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Recently, Chinese markets have shown weakness and sentiment has cooled. Hong Kong's Hang Seng Tech index has continued to fall since its peak last October, having already dropped back to its "924" starting point earlier on. The A-share market has also weakened recently, with the STAR 50 and ChiNext indices both retracing nearly 45% from their late-June highs.
We are not entirely surprised by this performance, at least for Hong Kong stocks. Since late last year, contrary to the various optimistic narratives circulating in the market, we have consistently held a cautious view. The core reason is that the overall credit cycle is oscillating, and in particular the household sector credit impulse is falling, which will significantly drag on market performance, especially for directions with large domestic demand exposure, unless fiscal policy steps up its efforts. This year, as the household credit cycle has continued to weaken and liquidity has tightened substantially, Hong Kong stocks, especially the "enlarged version of consumption" represented by Hang Seng Tech, have continued to underperform, validating our view.
Now that there has been a substantial correction, the question of when or under what conditions the market can bottom out has naturally become more important. When it comes to bottoms, the "924" of 2024 is the most easily recalled memory, not only because it is close enough to us, but also because the bottom lasted longer and was more profound, and because the subsequent rebound was stronger.
Reviewing the cycles of past years, there are some easily overlooked facts about Hong Kong and A-share markets: Hong Kong stocks always peak before A-shares; conversely, Hong Kong stocks also tend to bottom before A-shares; "924" was not the bottom for Hong Kong stocks, whose "true" bottom was at the end of January 2024, leading A-shares by 8-9 months; Hong Kong stocks over the past decade have basically followed a pattern of "one year of repair, one year of big bull, one year of big decline, one year of oscillation"; 2024 was repair, 2025 was a big rally, and 2026 is a big decline. Is this behind mere coincidence, or is there some pattern to follow?
In this article, we analyze the above cycles through comparative analysis to answer the core question of greatest concern in the current market: How will the market bottom out?
The reasons Hong Kong stocks always "lead" A-shares in peaking and bottoming
Leading in peaking is because Hong Kong stocks are more sensitive to the economic cycle, especially domestic demand, while leading in bottoming is because of risk-aversion thinking and dividends. An interesting phenomenon is that in the past five years' two rounds of Chinese market fluctuations, Hong Kong stocks not only peaked before A-shares but also bottomed earlier. This seemingly coincidental phenomenon actually reflects differences in industry structure, pricing mechanisms and capital preferences between the two markets.
First, on peaks: in the last round, Hong Kong stocks began adjusting in February 2021, with internet regulation, real estate credit contraction and slowing corporate expansion suppressing their performance first, but some A-share growth sectors continued until November of that year, a gap of about 8-9 months. The same is true this round: Hong Kong's Hang Seng Tech peaked in October 2025, but A-share tech growth extended until the end of June, also a gap of 8-9 months. The similar time difference in both rounds reflects differences in fundamental exposure and capital pricing mechanisms between Hong Kong and A-shares.
First, industry structure determines that Hong Kong stocks reflect the economic cycle, especially changes in the household credit cycle, earlier, while A-shares rely on the prosperity structure to last longer until new momentum is also exhausted. We have emphasized in several recent reports that Hong Kong stocks, especially Hang Seng Tech, are more like an "enlarged version of the consumption index," with internet, e-commerce, consumer electronics and other pan-consumer sectors occupying high weights, and the Hang Seng Index also including many credit-sensitive sectors such as finance and real estate. Therefore, when household credit contracts and real estate sales and consumer demand weaken, Hong Kong stock earnings expectations and valuations are more likely to come under pressure first. This was the case in 2021, when internet regulation and real estate credit contraction dragged on Hong Kong stocks, while A-share new energy, semiconductors and other high-prosperity industries still supported the continuation of the market. The same is true this round: since the end of 2025, the household credit impulse has continued to decline, dragging on Hong Kong internet and consumer sectors, but A-share AI hardware, computing power and some export chains still have relatively high prosperity, causing the two markets to diverge again.
Second, the offshore market attribute makes Hong Kong stocks more likely to feel "changes in the wind" of risk appetite earlier, while A-shares have their own "independent climate" under an incompletely open capital account. Unlike A-shares, which are mainly domestic capital with certain constraints on cross-border allocation, Hong Kong stocks, as an offshore market, need to continuously compete for capital with other global markets. Therefore, once domestic earnings expectations slow and other markets' relative returns become more attractive, overseas investors may be the first to reduce Hong Kong stock allocations, pushing up the equity risk premium. Taking foreign capital flows as an example, in 2021, after internet and real estate risks emerged, Hong Kong stocks were the first to bear valuation contraction pressure. EPFR data show that overseas active fund inflows began to slow from March 2021 and overall oscillated, and the active fund allocation ratio also reached a high of 13.6% at the end of January that year before declining, turning to underweight from September. This round is similar: the overseas active fund allocation ratio fell from 6.9% at the end of last October to the current 5.7%, but A-share market capital did not show obvious negative feedback until after September.
Next, on bottoms: Hong Kong stocks also seem to bottom before A-shares. 2024 is a typical case. The market usually regards "924" as the starting point of the previous round, but Hong Kong stocks actually bottomed as early as January 2024, about 8 months before "924." But a closer look reveals that this was not an economic or earnings bottom, but investors seeking fixed returns from dividends in an uncertain environment; Hong Kong stocks happen to have a high dividend proportion, which pushed the index to stabilize first—essentially still a risk-aversion mentality.
First, Hong Kong stocks adjusted earlier, more deeply, and had lower positions, all of which provided conditions for stabilizing first. From the perspectives of valuation, dividend yield, risk premium and fund allocation ratio, Hong Kong stocks had already reached quite extreme positions in early 2024. By comparison, although the A-share Shanghai Composite and ChiNext also experienced large retracements in early 2024, they were not as extreme as Hong Kong stocks across various dimensions; for example, the ChiNext risk premium once reached 3.9%, but this position was not as extreme as Hang Seng Tech at that time.
Second, Hong Kong stocks bottoming early was not a fundamental bottom, but precisely a reflection of investor risk aversion. From the end of January 2024, when Hong Kong stocks gradually bottomed until the "924" bottom, sectors led by technology internet represented by Tencent Holdings (00700), insurance and banks and other high-dividend sectors led, but consumer staples and real estate still lagged. The Hang Seng High Dividend Index continued to outperform the Hang Seng Index and Hang Seng Tech throughout 2024; earnings-wise, before the market bottom at the end of January 2024, Hang Seng Index and Hang Seng Tech EPS had not yet risen and were still stabilizing or being revised down, indicating that the market bottom at that time did not stem from fundamental stabilization. On the contrary, the popularity of the dividend strategy precisely shows that investors sought stable returns to avoid risk in an environment of uncertain growth.
In 2024, internet companies' increased buybacks also played a "shareholder return" effect similar to dividends. Tencent Holdings (00700) announced in March a full-year buyback scale of at least HK$100 billion. From February 2024 to "924," Tencent Holdings (00700) rose 39.9% cumulatively, and the Hong Kong dividend index rose 15.8%. Hang Seng Tech's buyback yield once reached as high as 2.4%, and Tencent Holdings' (00700) buyback yield rose from 1.8% in 2023 to 2.9%.
In fact, A-shares were similar: before "924" in 2024, dividend styles and sectors such as telecommunications, nonferrous metals and banks also led. The difference is that Hong Kong stocks have a higher proportion of dividend sectors, higher dividend yields, and insurance funds buying Hong Kong dividends do not need to bear dividend tax, so when the dividend strategy dominated, Hong Kong stocks benefited more and bottomed first.
Of course, some policies specifically targeting Hong Kong stocks may also have played a supporting role, but they should not be attributed as inherent factors.
Why Hong Kong stocks show a roughly "three-year cycle"
The credit cycle determines the trend, while capital supply-demand and trading determine the turning point. Hong Kong stocks roughly show a three-to-four-year cycle. Over the past decade, they have basically followed the pattern of "one year of repair, one year of big bull, one year of big decline, one year of oscillation," commonly known as "one time lasts three years, waiting three years for one time." In terms of turning points, the three important bottoms in January 2016, January 2019 and January 2024 were separated by about 36 and 60 months respectively; the three peaks in November 2017, February 2021 and October 2025 were separated by about 39 and 56 months respectively. This seemingly highly coincidental pattern actually reflects the cross-influence of credit changes, stock price performance and capital supply-demand. Overall, the credit cycle determines the medium-term trend, while capital supply-demand and trading determine the turning point.
The credit cycle is highly correlated with Hong Kong stock performance, with the household credit impulse peak synchronous with or leading the Hang Seng Tech peak by about 12 months. On peaks: the household credit impulse peaked in November 2016, leading the Hang Seng Tech peak in November 2017 by about 12 months; in February 2021 both peaked simultaneously; the household credit impulse high point in June 2025 led the Hang Seng Tech peak in October 2025 by about 4 months. On bottoms: the household credit impulse bottomed in June 2018, leading the Hang Seng Tech bottom in January 2019 by about 7 months; the household credit impulse bottomed in October 2024, lagging the Hang Seng Tech price bottom of January 31, 2024 by about 9 months. But this precisely shows that the January 2024 price bottom was a "dividend bottom" supported by shareholder returns such as dividends and buybacks, not a fundamental bottom.
So why is there a three-year cycle? After the credit cycle turns down, business cycles such as inventory and capacity usually lag the credit turning point by about 3-17 months and continue to decline; policy response also takes time, with a local backstop followed by the credit cycle bottoming in 2 to 16 months, while full-scale efforts can make the credit cycle bottom faster, such as within 1 month. Therefore, the so-called three-year cycle is precisely formed by the business cycle adjustment and the policy response, effort and transmission lags. In the down phase, inventory and capacity peaks lag the credit peak by about 1 quarter to 14 months, and policy from local backstop to full-scale effort can span about 15 months, both of which together lengthen the credit down phase and bottoming process. Taking the 2021-2024 round as an example, after the household credit impulse peaked in February 2021, capacity utilization peaked only in 2Q21, lagging by about 1 quarter; finished goods inventory year-on-year peaked only in April 2022, lagging by about 14 months. Policy response also takes time. In June 2023, the 7-day reverse repurchase rate and MLF rate were cut by 10 basis points successively, and the LPR that month was also cut by 10 basis points, marking the start of local backstops by monetary policy; in January 2024 a reserve requirement cut was announced, and in February the 5-year and above LPR was cut, still a local backstop. Only "9·24" marked full-scale efforts, about 15 months after June 2023; the household credit impulse bottomed in October, with full-scale efforts leading the credit bottom by about 1 month. In the up phase, full-scale policy efforts can make credit bottom quickly, with the inventory bottom lagging the credit bottom by about 10 to 17 months, and the market top basically synchronous with or lagging the credit top by about 12 months. Taking the 2024-2026 round as an example, after the full-scale "9·24" policy efforts, the household credit impulse bottomed in October 2024, lagging by only one month; finished goods inventory year-on-year bottomed only in August 2025, lagging the credit bottom by about 10 months. The household credit impulse formed a stage high in June 2025, and Hang Seng Tech peaked only in October, with the market top lagging by about 4 months.
Primary market financing: highs are basically synchronous with or lag the Hang Seng Tech peak by up to 24 months, with supply landing slower than the market. After the market rises, valuations improve and risk appetite improves, companies' willingness to list and refinance increases, but IPOs need to go through filing, review and issuance, and placements, rights issues and consideration issues also need planning and implementation, so new supply often increases gradually in the mid-to-late stage of the market. After Hang Seng Tech peaked in November 2017, IPO fundraising reached a high only in November 2019, lagging by about 24 months, while post-listing fundraising was basically synchronous with the Hang Seng Tech peak; after Hang Seng Tech peaked in February 2021, IPO and post-listing fundraising reached highs in March and April 2021 respectively, lagging by about 1 month and 2 months. After Hang Seng Tech peaked in October 2025, IPO and post-listing fundraising formed stage highs in July and August 2026, lagging by 9-10 months, but whether this is the final high of this round remains to be confirmed. Financing lows in 2024 lagged the Hang Seng Tech price bottom by about 1 to 7 months, and lock-up expirations further extend supply pressure. After Hang Seng Tech formed a price bottom in January 2024, monthly IPO fundraising fell to zero in February, lagging by about 1 month; post-listing fundraising bottomed only in August, lagging by about 7 months. After IPOs and refinancing are completed, cornerstone investors, controlling shareholders and other restricted shares still need to go through lock-up periods of different lengths, and potential supply formed by previous financing peaks may continue to be released after the market weakens.
Secondary market: southbound and active foreign capital position highs are basically synchronous with the Hang Seng Tech peak and fall after the market peaks. The active foreign capital allocation ratio reached highs in each round in January 2018, January 2021 and October 2025, lagging the Hang Seng Tech peak by about 2 months, leading by about 1 month, and basically synchronous, respectively. The proportion of public fund Hong Kong stock holdings in equity holdings was 36.9% in 4Q17, falling to 32.8% in 4Q18; 23.4% in 4Q20, falling to 15.0% in 4Q21; reaching 32.1% in 2Q25, still 30.4% in 3Q25, and falling to 26.1% in 4Q25. In terms of flows, southbound monthly net buying reached highs in January 2018, January 2021 and April 2025, lagging the Hang Seng Tech peak by about 2 months, leading by about 1 month, and leading by about 6 months, respectively. Active foreign capital monthly inflow highs appeared in January 2018, February 2021 and February 2026, lagging the Hang Seng Tech peak by about 2 months, basically synchronous, and lagging by about 4 months, respectively. In the bottom phase, southbound and active foreign capital position lows were basically synchronous with the Hang Seng Tech price bottom, but the active foreign capital overweight ratio low lagged by about 18 months. The proportion of public fund Hong Kong stock holdings in equity holdings fell to 16.2% in 4Q23 and rebounded to 16.9% in 1Q24, with the low basically synchronous with the January 2024 price bottom; the active foreign capital allocation ratio fell to 5.0% in January 2024 and also bottomed that same month. The active foreign capital overweight ratio fell to -1.60 percentage points in July 2025, lagging the price bottom by about 18 months, after which the underweight narrowed gradually.
In summary, the "three-year cycle" of Hong Kong stocks is not determined by a single variable, nor is it entirely coincidental, but is the result of credit, capital and policy transmitting in sequence. First, the household credit impulse peak is basically synchronous with or leads the Hang Seng Tech peak by about 12 months. After the market cools, secondary market capital and positions clear first, and primary market financing cools afterward, but both have certain lags, especially the latter: active foreign capital inflow highs are basically synchronous with or lag the Hang Seng Tech peak by about 4 months, while primary market financing highs can lag by about 24 months. Second, conversely, when the market weakens, policy from response to effort to transmission also takes time, with local backstop to full-scale effort spanning about 15 months, full-scale effort leading the credit bottom by about 1 month, and the inventory bottom lagging the credit bottom by about 10 to 17 months; the above lags combine to form a roughly three-year cycle.
How will the market bottom out?
Taking "924" as an example: a price bottom formed at the beginning of the year, and "924" drove the repair to spread. How the market bottomed in 2024 is a meaningful reference today. In fact, Hong Kong stocks bottomed 8 months before "924," with a price bottom formed by the resonance of multiple factors such as sufficient valuation and sentiment adjustment, position clearing, and higher shareholder returns; "924" was the key node when policy expectations turned comprehensively, A-shares completed bottom repair and Hong Kong stock repair spread.
Valuation and sentiment: both early 2024 and "924" were more extreme than now. After continuous adjustment since 2021, Hang Seng Tech's forward P/E fell to 12.9 times at the end of January 2024, and the forward equity risk premium rose to 4.3%; on September 16, on the eve of the "924" rebound, the two were 12.6 times and 4.8% respectively. Compared with the current Hang Seng Tech forward P/E of 13.1 times and ERP of 3.9%, they are still 0.4 and 0.9ppt lower than at the end of January 2024 and September 16, respectively. Although Hang Seng Tech has retraced 44% from its October 2025 high, the risk premium has not returned to the extreme level at that time.
Company buybacks: they increased significantly in 2024 but have continued to fall currently. In 2024, Hong Kong stock buybacks amounted to about HK$265.5 billion, up 109% from about HK$126.8 billion in 2023. Among major companies, Tencent Holdings' (00700) full-year buybacks increased from about HK$49.4 billion in 2023 to about HK$112 billion in 2024, and Meituan repurchased about HK$27.8 billion. In contrast, affected by capital expenditure, Hong Kong stock buybacks fell to about HK$179.8 billion in 2025, down about 32% year-on-year; as of October 31, 2026, they were about HK$128.2 billion, down about 42% from the same period in 2024 and about 12% from the same period in 2025. The capital support provided by listed company buybacks is clearly weaker than in 2024.
Institutional positions: currently close to the low points of active foreign capital and public fund positions in early 2024. Under the EPFR measure, active foreign capital allocation to China fell from 14.6% in October 2020 to about 5.0% in January 2024; the proportion of active public fund Hong Kong stock holdings in stock investment market value also fell to 16.2% in 4Q23 and rebounded slightly to 16.9% in 1Q24. As of September 2026, active foreign capital allocation to China was about 5.7%, 0.7 percentage points higher than then; in 3Q26, the active public fund Hong Kong stock holding proportion was 18.3%, 1.4 percentage points higher than then. Overall, current institutional positions are at a relatively low level, close to early 2024, but position clearing has not yet reached the degree at that time.
IPO and refinancing: both contracted significantly in 2024, and are clearly higher now. In 2024, Hong Kong IPO and post-listing fundraising were about HK$88.1 billion and HK$85.8 billion respectively, totaling about HK$174 billion, significantly lower than about HK$780.5 billion in 2021. In terms of monthly fundraising, IPOs fell to zero in February 2024, and post-listing fundraising bottomed in August 2024. In contrast, the primary market supply-demand balance is far from the "bottom area." In 2025, Hong Kong IPO and post-listing fundraising totaled HK$613.8 billion, and in the first 10 months of 2026 it further rose to HK$748.9 billion, including about HK$401.4 billion from IPOs and about HK$347.6 billion from post-listing fundraising.
Policy environment: local backstop measures were already in place in early 2024, but a comprehensive turn came only with "924." In early 2024, policy began to gradually step up: on January 24 the central bank announced a 0.5 percentage point reserve requirement cut; on February 6 Central Huijin announced an expansion of ETF purchases; the securities regulator promoted institutional entry and supported buybacks and increased holdings; on February 20 the 5-year and above LPR was cut by 25 basis points to 3.95%; subsequently on April 19 five capital market cooperation measures with Hong Kong were introduced, and on April 30 the Politburo meeting proposed coordinated research on digesting existing housing and optimizing incremental housing. These measures helped improve market expectations, but overall remained mainly local backstops. Only with the concentrated "924" package of reserve requirement and rate cuts, lower existing mortgage rates and down payment ratios, and support for the capital market and buybacks and increased holdings did policy expectations turn more comprehensively, pushing the market from stage stabilization to broader repair. By comparison, the sharp market decline, credit risks and the seasonally unexpected drop in the October PMI all increased the probability of short-term efforts, such as another round of stock buybacks. But the current fiscal impulse is still relatively weak, especially the policy mix that can effectively improve the household sector balance sheet is still insufficient.
In summary, Hang Seng Tech bottoming first in early 2024 was the result of multiple factors: sufficient valuation and sentiment adjustment, institutional allocation falling to a low level, market preference for dividends, and increased company buybacks. On that basis, "924" drove the market repair to spread through a more forceful policy turn. Compared with then, valuations have not yet reached the extreme level at that time, institutional allocation is close to a low level, company buybacks are fewer and primary market supply is greater. From market conditions alone, low valuation, low allocation and the pursuit of dividends constitute a partially similar situation, but buyback and primary market conditions are still not as good as then, let alone the fundamental policies that truly create a fundamental bottom. This is consistent with our judgment in "What Has Changed Two Years After 924?" Low valuations and oversold sentiment constitute conditions for a short-term rebound, namely odds value, but for an upward reversal the core lies in a substantive improvement in the household credit cycle, which requires fiscal policy to step up further and tilt toward the household sector, recreating a "924 moment."
Source: This article is excerpted from "How Will the Market Bottom Out?" published on November 1, 2026. Liu Gang, CFA, Analyst, SAC license number: S0080512030003, SFC CE Ref: AVH867; Zhang Weihan, Analyst, SAC license number: S0080524010002, SFC CE Ref: BSV497; Zhang Dian, Analyst, SAC license number: S0080525090003.
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