The Hong Kong dollar's recent movements may carry significant market signals.

On September 23, Hong Kong dollar interbank lending rates surged again, with the one-month rate tied to mortgage lending reaching 3.91107%, up 29.797 basis points. This marks the fourth consecutive day of increases and a four-month high.

Simultaneously, data shows the Hong Kong dollar has appreciated approximately 1% against the US dollar over the past 30 days - such magnitude has occurred only once since 2003.

Additionally, as quarter-end approaches, mainland investors have intensified their purchases of Hong Kong stocks, driving up demand for the Hong Kong dollar. The KraneShares CSI China Internet ETF (KWEB) recorded its sixth consecutive week of inflows, marking the longest streak since February.

Today, Hong Kong's stock market showed overall weakness. How will it perform going forward?

**Hong Kong Dollar Volatility**

On September 23, Hong Kong dollar interbank rates continued their upward surge. The one-month rate related to mortgage lending reached 3.91107%, up 29.797 basis points, marking four consecutive days of gains and hitting a four-month high. The three-month rate, reflecting banks' funding costs, reached 3.73881%, up 18.107 basis points.

Overnight rates reached 4.4525%, up 31.821 basis points; one-week rates climbed 39.69 basis points to 4.69857%, while two-week rates rose 34.952 basis points to 4.63333%. For longer tenors, six-month rates increased 7.47 basis points to 3.49643%, and one-year rates gained 2.631 basis points to 3.41607%.

Notably, benefiting from robust equity fund inflows and favorable money market conditions, the Hong Kong dollar exchange rate has strengthened at a pace rarely seen in over two decades. Data indicates the Hong Kong dollar has appreciated approximately 1% against the US dollar over the past 30 days - such significant movement has occurred only once since 2003.

As quarter-end approaches, mainland investors have intensified their Hong Kong stock purchases, boosting demand for the Hong Kong dollar. Additionally, the KraneShares CSI China Internet ETF (KWEB) recorded its sixth consecutive week of inflows, the longest streak since February. Bloomberg-compiled data shows $142 million flowed into this US-traded fund during the week ending September 19. However, the six-week total of $599 million represents less than one-third of the amount attracted during the six-week period from January to February.

**Long-term Trends Remain Intact?**

This morning, both Hong Kong and A-shares experienced corrections. EPFR data shows foreign long-only funds began selling A-shares and Hong Kong stocks last week, shifting to buy the Nikkei, primarily due to concerns about short-term market overheating. Some analysts believe long-term trends remain unaffected, with short-term corrections providing better entry opportunities. They continue to favor Hong Kong stocks and A-share technology stocks, particularly domestic semiconductors and robotics.

According to Guolian Minsheng Securities data, the Hang Seng Index has outperformed the S&P 500 since 2025 began. Since 1965, the Hang Seng Index has delivered positive returns in 38 out of 61 years and negative returns in 23 years, with positive returns accounting for 62% of the time. Among the 38 positive return years, 35 years outperformed 1-year US Treasury yields, representing 92.1% of positive return years and 57.4% of all years. The index outperformed the S&P 500 in 34 years, approximately 55.7% of the time. Some years' "outperformance" may have resulted from larger S&P 500 declines. After excluding negative return years, the Hang Seng's outperformance of the S&P 500 drops to 29 years, approximately 47.5%.

The decade from 2013 to 2023 represents the Hang Seng Index's worst 10-year performance, with an annualized return of -3.1%, compared to 2.4% for 10-year US Treasuries during the same period. Within this decade, from 2020 to 2023, the Hang Seng recorded four consecutive years of negative returns - the only such streak in its history - with cumulative declines of nearly 40%. The pandemic impact was among the most significant factors behind this four-year bear market. The previous comparable bear market occurred after the 2000 internet bubble burst, when the Hang Seng posted negative annual returns for three consecutive years from 2000 to 2002, with cumulative declines of 45%.

Guolian Minsheng believes that historical data suggests a correlation between US Federal Reserve policy cycles, dollar tides, and Hang Seng Index breakthroughs to new highs. Periods when the US maintains low interest rates tend to favor Hong Kong stock breakthroughs. During several US monetary policy cycles since 2000, the Hang Seng Index has broken through previous historical highs. From current levels, there remains substantial upside potential to new highs.

Recent Hong Kong dollar movements indeed validate this assessment. CITIC Securities believes that from a trend perspective, except for special circumstances in 2019 and 2020, Hong Kong stocks have generally performed well in the short term following rate cuts. Medium to long-term performance depends on whether rate cuts effectively expand China's policy operating space. Looking ahead to this cycle, preventive rate cuts are expected, with US employment cooling but economic resilience persisting. Rate cuts aim to address potential risks. Short-term growth sectors like technology, discretionary consumption, and pharmaceuticals are expected to benefit. Currently, foreign capital has broad room for increased allocation. Against the backdrop of China's growth stabilization policies and fundamental bottoming, Hong Kong stocks' core assets demonstrate prominent allocation value.