Illustration: Tang Tengfei/GT

The combination of persistent southbound capital and targeted investment in high-growth technology sectors is reinforcing Hong Kong's status as a global financial center for tech-driven capital allocation, catalyzing both market performance and real economic innovation.

Chinese mainland funds have continued to buy through the Stock Connect. As of Wednesday, net inflows of southbound capital so far this year reached HK$1.006 trillion ($129 billion), marking the highest annual level since the launch of the Stock Connect mechanism in 2014. Since July 2023, there have been net inflows of southbound funds for 27 consecutive months, the Securities Times reported on Thursday.

Southbound funds have injected ample liquidity into the Hong Kong stock market through continuous buying, sustaining strong momentum. Although the market experienced volatility on Thursday, as of that date, the Hang Seng Index and the Hang Seng Tech Index had each risen more than 24 percent year-to-date, ranking among the best-performing major global indices.

In terms of increased allocations, according to SWS Research's industry classification, financials and technology are the main focuses of southbound capital. Notably, investors are paying significant attention to technology stocks. 

Southbound funds show a consistent preference for companies involved in semiconductors and innovative pharmaceuticals that possess core technological breakthroughs, as well as for companies with high growth potential.

According to data reported by the Securities Times on Thursday, the net inflow for the pharmaceuticals and biotechnology sector has exceeded HK$100 billion year-to-date. Net inflows for the electronics, communications, and computer sectors have each surpassed HK$50 billion. 

For example, semiconductor company InnoScience (Suzhou) Technology Holding Co has risen nearly 200 percent year-to-date, while XtalPi Holdings in the pharmaceuticals and biotechnology sector has gained nearly 60 percent.

Relying on diverse financial instruments, including exchange-traded funds and stock connect programs, the Hong Kong stock market channels liquidity into the technology sectors. After receiving financing, technology companies increase research and development and expand production capacity, which, in turn, boosts both profitability and valuations. 

This enhanced performance attracts additional southbound capital, as well as growing interest from international investors seeking opportunities in innovation-driven sectors in China's economic transformation. Over time, this forms a virtuous loop of capital flowing into industry, driving operational expansion, generating higher returns, and reinforcing further investment.

Another notable trend in Hong Kong stocks this year is that foreign capital has become a major cornerstone investor in Hong Kong IPOs. According to a previous report by the Shanghai Securities News, as of June, 15 IPO companies had introduced foreign investors as important investors, including China's electric vehicle battery manufacturing giant, Contemporary Amperex Technology Co.

Looking ahead, China's policy support for technological innovation, along with Chinese tech companies' pursuit of growth in emerging fields such as artificial intelligence (AI), is expected to further strengthen market confidence in Hong Kong technology stocks, attracting more capital to boost the growth of companies in related industries.

For instance, optimism is buoying the AI sector, which combined with infrastructure and other related sectors will be worth $1.4 trillion by 2030, Reuters reported on Tuesday, citing analysts at Morgan Stanley. Such optimism has supported the strong performance of the Hang Seng Tech Index this year, the report said.

In financial markets, the flow of investors' capital is the most accurate reflection of market prosperity and the development prospects of specific sectors in the real economy. The current widespread preference for the Hong Kong stock market's technology sector reflects investors' recognition of these companies' profit potential and industry standing.

It also serves as a vote of confidence in China's technology-driven economic transformation. Such a rational and market-aligned choice is likely to generate greater returns for these investors.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn