Hong Kong's technology sector staged a powerful rebound on July 8th, with Chinese tech stocks listed in the city recording their largest single-day gain in 14 months, as global capital rotated from AI infrastructure-related markets towards those with lower valuations.

On Wednesday, Hong Kong's three major indices opened higher and continued to climb, with technology and internet stocks leading the charge. The Hang Seng Index reclaimed ground above the 24,000-point level, while the Hang Seng Tech Index surged nearly 5%. The Hang Seng China Enterprises Index saw an intraday gain of up to 4%, marking its biggest daily jump since at least May 2025.

At the individual stock level, Alibaba Group Holding Ltd (HKG: 9988) stood out with a gain that at one point exceeded 11%. This followed reports that the company had conducted pre-earnings briefings with analysts ahead of its financial report. Analysts viewed the partnership between its Lazada unit and Meta Platforms Inc (NASDAQ: META) as a positive signal for Alibaba's long-term profit outlook, boosting market sentiment.

Concurrently, South Korea's benchmark Kospi index experienced a single-day decline of up to 4%, with Japanese markets also falling in sync. This painted a clear picture of capital rotation across Asian markets.

Drivers of the Rally

The current upswing is being driven by a confluence of factors: a global rebalancing of funds from richly valued markets like South Korea and Japan towards the more undervalued Hong Kong market, a series of catalysts in the AI industry, and a subtle shift in the regulatory policy landscape.

Capital Flows from Japan and South Korea

The core rationale behind the Hong Kong rally lies in this regional rebalancing of global capital. Jason Chan, Senior Investment Strategist at Bank of East Asia, noted that "the relative strength of Hong Kong stocks stems from global funds unwinding paired trades from AI infrastructure-related markets towards undervalued and value stock markets."

This rotation is particularly evident in regional market performance. The South Korean Kospi's 4% drop brings its cumulative decline from last month's peak to 20%, pushing it into technical bear market territory. Its extreme daily swings, exceeding 5%, have left investors on edge.

In the first half of the year, South Korea led global markets on the back of strong profit growth from its chipmakers, while Hong Kong's tech giants performed only better than those in Indonesia.

Wave of AI Catalysts

A series of AI-related developments have provided momentum. Tencent Holdings Ltd (HKG: 0700) officially launched its new-generation large language model, Hunyuan Hy3. Meituan (HKG: 3690) announced the open-sourcing of its trillion-parameter model, LongCat-2.0. Meanwhile, Zhipu AI released and open-sourced its flagship model GLM-5.2, which scored 51 on the Artificial Analysis comprehensive leaderboard, ranking it among the world's top three most advanced open-source models. It also secured the global top spot in the Code Arena evaluation system, which involved over a million users.

On the index front, the inclusion of Zhipu AI and MiniMax in the Hang Seng Tech Index's constituent stocks on June 8th is significant. According to estimates from Soochow Securities, the weighting of AI-related stocks in the index is expected to rise from approximately 25% to 40%, potentially attracting $1.25 to $1.75 billion in passive fund inflows.

Policy Shift Offers Support

A marginal change in the policy environment is also providing support. According to a notice on the website of China's Ministry of Industry and Information Technology, seven government departments jointly issued an action plan to promote coordinated development between large, medium, and small enterprises in the platform economy. Market observers interpret this as a shift in the regulatory approach from "rectification and standardization" towards "empowerment and innovation," which could help alleviate the regulatory uncertainty that has previously weighed on tech sector valuations.

Liu Gang, Chief Overseas and Hong Kong Stock Strategist at China International Capital Corporation (CICC), pointed out in a July 6th research report that Hong Kong stocks have corrected over 30% from their peak last October, with the internet sector falling more than 40%. Some leading stocks have even retreated to levels seen before the "September 24th" market surge. He also noted that the Hang Seng Tech Index's valuation has fallen below one standard deviation of its historical average, while share buybacks by listed companies have hit their highest level since the "September 24th" period. He believes short-term catalysts for a rebound could come from three areas: a pullback in U.S. Treasury yields, regional capital rebalancing driven by volatility in tech markets, and marginal policy changes.

Sustainability of the Rebound in Question

Despite the impressive single-day gains, significant doubts remain regarding the sustainability of this rebound.

The fundamental logic that previously supported the strength of the South Korean market has not fundamentally changed. Samsung Electronics Co Ltd (KRX: 005930) reported on Tuesday that its quarterly profit surged 19-fold year-over-year, indicating that chipmakers' profit growth remains robust. In contrast, domestic internet giants like Tencent and Alibaba have faced earnings pressure due to weak demand, a structural issue that is difficult to reverse in the short term.