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Nicholas Spiro

There are many disconnects in financial markets. One of them is Japan’s benchmark 10-year bond yield, which currently stands at just 2.7 per cent despite the country’s large public debt burden – more than 240 per cent of economic output.
Although Japanese bond yields have risen sharply in the past three years, the 10-year yield is slightly lower than that of Germany, whose government debt as a percentage of economic activity is around one-quarter the size of Japan’s.
Another anomaly is the outperformance of the debt of non-investment grade companies. The credit spread, or risk premium, on junk-rated bonds is close to its lowest level since 2007 despite the prospect of higher interest rates, acute geopolitical risks and rising defaults in the increasingly vulnerable private credit market.
One of the most striking peculiarities is the growing divergence within Hong Kong’s equity market. Hong Kong remains the top fundraising venue in Asia. In the second quarter of this year, proceeds from share sales – which include listings, placements and block trades – reached their highest quarterly level in five years, according to Bloomberg data.
The artificial intelligence (AI) surge has been a boon to the city’s equity market. Chinese high-end manufacturing companies across the AI supply chain continue to launch multibillion dollar offerings, cementing Hong Kong’s role as the primary conduit between Chinese and global finance.
Moreover, mainland Chinese investors are a vital source of demand for Hong Kong stocks, constituting more than 40 per cent of daily turnover via the Stock Connect’s southbound channel, according to Societe Generale. In a report on May 18, the bank said more than 90 per cent of initial public offerings in Hong Kong were in the advanced manufacturing, technology and biotechnology sectors, industries “deemed to be strategic in accordance with the 15th five-year plan”.


The AI boom is reshaping Hong Kong’s equity market. While tech-related sectors accounted for just 5 per cent of the Hang Seng China Enterprises Index in 2017, they now comprise one-quarter of the gauge.
However, it is the particular exposure to the tech sector that has become a liability for Hong Kong. Last year, the offshore market outperformed onshore equities thanks to a combination of the revival of the city’s capital markets, strong liquidity and a sharp rally in internet platform stocks in response to DeepSeek’s stunning innovations.
The onshore market, by contrast, was out of favour with investors because of the CSI 300 index’s higher exposure to sectors that bore the brunt of China’s downturn, such as consumer staples and materials. However, sentiment shifted in the second half of 2025 as software companies the world over came under heavy selling pressure because of fears that their business models would succumb to AI disruption.
This led to a strong preference for heavy assets with low obsolescence – known as the “Halo trade” – with semiconductor stocks and tech hardware and equipment shares powering the AI trade. In a report on May 13, Morgan Stanley, which favoured the offshore market last year, said it preferred onshore stocks because of stronger exposure to “upstream asset-focused sectors that are less disruptible by the AI supercycle”.
This puts Hong Kong at a disadvantage. As Goldman Sachs pointed out in a report on June 3, the relative weightings of tech hardware and equipment stocks versus software shares have become the key determinant of the performance of Asian equity markets this year.




Hardware and equipment stocks account for 45 per cent of AI-related tech exposure in the CSI 300 index, with even higher shares in the tech-heavy ChiNext and Star50 indices. On the other hand, software stocks constitute 53 per cent of AI exposure in the Hang Seng Tech Index and 38 per cent in the MSCI China Index.
The software-heavy offshore market has contributed significantly to the Hang Seng’s nearly 11 per cent decline this year, making it the worst-performing major equity market. Net inflows via the southbound channel have fallen sharply in the past several months as investors reduced their exposure to e-commerce stocks. “We think it may take time” before the recent wave of AI IPOs is reflected in the Hang Seng Tech Index, Societe Generale said.
In fact, the underperformance of Hong Kong’s stock market is somewhat similar to the sharp decline in Indian equities, which have suffered amid investors’ aversion to the software sector. Respondents to Bank of America’s latest Asia fund manager survey on June 16 said “the absence of a clear AI play” was the main reason India’s equity market was vulnerable.
Hong Kong is in a much stronger position than India. It is a testament to the city’s strong appeal as a fundraising venue that leading mainland Chinese companies, many of them prime beneficiaries of the buildout of data centre and AI infrastructure, are lining up to raise equity in Hong Kong despite the fact that the Hang Seng is on the cusp of a bear market. The index is down about 18 per cent since January 29.
More importantly, the dramatic revival of Hong Kong’s equity market has accentuated the city’s unique structural source of financial revenue. As long as mainland China remains constrained by capital controls and a managed currency, Hong Kong will remain the dominant offshore dollar funding centre in Asia. Shifts in the AI trade have revealed vulnerabilities in Hong Kong’s stock market, but the share sale boom shows the city is well-placed to capitalise on Beijing’s AI ambitions.


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The AI trade has shown gaps in Hong Kong’s stock market, but the share sale boom suggests it is set to capitalise on Beijing’s AI ambitions


The AI trade has shown gaps in Hong Kong’s stock market, but the share sale boom suggests it is set to capitalise on Beijing’s AI ambitions.


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Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


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Why Hong Kong has become the worst-performing major stock market

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}The AI trade has shown gaps in Hong Kong’s stock market, but the share sale boom suggests it is set to capitalise on Beijing’s AI ambitions

The AI trade has shown gaps in Hong Kong’s stock market, but the share sale boom suggests it is set to capitalise on Beijing’s AI ambitions