China's tech rally rests on 'hot money'

Reuters

17-02-2025

HONG KONG, Feb 17 (Reuters) - China's apparent breakthrough in AI and rapprochement with tech giants has sent Hong Kong stocks and internet giants soaring, but the buyers behind it are flighty and brokers say global investors are wary of big bets while markets swing wildly.
Hong Kong's Hang Seng (.HSI), opens new tab has roared back from a run of lean years to vie with Germany's DAX (.DAX), opens new tab as the world's best-performing market for the year so far, with gains of 13% and 13.1% respectively, against a 4% rise for the S&P500 (.SPX), opens new tab.
Hong Kong tech shares (.HSTECH), opens new tab have surged 31% since the middle of January to hit three-year highs on Monday, while President Xi Jinping sat down with top tech leaders in Beijing.
Prices gyrating as investors scoured pictures and footage of the meeting for the faces of top bosses neatly underscored the fevered speculation and the degree of hope behind the rally.
Trading also illustrated what has become an adage of investing in China in recent years, that the biggest prize goes to the earliest movers, especially if they can get out as soon as the euphoria begins to fade.
"As with moves in the past two years or so in HK/China, it's very retail driven (and volatile) - a trading market," said Wong Kok Hoong, head of equity sales trading at Maybank.
"Hedge funds or the more Hong Kong-China centric funds are well aware of the dangers of not rushing in from the onset."
Data from brokers seems to show that is exactly who is buying.
CICC estimates that cumulative southbound flows - that is, buying by mainland investors - have reached HK$26.6 billion ($3.4 billion) since the Lunar New Year holiday in early February, on par with a record-breaking rush in September.
A Morgan Stanley note on hedge fund positioning showed net exposures near their highest in a year, with buyers mostly in Asia and taking long positions, rather than covering short bets.
"Hot money is driving the market for the past two weeks," said Steven Leung, who handles institutional clients at brokerage UOB KayHian in Hong Kong, referring to funds controlled by investors seeking short-term returns.
EARLY BELIEVERS
The rally's triggers include the sudden popularity of Chinese AI startup DeepSeek, which has developed an AI model far cheaper than U.S. rivals, relief that China has not been hit with big U.S. sanctions, and the sight of Xi meeting with tech leaders.
Shares in Alibaba (9988.HK), opens new tab have headlined the rally on news of an AI partnership with Apple (AAPL.O), opens new tab along with the appearance of founder Jack Ma, who has kept a low profile over years of crackdowns on China's tech giants, at this week's symposium with Xi Jinping.
The stock touched a three-year high on Monday and is up nearly 50% for the year so far.
The volume of Alibaba shares traded in Hong Kong last week was the largest since listing in late 2019 and weekly volume for its U.S.-listed ADR was the highest for two years.
"(Jack Ma's) presence would be hugely symbolic of how the government's stance towards the tech sector has changed," said Christopher Beddor, deputy China research director at Gavekal Dragonomics in Hong Kong.
"If there's one person associated with the tech crackdown, it's Jack Ma...it's more or less a total reversal of the policy stance from a few years ago, when officials vowed to curb the 'disorderly' expansion of capital."
To be sure, Morgan Stanley said in a note last week that global investors were starting to reassess China's investability, after a long period of limited attention, though it added that as of late January they had been underweight.
On Monday, Goldman Sachs analysts raised forecasts for the MSCI China index (.dMICN00000PUS), opens new tab to 85 from 75 and there are investors who see a sustainable rally.
Still, for many the lesson from disappointments after rallies on China's post-COVID reopening and pledges of stimulus in September has been to move fast and think short-term.
Maybank's Wong said that amongst themselves, retail investors in China say: "The early believers get to eat the chicken; the subsequent ones get to drink the chicken soup; and the late true believers will have to take over the empty plates."
($1 = 7.7807 Hong Kong dollars)