In recent months, a series of policies have breathed new life into China's financial markets, captivating global investors once againThe momentum gained is substantial, and there's a palpable sense of competitiveness as China’s stock market endeavors to match its historical highs set by other global markets.

The Hang Seng Index has experienced remarkable performance, boasting an annual gain of nearly 30%. It stands out, leading both the Hang Seng Index and the Hang Seng Tech Index when pitted against China's A-sharesDespite the A-share market witnessing a significant surge, hitting circuit limits of over 10% for two consecutive days, its recovery remains lagging compared to Hong Kong's stock market indices, indicating that the latter holds the upper hand in this competitive landscape.

Historically, Hong Kong's stock market has been perceived as rather challenging to invest in; if A-shares represent a moderate level of difficulty, Hong Kong's market can be likened to a hellish ordeal

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Valuations for identical companies tend to depreciate by around 20% the instant they are listed in Hong KongMoreover, numerous firms report losses, a trend commonly seen within the majority of Hong Kong listed companiesThis challenging environment is exacerbated by strict requirements regarding dividends, growth rates, net cash, and liquidity.

Another contributing factor to this phenomenon is that many companies listed in Hong Kong are not localWith a scarcity of domestic currency holders, the primary market participants are foreign investors and mainland capitalAs these foreign investors profit, they typically convert their earnings back into U.SdollarsSimilarly, profits garnered by mainland investors frequently revert to Chinese yuanConsequently, Hong Kong-listed stocks often seem sidelined, reacting strongly to negative changes in both foreign and local policies, while failing to reflect positive incentives appropriately.

This cycle of undervaluation has persisted for years, with no corrective adjustments observed, resulting in Hong Kong stocks reaching their lowest valuation in a decade within 2023. However, the suppressed state creates a spring-like potential; it’s highly likely for stocks to bounce back vigorously, given favorable market conditions.

Even prior to this recent policy shift, the Hong Kong market was already paving its own way, decoupling and distancing itself from A-shares in terms of performance

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According to mid-range growth metrics, the Hong Kong market was consistently outperforming A-shares, indicating a pre-emptive bullish sentimentThis bullish trend in Hong Kong was not merely a reaction to catalyzing policies but was rooted in a larger perception that the Hong Kong market represents more accurately the trends within China’s capital landscape.

What factors have contributed to this turnaround? Is Hong Kong still positioned to lead the market? To explore these questions, we can begin by examining a crucial element: share buybacks.

From a fundamental standpoint, both markets primarily mirror the Chinese economy; a considerable portion of the state-owned enterprises is dual-listed in both marketsThus, performance trends tend to align significantlyHowever, analyzing the first half of this year, discrepancies in growth rates have emerged, with Hong Kong showing a notable increase compared to its mainland counterpart, generally surpassing A-share performance by a few percentage points

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Excluding the anomalies from Alibaba's fiscal year schedule, overall profit growth across Hong Kong-listed companies stands at approximately 4%, contrasting sharply with the negative growth observed in A-shares.

Leading factors behind performance divergence can be attributed to sizable profit generators and disappointing outcomesFor instance, while the overall profit growth of A-shares hangs in negative territory, the Hong Kong market showcases positive growth facilitated primarily by tech giants such as TencentDespite Alibaba facing substantial decreases, significant contributions from Tencent and Meituan offset these declines, leading to a positive profit trajectory overall.

Nonetheless, pressures persist in the Hong Kong market, especially from substantial losses reported by numerous real estate firms

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However, many of these companies are also demonstrating reduced losses year-on-yearA similar trend is also reflected in A-share sectors, particularly within solar energy stocks, which appear to be grappling with challenges analogous to those faced by real estate firms.

Ultimately, the stellar performance of major internet companies seems to be catalyzing Hong Kong's overall resultsIn the face of positive growth rates, combined with Hong Kong's favorable valuation metrics, it only seems justifiable for the market to rally stronger than A-shares.

Comparatively speaking, Hong Kong's performance still lags behind the U.Sstock market—where profit growth rates hover around 10%—leading to an anticipated boost in profit forecasts for 2024 as currency depreciation begins to level off

Companies in the Hong Kong market have also delved deep into buybacks, now exceeding 200 billion HKD, pushing overall dividend yields to above 4%—a remarkable figure on a global scale.

A vast majority of buybacks stem from private enterprises, implemented not only to stabilize their stock prices but also as a realization of best practices adopted from the U.SmarketsThese buybacks function as pivotal avenues for returning shareholder value while enhancing profitability levelsMany U.Scompanies have utilized buybacks to minimize share count, effectively boosting earnings per share (EPS), thus demonstrating dual benefitsFor instance, Meituan executed a substantial buyback during a price dip, acquiring around 200 million shares and spending close to 20 billion HKD, ultimately generating returns equivalent to 40 billion HKD at present valuations

This strategic decision significantly bolstered the company’s market position.

Such buybacks have been frequent, often surpassing current profits, with notable players like Alibaba, JD.com, and Meituan all committing more to buybacks than their semi-annual earningsThis clearly reflects their outlook—capable of deploying capital wisely during these lower-price intervalsIn contrast, A-share buybacks have only reached approximately 130 billion HKD thus far, trailing behind that of Hong Kong despite A-shares collectively being valued at double Hong Kong’s market capThis scenario further illustrates the stabilizing effect of these buybacks within a regularly declining A-share market while Hong Kong has continued to maintain its values.

While the buybacks of individual companies have yet to bring about sweeping benefits across the broader market, their positive impacts on respective stocks remain evident.

Thus, the trends emerging from Hong Kong in comparison to A-shares lean towards a model reminiscent of the U.S

market, where large corporations drive significant price increasesReturns on a select group of stocks, particularly those engaging in substantial buybacks, have fared better than the overall Hong Kong indexCurrently, only about 25% of stocks have outperformed the broader index—pointing towards a greater likelihood of larger cap stocks achieving better performance than the general index.

Hong Kong is then evidently embracing a model similar to the large-scale buyback strategies characteristic of U.SequitiesHowever, continued observation is essential to recognize if such buybacks will become a regular practice; that consistent buyback behavior holds the key to Hong Kong's long-term bull market evolutionIn the U.S., companies often allocate hundreds of billions annually toward buybacks irrespective of market conditions—a stark contrast to Hong Kong's more flexible approach, whereby buybacks are influenced by market performance, may prove detrimental to future stockholder returns.

Furthermore, evaluating the broader context, the current ascendancy of Hong Kong's stock market is justified, suggesting the potential for these stocks to reach historical highs in this ongoing bull market

However, whether Hong Kong can shake off its historical label as a 'hellish' market ultimately hinges on the commitment of companies to engage in consistent dividend payments and stock buybacksIf companies refrain from buybacks due to perceived high valuations, the market sentiment may quickly diminish, leading to deteriorating valuations and subsequent volatility.

In contrast to A-shares, the potential maximum trade volume in Hong Kong is tangible; A-shares, however, present an opportunity for significant influx of capital to push prices upward, with indications of substantial short-term volatilityYet, the core of this difference lies in the sustainability of earnings; with A-shares currently facing negative growth, the prospect for recovery appears dimAlthough short-term forecasts remain unpredictable, projecting over a timeframe of two to three years could very well reveal that Hong Kong stocks may reclaim superiority in performance over A-shares.