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Hong Kong’s bull market is leaving China behind, in a sign that a lacklustre economic recovery and trade tensions with the US have weighed on investor sentiment in the mainland.

Equities in mainland China are flat so far this year, compared with a 20 per cent gain for Hong Kong’s Hang Seng index, the city’s biggest year-to-date outperformance against the mainland since 2008.

Hong Kong’s bull run has been driven by record investment flows from mainland China amid post-DeepSeek enthusiasm for technology companies such as Alibaba and Tencent, which are not listed on the mainland.

But the mainland stock market, which has a greater number of companies in traditional sectors such as heavy industry, property and energy, has sputtered. Deflationary pressures, weak consumer sentiment and falling house prices have hurt investor sentiment for mainland equities, known as A-shares.

“A-shares better represent the broader Chinese economy,” said Dong Chen, chief Asia strategist at Pictet Asset Management. “You look at the broader economy, it is still bottoming but not picking up yet . . . fundamentally, we need stronger stimulus.”

A-shares rallied in September last year after authorities offered support for the stock market. Investors entered 2025 optimistic that Beijing might introduce more fiscal stimulus to boost the economy and markets, but those measures have failed to materialise.

China’s stock market is particularly sensitive to the country’s 200mn or so retail investors. While Beijing has stepped up efforts to encourage institutional investors to buy and hold shares over long periods, retail investors still comprise a majority of trading in the mainland market.

“For the mainland market to take off you need retail to jump in with both feet,” said Ajay Rajadhyaksha, global chair of research at Barclays.

Margin trading in A-shares, used as a proxy for Chinese retail investor sentiment, has been flat since April. Daily turnover on the Shanghai and Shenzhen stock exchanges has fallen after a surge in February following the release of DeepSeek.

Retail investors have been hurt by a years-long drop in house prices after a government effort to rein in property developers’ debt led to the default of several builders. A large share of Chinese households’ wealth is held in property.

During a cabinet meeting last month, Chinese Premier Li Qiang pledged greater efforts to stimulate consumption, improve real estate demand and boost household wealth, but analysts said policies so far this year, including a trade-in programme for electronics, would not reverse sentiment.

“In reality, the stimulus policy support for property and consumption is still limited and narrow,” said Winnie Wu, chief China equity strategist at BofA Global Research, adding that the trade-in programme only “frontloaded” consumption.

Rising US-China tensions have not helped. Juliana Hansveden, an emerging markets portfolio manager at Ninety One, said Beijing could be holding off on more forceful stimulus measures amid uncertainty over trade negotiations with the Trump administration.

Foreign interest in Chinese equities has dropped, although it has become more difficult to measure after authorities halted data on northbound flows in the Stock Connect programme last year. Chinese equity exchange traded funds domiciled in North America and Europe had net outflows of $1.6bn for the year to date, according to a Financial Times analysis.

“For a lot of US-based investors, China is just a no-go,” said Pictet’s Chen.

Some investors point to Beijing’s positive rhetoric around consumption and the private sector, as well as innovative companies trading at attractive valuations, as reasons to be optimistic.

“The real growth might not be across the board, and that’s acceptable. It’s going to be more of a bottom-up opportunity,” said Hansveden, referring to investment strategies that focus on specific companies’ performance rather than the macroeconomic environment.

“China and Hong Kong are the only markets that have not rallied to above pre-Covid levels,” said George Molina, head of Asian trading at Franklin Templeton Investments. “From a valuation perspective it is cheap . . . you can’t ignore it.”