloomberg, Wind, CICC Research Department

Authors: Liu Gang, Zhang Hanwei, Source: Kevin Strategy Research, Original Title: CICC: How much Hong Kong stocks have public funds bought?

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not consider individual users' specific investment goals, financial conditions, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk