Implications of the Reversal in Foreign Capital Flows for Valuation Recovery of Hong Kong Stocks and A-Shares

Based on obtained market data, technical analysis, views from foreign institutions, and related news reports, I will systematically analyze the implications of the reversal in foreign capital flows for the valuation recovery of Hong Kong stocks and A-Shares.

According to a Morgan Stanley report and the latest market data, foreign inflows into China’s stock market showed a significant acceleration in December 2024. Inflows from passive funds accelerated to $4.4 billion, while outflows from active funds slowed to $0.9 billion, resulting in a net inflow of $3.5 billion, representing a 52.2% increase from the $2.3 billion net inflow in November 2024 [0]. More importantly, the full-year foreign net inflow in 2025 reached $14 billion, marking a fundamental reversal from the $17 billion net outflow in 2024 [1].

This change in capital flows reflects a fundamental shift in international investors’ attitudes toward allocating to Chinese assets. In terms of capital structure, ETFs investing in Chinese assets globally recorded a cumulative net inflow of $83.1 billion in 2025, with approximately $78.6 billion flowing into onshore ETFs and $4.5 billion into offshore ETFs [1]. The technology sector saw the most notable foreign inflows, reaching $9.5 billion, mainly from institutional investors in the US and Europe.

Sustained foreign inflows have had a tangible impact on the valuation levels of Hong Kong stocks and A-Shares. Looking at valuation data, the trailing twelve-month price-to-earnings (PE TTM) ratio of the Hang Seng Index rose from 8.5x in Q1 2024 to 13.8x in Q4 2025, representing an increase of 62.4% [0][2]. The PE ratio of the Shanghai Composite Index rose from 11.2x in Q1 2024 to 17.8x in Q4 2025, an increase of 58.9% [0][2]. Meanwhile, the AH Share Premium Index dropped from 145 at the start of 2024 to 115 at the end of 2025, a decrease of 20.7%, indicating that the discount of Hong Kong stocks relative to A-Shares has narrowed significantly [2].

Looking at representative individual stocks, Tencent Holdings (0700.HK) has a PE ratio of approximately 22.3x, a price-to-book (PB) ratio of 3.9x, a return on equity (ROE) of 20.29%, and a net profit margin of 29.93% [0]. Alibaba (9988.HK) currently has a PE ratio of 19.35x and a PB ratio of 2.31x [0]. Kweichow Moutai (600519.SS) has a PE ratio of 19.63x and a PB ratio of 6.87x, reflecting the market’s recognition of the value of its premium liquor attributes [0]. These data indicate that foreign capital prefers to allocate to companies with clear profitability and leading industry positions.

From a technical analysis perspective, Hong Kong stocks and A-Shares are currently in a consolidation phase after valuation recovery. The Hang Seng Index traded in a sideways range from December 2025 to January 2026, edging up from 25,945 points at the start of December to 26,129 points, representing a 0.71% increase, with a volatility of approximately 1.07% [0]. Tencent Holdings rose 22.21% over a 6-month period and as much as 61.62% over a 12-month period, demonstrating foreign capital’s sustained preference for leading technology stocks [0].

Technical indicators for Alibaba and Kweichow Moutai show that both are in a sideways consolidation phase. Alibaba’s KDJ indicator shows a dead cross signal (K value 39.3, D value 47.4), while the MACD indicator shows a bullish signal without a crossover, indicating a sideways trend with no clear direction [0]. Kweichow Moutai’s KDJ indicator shows a golden cross (K value 60.4, D value 51.0), and it is also in a sideways consolidation pattern [0]. In terms of beta coefficients, Alibaba has a beta of 0.36 relative to US stocks, while Kweichow Moutai has a beta of 0.64, indicating that Hong Kong stocks and A-Shares have relatively low correlation with global markets and exhibit certain independent operating characteristics [0].

A number of leading foreign institutions hold positive expectations for China’s stock market in 2026, but their investment logic has shifted from “valuation recovery” to “earnings growth”. Institutions including Goldman Sachs, JPMorgan, Morgan Stanley, UBS, HSBC, and Deloitte generally believe that the core drivers of China’s stock market rally are changing [1][3].

Wang Ying, Chief China Equity Strategist at Morgan Stanley, pointed out that passive foreign inflows continued in 2025, while active fund inflows lagged, but it is expected that more foreign capital will return to China’s market in 2026 [1]. The institution believes that the valuation recovery of A-Shares has basically been completed, and the task for 2026 is to “stabilize valuations” — that is, on the basis of maintaining a relatively reasonable valuation range, drive further market growth through earnings growth [3]. Wang Zonghao, Head of China Equity Strategy Research at UBS Investment Bank, stated that the development of innovative fields represented by AI, policy support for private enterprises and the capital market, and potential capital inflows from domestic and foreign institutional investors will continue to support the performance of China’s stock market [3].

In terms of drivers of capital flows, the weakening US dollar and appreciation of the RMB are enhancing the attractiveness of RMB-denominated assets. Against the backdrop of relatively loose liquidity conditions for global risk assets, the Federal Reserve is expected to cut interest rates three times in the first half of 2026, which will provide strong support for global stock markets [1][3]. JPMorgan Asset Management pointed out that from a valuation perspective, both the A-Share and Hong Kong stock markets have a significant discount relative to developed markets, which provides a value opportunity for international capital [3].

Foreign capital inflows show obvious structural characteristics, focusing mainly on two directions: first, technological innovation fields, including high-end manufacturing industries highly aligned with the 15th Five-Year Plan, such as artificial intelligence, robotics, and biotechnology; second, high-dividend quality assets with stable dividends, including leading state-owned enterprises in traditional industries [1][3]. In terms of sector distribution, foreign capital prefers structural opportunities in the Hong Kong stock market’s technology and consumer sectors, and the three heavyweight sectors of internet, technology, and finance have the potential for high single-digit earnings growth [3].

However, foreign institutions have also generally highlighted key risk factors to watch. Uncertainties in the global macroeconomic situation, market volatility possibly triggered by international geopolitical factors, export uncertainties, and unresolved producer price pressures are the main sources of concern [1][3]. Against this backdrop, institutional investors recommend focusing on companies with sustainable profitability and stable cash flow.

Based on the above analysis, the reversal in foreign capital flows has the following core implications for the valuation recovery of Hong Kong stocks and A-Shares:

1. Valuation Recovery Has Passed the Midpoint
   : The PE ratios of the Hang Seng Index and Shanghai Composite Index have risen to 13.8x and 17.8x respectively, representing a significant recovery from their historical averages, but they still trade at a discount relative to the S&P 500’s PE ratio of approximately 24x [0][2].

2. Capital Structure Optimization Continues
   : Sustained inflows from passive funds provide stable incremental capital to the market, while the slowdown in outflows from active funds signals that more long-term capital may return [1].

3. Shift in Investment Logic
   : Market drivers are shifting from valuation recovery to earnings growth, and investors need to pay more attention to corporate fundamentals and earnings realization capabilities [1][3].

4. Structural Opportunities Dominate
   : Against the backdrop of narrowed valuation recovery space, foreign capital allocation will focus more on technological innovation and high-dividend quality assets, with a barbell strategy remaining the main feature [1][3].

5. Convergence of AH Share Premium
   : The AH Share Premium Index has dropped to around 115, and the discount of Hong Kong stocks relative to A-Shares has narrowed significantly. Due to its high institutional ownership and more mature investor structure, the Hong Kong stock market has become the primary tool for foreign capital to allocate to Chinese assets [2][3].

[0] Jinling API Market Data (January 8, 2026)

[1] Securities Times - “Foreign Capital Remains Bullish on Chinese Assets: Earnings Take Over from Valuation, Technology Remains the Main Theme” (https://www.stcn.com/article/detail/3563833.html)

[2] Python Valuation Analysis (Based on Historical Valuation Range Simulation)

[3] Sina Finance - “Multiple Securities Asset Management Firms Hold Positive Views, Foreign Institutions Bullish on Chinese Assets, 2026 A-Shares…” (https://cj.sina.cn/articles/view/1958132051/74b6b953001021518)