After a few tough years, Hong Kong’s stock market has finally made a big comeback.
The Hang Seng Index rose 22% since the start of this year, making it one of the best performing markets in the world.
So what’s driving the Hang Seng Index?
Background
Before 2025, the Hang Seng Index looked gloomy.
After reaching its peak in 2021, the Hang Seng Index went into a bear market – China’s real estate bubble burst, the COVID-19 pandemic slowed China’s economy, and foreign investors lost faith and moved their money either to the US or Japan, where AI and tech stocks were hot.
By 2024, Hong Kong stocks were trading at just 10x PE ratio – super low prices. In fact, this was far lower than its 16x PE ratio back in 2021.
What’s more, some of Hang Seng’s biggest tech giants like Tencent and Alibaba were trading at low mid-teens PE ratio, which is unusual for technology and telecommunication stocks.
The market was clearly undervalued. Yet it took at least four years before seeing a correction.
What sparked Hong Kong stocks’ rebound in 2025?
My personal view is the rally we’re seeing now actually started in September 2024. That’s when the Chinese government announced a large stimulus package to revive the sluggish economy in the post-pandemic era.
While this stimulus package stands for “926”, it’s a sign that the Chinese government was getting real about kickstarting the economy.
Investors realized Hong Kong stocks were just way “too cheap” to ignore.
And started to increase their exposure to Hong Kong stocks – confidence returned, money flowed in again.
Since then, the Hang Seng has been on a strong rebound. Since then, the rally has unfolded into three phases.
Stage 1: The DeepSeek and Ne Zha 2 Effect
Now, two big events early in 2025 pushed the Hang Seng Index higher.
First, the Launch of DeepSeek AI before Chinese New Year. This was China’s answer to US artificial intelligence.
It proved China could also develop powerful AI at relatively low cost. Investors suddenly saw Chinese tech in a new light. Since then, advanced AI is no longer exclusive to the US.
This led to a revaluation in China tech stocks.
Next, Ne Zha 2’s movie success.
The launch of Ne Zha 2, a domestic folk tales cartoon in China also showed the country’s massive potential in the creative industry and consumer market. The movie smashed box office records.
It became the highest-grossing animated film worldwide and the first animated film to cross the $2 billion mark.
Both events energized Hong Kong’s stock market, driving the tech and consumer stocks higher. At this time, the Hang Seng Index hit a 3-year-high, challenging naysayers on the death of Asia’s biggest financial hub.
Stage 2: Quick recovery after “L-Day”
Then in April 2025, newly elected President Donald Trump announced new tariffs on many countries, including China.
Although global markets tumbled when Donald Trump announced his “reciprocal tariffs”, the Hong Kong market quickly recovered when US and China started the negotiations later that month.
Although both superpower countries imposed a series of retaliation after Liberation Day – having raised tariffs to 145% and 125% respectively, investors got less concerned and were tired of the relentless and meaningless increases in these huge levies.
When more practical negotiations started, markets believed the worst of the trade war was over.
Stage 3: The Biotech boom fueled by Pfizer
The third phase came from the healthcare sector. Pfizer, a major US pharmaceutical giant, signed a licensing deal with Chinese biotech company, 3SBio (SEHK: 1530). This was another DeepSeek moment, which sparked a biotech rally.
Shares of biotech and innovative drug makers jumped, just like the tech and consumer stocks in Hong Kong earlier in the year.
This drove the Hang Seng Index even higher.
What’s next for Hong Kong’s stock market?
After six to nine months of rally, I believe the rally still continues.
Domestically, people take reference to HIBOR, the Hong Kong Interbank Offered Rate to see the supply and demand of the Hong Kong dollar.
Since May 2025, there has been an abnormal trend in HIBOR as it dropped to lower than 1% for the first time in recent years. As the domestic property market remained sluggish, the movement in HIBOR may imply a huge capital inflow for equity investment.
Simultaneously, the business performance of Hong Kong Stock Exchange hit record high, with an average trading volume of over HK$200 billion, which is close to double that in 2023 and the first half of 2024. These are strong signs investors still believe in the Hong Kong market.
Risks to watch
Having said that, there are a couple of risks I’m seeing. First, China’s economy may still be fragile. If domestic spending stays weak, the recent rebound could lease steam.
Also, US-China political tensions remain. I’m not surprised if short-term shocks will continue to hit markets.
Lastly, with the tech and biotech sectors booming, any unexpected government crackdowns – like what we saw a couple years back to the property and education sectors – could return.
My final thoughts
From doom and gloom to a strong rebound this year, the recent rally is driven by changes in both fundamentals and sentiments of China – new AI technology, unfolding of creativity in its movies, biotech development and more. Perhaps, it’s a good time to look at opportunities in the world’s second largest economy, with its recent rally driven by fundamental shifts in the economy. Perhaps, the rally might not just be yet over.
