Hong Kong stocks outperformed their mainland counterparts, the largest profit margin in nearly two decades as they poured from China into China due to concerns about the domestic economy and enthusiasm for the territorial technology stocks.
The benchmark Hang Seng index grew 16.4% this year, while the CSI 300 index in mainland China fell 1.2%, its largest performance year to date since 2008.
The rise of Chinese startups, which claimed that AI uses much less computing power than U.S. competitors, has encouraged investors to have interest in Hong Kong-listed technology stocks.
The territory's stocks are more pronounced than mainland stocks after U.S. President Donald Trump's "Liberation Day" tariffs in April, which has also been helped to ease tensions in the U.S./China trade war.
The rally was flowing into Hong Kong at a record high level from mainland China.
"Most of the running volume in Hong Kong is driven by Operation South (from the mainland) this year," said James Wang, head of China's equity strategy at UBS.
"Many of them are driven by AI trading," he added, noting that Hong Kong's AI stock ratio is higher than that of the mainland.
Wei Li, head of China's multi-asset investment at BNP Paribas, said Hong Kong's performance also "causes fundamental differences in market composition."
“Hang Seng Index’s weight on the global liquid sector, such as technology and finance, allows it to leverage the Fed’s dirty hub and a new appetite for Chinese tech stocks.”
Chinese technology companies such as Tencent and Alibaba are listed in Hong Kong and the United States, but not in the mainland. Alibaba first used it to mainland investors in September after the company went public in Hong Kong.
China's President Xi Jinping's meeting in February was also considered a positive for mainland and Hong Kong stocks, but especially for the latter stocks.
"Investors believe the government is moving again for the technology sector," said Tai Hui, chief Asian market strategist at JPMorgan Asset Management.
China's economy has been hit hard by the collapse of the real estate market and the trade war with the United States, which has helped Hong Kong surpass its performance.
“There are widespread concerns about China’s domestic economic weakness,” said Andrew Tilton, chief Asia-Pacific economist and head of EM economic research at Goldman Sachs.
Hong Kong may benefit from any transfers in which U.S. stocks enter other markets and further lower tax rates in the second half of the year, JPMorgan’s Hui said.
Hui added: "Hong Kong is collecting capital from Chinese and international investors" because overseas investors are more likely to buy stocks in the city than mainland China.
According to UBS's Kingdom, international currencies flowing into Hong Kong appear to come from shorter investors, such as hedge funds, rather than long-term market participants such as pension funds.
"I wouldn't say there's a lot of long money back to the Chinese stock market right now," he added. "In China, investors have burned down for a long time."