Chinese technology titans are out of the penalty box

Overview

On April 7th, Hong Kong had its most active day in its history with over $US 50 billion in trading volume (in the cash equities). This is a pretty significant milestone for a market that just 20-years ago was lucky to exceed $1 billion on a busy day.

Although, Hong Kong has been known to experience periods of volume spikes over the past two decades, this past year we’ve observed record volumes on a few occasions, and I’m inclined to believe that the elevated trading volume is sustainable.

Periodically, I like to do a deep dive into the market turnover so as to understand whether the investor activity is sustainable. More specifically, I try to determine if the HKEx (0388.HK) is over-valued, under-valued or reasonably-valued.

The HKEx has been very good to me as a trading asset over the years. I’ve been in and out of shorting this stock (in size) at least a dozen times since 2008, as more often than not, the volume spikes are short-lived in my experience.

Currently, the HKEx is trading at around HK$395 per share, and I dare to suggest that it just may be fairly-valued, for the simple reasoning that China’s tech titans (Alibaba, Tencent, and so on) are no longer in the penalty box. Elevated volume is here to stay.

Analysis

The Hong Kong market has been very well managed over the past two decades and has evolved into a very robust financial center. This is best illustrated in the volume growth from a few billion (in USD) in the early 2000s to a steady year-on-year increases to an average of $US10.1 billion in 2024.

As a very retail-centric (with several hundred local brokers) marketplace, there have been numerous periods of “market euphoria” over the years, where trading volume has expanded by multiples. The “China story” began in around 2005 and had its first peak in 2007 (the Hang Seng Index hit 31,000 in Nov ‘07); strong volume returned in 2015 with the launch of the stock-connect, and then again in 2021 with the launch of the bio-tech board.

But, in 2024, trading volume jumped to a new range, with weeks of activity averaging over $US20 billion per day, and several days of broaching $50 billion. I think possibly this could represent a new era where Hong Kong has strong and robust trading.

What’s changed; the CCP’s regulatory crackdown on China’s technology sector, which began in 2020, now appears to be over. This appears evident in the trading activity.

Most Active Stocks

The distribution of trading in Hong Kong has shifted from its historical concentration in financial services (HSBC, BOC, CCB, and so on) and property (Wharf, Cheung Kong, SHK) into a technology-focused marketplace.

On April 7th, when the market hit a record high in turnover, the activity was led by the technology titans: Tencent, Alibaba, Xiaomi, Meituan, SMIC, JD, and BYD accounted for over $25 billion of the total turnover.

For the time being, Chinese technology firms are back in fashion, and I don’t think this is a fad. Wherever you look in China, whether it’s TikTok, XPeng’s flying cars, DeepSeek AI, Huawei’s Harmony OS, or the range of EV vehicles, its hard to deny China’s leadership.

Trends in Global Market Volume

We should take pause and consider the relative size of the Asian financial markets, which are only a minority of the global markets. Trading volume has been growing steadily in most major markets for the past decade, with the most notable the US equity markets, which average over $US500 billion of daily trading, and periodically have exceeded $1 trillion on a given day. The Asian markets still represent less than 20 percent of the US markets turnover.

The US, however, is a special case given the depth of electronic commerce networks (ECNs), high-frequency market makers (HFTs), and equity trading funds (ETFs), which although are present in other regions, the US is at a different magnitude of scale.

On a relative volume comparison level, in the past 20 years, trading activity in the US has grown 8x (800%), Hong Kong around 6x, and Japan 3x and Australia 2.5x.

Nevertheless, I would suggest the growth in Hong Kong has been impressive, given that our market structure (trading costs due to stamp taxes) restricts the participants of HFT, which are in excess of 70 percent of the US turnover.

Concentration of Liquidity

I am concerned about the concentration of liquidity as turnover occurs in a minority of the market. In Hong Kong, the top-20 stocks represent over 60 percent of the turnover, and on peak trading days, such as April 7th, they were 72 percent.

Percentage of Turnover in Top 20 Most Active Stocks

Having said that, concentration of liquidity is consistent around the globe now. I would attribut this aspect of the markets to the growth of ETFs and passive trading.

ADV Valuation of HKEx

Anyway, in terms of investing or trading opportunities, I’ll return my attention to the HKEx, which should be recognized as among the most profitable financial services firms in the world. For every trade, they earn a settlement and clearing fee, and if I recall, the profit market based on turnover has always been over 70 percent.

Correspondingly, the HKEx is among the most volatile stocks in the HK market; whenever volume spikes the HKEx rallies. The HKEx has doubled and retreated on several occasions in the past decade.

For many years, I’ve been using a crude model of comparing the 30-day volume weighted share price of the HKEx to the 30-day average daily volume (ADV) as a reference for the valuation of the HKEx. The relationship is statistically significant, and provides a reference for a “fair value” price level.

That is, in my analysis, the share price of the HKEx typically reverts to the annual average ADV, albeit there can been long periods of deviation. Thus, for a 12-month average daily volume of $US6 billion, I’d forecast the HKEX’s valuation of $200.

Since Sept 2024, I would estimate the ADV in Hong Kong at $US12.95 billion, and thus the potential valuation of the HKEx at the $430 range.

The Outlook for ADV

But, the situation changed last year in Oct 2024 after the CCP’s policy announcements on National Day, and we moved into a new gear where ADV has broken away from it’s previous decade range.

The multiple of growth in trading activity could not be attributed to speculation from HK’s community of retail investors. The change in policy must have attracted new participants.

Considerations

Although, we are still in the early days of this new era, and we’ve only had two periods of huge market activity (Oct 2024 and April 2025), I think there are a few factors that would suggest we may have sustainable higher volume in the coming years. At least to shift from a $US6 billion range to above $US10 billion average.

Firstly, the market appreciation of the China technology sector is the most compelling. If the top-6 Chinese technology firms manage to hold their current valuations, we will likely see over $20 billion in turnover, which is just 1% to 2% of their market capitalization. There’s a lot of new developments to be excited about in China tech, and on a relative valuation to the US tech sector, they remain less than 10% of the US market capitalization.

Secondly, Hong Kong cash deposits increased by over $US200 billion in 2024 to a record high of $US2.26 trillion. The SAR remains an important and growing destination for Chinese wealth. As the property sector has become stagnant in recent years, its likely that investor will have a preference for the stock market, with the technology sector being their priority.

Lastly, and often overlooked, would be the potential return of foreign investors. We haven’t had any significant foreign investment flows into Hong Kong since prior to the global financial crisis, when many liquidated their Asian operations to concentrate on domestic markets. They used to represent 25 percent of our turnover.

These three factors alone would suggest that our market volume in the next five years will be significantly stronger than the previous years.

Anyway, this is intended as an opinion piece, as trading volume rarely attracts attention of the traditional investment analysts community.

$US50 billion is a big milestone, and I’d just like to acknowledge and congratulate the Hong Kong market participants. Good job!

Appendix - HK Market Volume Outlook Jan 2024

This is a publication from Jan 2024 when the HKEx was trading around $230, and I had high conviction at the time. This article has additional commentary on the global market volume, and further embellishes on framework discussed above.