China and Hong Kong equity markets have emerged as the best performers, with the CSI 300 Index and Hang Seng Index rising ~20-30% year-to-date. Meanwhile, both bond markets have recorded substantial inflows. In China’s onshore market, the 10Y CGB yield touched 1.65% in May before rebounding to around 1.87% recently, while USD/CNY strengthened from 7.35 in 1Q25 to about 7.10. In Hong Kong, the HKMA 10Y EFB yield declined to 2.98% as of yesterday, with the spread against the U.S. 10Y Treasury narrowing from around –100bps at end-2024 to –120bps.
We see a few key catalysts at play:
First, we see renewed foreign investor interest. According to the IIF, non-resident investors purchased a net USD 22 bn in equities and USD 101 bn in debt between May and August. Foreign ownership outstanding have also rebounded from the trough of 2023. In fact, we note that foreign financial institutions (FI) have already well-positioned in Hong Kong since 2024. The number of foreign FI regional headquarters in Hong Kong jumped to 300 from 248 in 2023 after staying side-way since 2018. As trade tensions and global fiscal concerns persist, investors are seeking alternatives to the USD and traditional developed market assets.
Second, monetary easing is rendering support. While economic fundamentals remain weak, incremental liquidity is flowing into both bonds and equities—seeking stability in the former and higher returns in the latter. Beyond the LPR and RRR cuts in May, the central bank has continued injecting liquidity through open market operations. As a result, front-end rates such as DR007 and R007 have fallen from around 2% in 1Q25 to roughly 1.5% in 3Q25.
There are signs of rotation from bonds into equities. The first half of 2025 was characterized by heavy inflows into China’s bond market. According to EPFR, bond funds received USD 22 bn in 1H. As yields fell, investors with stronger risk appetite took profits on long-end onshore bonds and rotated into equities in search of higher returns. The implication is that long-end yields may see upside bias, while short-end rates will stay anchored. The curve is likely to steepen further.
Meanwhile, P/E ratio of China/HK equities are expanding alongside ample liquidity. China’s M1 growth returned to positive since Dec-24, and P/E ratio of CSI 300 jumped from 15.2x to 18.6x. Meanwhile, the correlation over the past 5 years between China’s M2 YoY growth and the 24-month lagged performance of the HSI and HSTECH is 0.60x and 0.80x, respectively. This indicates that the incremental liquidity from onshore aids Hong Kong’s stock market performance with a time lag. 
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