Why I’m Changing My Top 2025 Call to Mainland Chinese Stocks

I said in my year-ahead look at Asia for 2025 that I would be waiting for an entry point into Indian equities, which have been correcting since late September. That point has not yet come.

Besides indicating that I would continue to hold Taiwan Semiconductor Manufacturing Co. TSM (TW:2330) as a long position, I made India-focused exchange-traded funds (ETFs) my “buy” call for the year. I do believe they will rebound, but India is experiencing outflows from global investors, and the economy continues to slow. The central bank has room to ease now inflation is moderating, but any rate cuts will take time to have an effect. So, hold fire on India and India consumption plays for now.

I’m changing my call at least for the first half of this year, to suggest that U.S. investors look at mainland Chinese stocks, particularly those listed in Hong Kong. They are surging broadly on the “DeepSeek effect,” with growth and particularly tech equities strongly in favor. It has been a remarkable change in momentum for a sector that was drifting to a low point on January 13.

The highest-quality Chinese tech plays are now listed in Hong Kong. That’s an easy market for international investors to access, and mainland investors can also now pump money across jurisdictions from the Shanghai and Shenzhen markets into Hong Kong stocks via the “Stock Connect” system.

We are seeing exceptionally strong flows in that mainland money. Chinese cross-border investors bought a net HK$22.4 billion ($2.9 billion) in Hong Kong stocks on Tuesday, for instance, the most since early 2021. That marks the fourth-largest flows on record, Bloomberg tracking indicates, since the Stock Connect link started in late 2016. Wednesday's numbers aren't quite as high but still show strong southbound demand.

It is not entirely DeepSeek that is driving the momentum, although it certainly helps. The rally began after President Donald Trump took office. The second Trump presidency is one of those “truth is stranger than fiction” moments for Chinese companies, since the self-proclaimed “Tariff Man” first walked back a threatened 60% import tax on Chinese goods down to 10%, then said he’d really rather not impose tariffs on China at all.

Trump is due for another call with Chinese President Xi Jinping, after they spoke shortly before Trump took office. I would expect a trade deal in the offing, given Trump’s attempts to keep that relationship sunny. Xi, meanwhile, hosted China tech bosses at a symposium on Monday that signals his eagerness to regain the trust of entrepreneurs after a Big Tech crackdown.

So, Hong Kong stocks were rallying before the “DeepSeek moment” hit U.S. markets on January 27, the Monday when Nvidia NVDA plunged 16.9%, dragging the Nasdaq down 3.1%.

The Hong Kong market was already up 7.2% since the week before Trump’s inauguration. Now the gains have been supercharged coming out of the Lunar New Year trading break at the end of January.

The upshot is a rapid increase in the prices of the so-called “H-shares” as a whole, mainland Chinese companies that are listed in Hong Kong. The gains are most pronounced in the growth-oriented tech darlings that captured the imagination of global investors when China was posting a double-digit pace of annual economic growth. But the broad market has followed the same pattern.

Consider that the most-popular purchase in terms of volume on Tuesday was the broad-market Tracker Fund of Hong Kong (HK:2800). This is an ETF set up in 1999 by the Hong Kong government in the wake of the Asian financial crisis, as a way to offload positions the government and its central-bank equivalent, the Hong Kong Monetary Authority, had acquired in a bid to stem the market hemorrhaging at that time.

It now tracks the Hang Seng index as a whole. The ETF drew 10.5% of the buy volume for Tuesday, overall trades almost exclusively purchase orders. On the other hand, the largest individual stock in Hong Kong, Tencent Holdings TCEHY HK:0700, in fact saw net selling at least from Shanghai investors on Tuesday after the stock had a very strong Monday.

Tencent shares are at their highest level since 2021 after the company started deploying DeepSeek on Tencent’s WeChat social-media platform. That’s driven Tencent up 19.7% year to date, and a whopping 36.0% since that January 13 low. Its Tuesday high saw Tencent retest levels it last saw in 2021, when a post-pandemic surge proved too early and too optimistic about China’s pace of recovery.

Tencent’s performance is impressive but not exceptional. It is almost matched by the Hang Seng Tech index as a whole, which has gained 34.1% since January 13. And while the purchasing fervor may be favoring China tech, the broad-market rally is also including other mainland sectors.

The Hang Seng index as a whole has advanced 21.4% since January 13. The Hang Seng China Enterprises index, comprising only mainland-based companies, slightly outpacing that, with a 23.6% advance in the same timeframe. As I noted in my 2024 review, the China Enterprises index was the surprise outperformer in Asia last year.

There are far fewer Hong Kong-specific ETFs listed in the United States. Neither the iShares MSCI Hong Kong ETF EWH, up 1.9% year to date, nor the Franklin FTSE Hong Kong ETF FLHK, up 1.8%, have isolated the effect of mainland-specific companies listed here.

Your best bet would be to look at the KraneShares Hang Seng Tech Index ETF KTEC. It is matching the rally, up 24.0% in 2025. Chinese investors are very momentum driven but the wind is currently behind that ETF’s sails.

There isn’t a broad-market Hang Seng index tracker listed on U.S. exchanges. That would leave investors attempting to buy the Tracker Fund or similar ETF in Hong Kong. Bolder investors can look at the U.S. listings of specific China stocks.

Prominent members of the Hang Seng China Enterprises index that are also listed in the United States include: Alibaba Group Holding BABA (HK:9988); its rival JD.com JD (HK:9618); video-game empire NetEase NTES (HK:9999); and online travel agency Trip.com TCOM (HK:9961). It’s also worth a look at Temu app parent PDD Holdings PDD, a rare major China tech play yet to list in Hong Kong.

There are both ethical and practical concerns for U.S. investors seeking to play this rally. I noted back in November that the political crackdown in Hong Kong makes it hard to justify holding Hong Kong stocks. Beijing has taken firm control, all political opposition has vanished, and 45 pro-democracy politicians were in November sentenced to up to a decade in prison for holding an unofficial primary. Their attempts to get elected and disrupt the current administration were ruled not “opposition politics” as they would be in the West, but instead “subversion” and a desperate threat to national security.

I do currently hold positions in three Chinese electric-vehicle makers, with my biggest position in BYD BYDDY (HK:1211). But I have deliberately done my buying in the United States, avoiding my home market here in Hong Kong. So, the rally in China tech poses a moral quandary. It's a question of conscience.

Long-time China skeptic Carson Block isn’t having any of it. The hedge fund manager, who runs Muddy Waters Capital, said in a Bloomberg interview in Singapore on Tuesday that he has been “banging the drum about for 15 years” that you can’t trust the accounting of Chinese companies. What’s more, there’s the political risk of an invasion or blockade of Taiwan, he added.

He does admit, though, that the momentum is with China stocks, noting he “wouldn’t stand in front of this train at this point in time.” Momentum traders can hop on.

Block’s next destination? India. He’s looking to explore a fund focused on Indian stocks. Mind you, his history of uncovering questionable accounting suggests some Mumbai listings may be in for severe scrutiny if Block follows through.