Wall Street entered 2025 with bullish bets on onshore Chinese stocks, counting on Beijing’s stimulus drive to cushion the blow from US tariffs. Six months in, they couldn’t have been more wrong.

Blame it on the breakthrough by DeepSeek in artificial intelligence that suddenly turned the tide in favor of Chinese shares listed in Hong Kong. With persistent economic woes battering the onshore market, the Hang Seng China Enterprises Index has beaten the CSI 300 Index by nearly 20 percentage points so far in 2025, heading for the biggest annual outperformance in two decades.

Strategists at Julius Baer Group Ltd. and Morgan Stanley are among those expecting the Hong Kong market’s lead to continue. A slew of new hot listings, including bubble tea maker Mixue Group and battery giant Contemporary Amperex Technology Co. Ltd., has reignited global interest toward the financial hub and expanded investment options. Mainland investors have poured nearly $90 billion into Hong Kong stocks this year, already nearing 90% of the whole amount for 2024. 

The sector structure in Hong Kong “is also becoming more comprehensive with recent listings and upcoming IPOs,” said Richard Tang, China strategist at Julius Baer. “H-shares are likely to continue outperforming A-shares driven by global rebalancing flows and strong Southbound flows,” he added, referring to Hong Kong and mainland-listed stocks, respectively.

As the Hang Seng China gauge has gained 17% this year, the CSI 300 Index has shed more than 2%. Analysts attribute the weakness to the onshore market’s composition — heavy on property, financial and traditional consumption stocks — which are more reliant on domestic demand. Tech heavyweights including Alibaba Group Holding Ltd. and Tencent Holdings Ltd. are listed in Hong Kong. 

Despite China’s unexpectedly strong retail sales in May, deflationary forces and a housing slump persist. Even as trade tensions continue to simmer, the big bang stimulus from Beijing that some investors had hoped for has yet to materialize.

A key source of support for the A-share market has also subsided. After actively propping up stocks early April as tariff shocks hit, state funds have been notably absent, according to Bloomberg’s analysis of exchange-traded funds purchased by Central Huijin Investment. 

Meanwhile, things have been coming together for Hong Kong. HSBC Holdings Plc expects mainlanders’ purchases via the southbound stock connect to reach $180 billion this year, an unprecedented amount.

Read: What’s Behind China’s Listing Frenzy in Hong Kong?: QuickTake 

A reassessment of China’s tech potential has driven a re-rating of stocks in Hong Kong. The Hang Seng China gauge now trades at 9.3 times its forward earnings estimates, above a five-year average of 8.5 and sharply higher than the 2024 low near a ratio of six.

“More single-stock opportunities related to AI and new consumption, particularly the larger caps, are listed in Hong Kong,” Morgan Stanley strategist Laura Wang wrote in a note earlier this month. “Some of the long-term well-liked A-share companies are choosing to come to Hong Kong for dual-listing.”

The steep underperformance of A-shares, however, means there may be room for catch-up. The premium that onshore stocks have long commanded over Hong Kong peers has narrowed to about 30%, below a five-year average of around 42%.

Fiscal stimulus could revive interest in beaten-down sectors onshore, such as consumer staples. There’s also an array of hardware tech firms that should benefit from Beijing’s push for self sufficiency.

“A-shares still have investment appeal,” said Agnes Ng, portfolio specialist at T. Rowe Price Group Inc. “If China’s economic growth slows in the second half and stimulus is deployed, A-shares would benefit directly.”

Yet the limited pool of attractive megacap stocks onshore means the recovery will once again hinge on if and when Beijing will deploy greater stimulus. That lingering uncertainty will likely keep investors favoring Hong Kong for the time being.

“H-shares are typically higher beta due to the index make-up — and in an up year are likely to outperform,” said Robert Mumford, investment advisor at GAM Investments. “The end-goal of a range of policy stimulus is to increase consumption, which is the core underlying business of the internet platform companies. Hence we are more positive on H shares versus A.”

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