Short squeeze trading in Hong Kong stocks and pair trading coexist, while US stocks regain momentum in AI trading

Author: CITIC Securities Research

Summary

This week, the central bank governor Pan Gongsheng stated that the proportion of foreign reserves allocated to assets in Hong Kong will continue to increase, driving a significant rebound in Hong Kong stocks for the second consecutive week. Currently, the proportion of short positions in Hong Kong stocks has slightly decreased from the mid-June peak to 2.43%, but it remains above three standard deviations from the historical average. With internal and external disturbances gradually easing, a significant pullback is expected in the future.

However, there are also noticeable signs of pair trading in Hong Kong stocks recently. In the short term, we still recommend focusing on sectors with high certainty in fundamentals and event catalysts, including: innovative drugs, aviation, robotics, and metals with strong industrial properties.

In the U.S. stock market, the momentum of AI-related trading has significantly returned this week. The stock price of SK Hynix rose after its listing in the U.S., confirming the continued heat in the AI hardware supply chain. Meta's expansion of data centers and Amazon's bond issuance confirm that the capital expenditure of tech giants remains resilient, effectively alleviating market concerns about a slowdown in investments in the AI sector.

We expect the U.S. stock market to maintain a fluctuating upward trend and recommend focusing on: software, military industry, energy infrastructure, and financial sectors.

Foreign Reserves Will Continue to Increase Asset Allocation in Hong Kong

According to the central bank's official website, on July 7, the People's Bank of China, the Hong Kong Monetary Authority, and the Hong Kong Securities and Futures Commission jointly announced 11 new measures to further deepen financial market cooperation between Hong Kong and the mainland, aimed at improving the construction of Hong Kong's fixed income and money markets, as well as supporting the arrangement of Hong Kong as an offshore RMB hub.

In his speech, Pan Gongsheng, the governor of the People's Bank of China, stated that the central bank will work with the local government and financial regulatory agencies in Hong Kong to build, consolidate, and develop Hong Kong as a financial center. He mentioned that the national foreign exchange reserves will continue to increase the proportion of asset allocation in Hong Kong, injecting more momentum into the development of Hong Kong's capital market.

This statement was first mentioned by Governor Pan Gongsheng at the 18th Asian Financial Forum in 2025, after which Hong Kong stocks welcomed the second round of increases since September 24, with the Hang Seng Index rising nearly 30% within 45 trading days.

According to the annual report of the State Administration of Foreign Exchange, the currency structure of China's foreign exchange reserves shows a higher degree of diversification and dispersion compared to the global average; from the perspective of returns, the average yield of China's foreign exchange reserve investments reached 3.2% from 2010 to 2019. In the Hong Kong stock market, the TTM dividend yield of the Hang Seng High Dividend Yield Index currently stands at 6.0%, clearly demonstrating a strong yield advantage.

Short Squeeze Trading and Pair Trading in Hong Kong Stocks

In the past two weeks, the leading sectors in Hong Kong stocks have mainly been those with the highest proportion of short positions, such as healthcare (4.07%), consumer discretionary (3.03%), and technology (2.83%).

Overall, although the proportion of short positions in Hong Kong stocks has slightly decreased from the mid-June peak to 2.43%, it remains above three standard deviations from the historical average. With internal and external disturbances gradually easing, we expect a significant pullback in the future.

However, since the overall rebound of Hong Kong stocks on June 29, the A/H premium index has expanded by 2.1%, especially for H-shares, where the premium rate of recently premium stocks has significantly narrowed, including companies like Lattice Semiconductor, Zhaoyi Innovation, and CATL. Coupled with recent signs of RMB appreciation and continued outflows from southbound ETFs (which have cumulatively flowed out 125.6 billion yuan since March 5), we also highlight the impact of pair trading on H-shares.

In the short term, we still recommend focusing on sectors with high certainty in fundamentals and event catalysts, including: 1) innovative drugs (resilient performance + buyback support + overseas business development); 2) aviation (peak travel season + falling oil prices); 3) robotics (catalyst for expected mass production of Optimus); 4) metals with strong industrial properties (high growth in performance + easing interest rate expectations).

This Week, the Momentum Trading of AI Computing Power in U.S. Stocks Has Revived, and Market Risk Appetite Has Increased

The information technology, energy, and communication services sectors led the gains, with the Philadelphia Semiconductor Index rising by 2.7%.

SK Hynix's ADR rose by 12.8% on its first day of trading, with oversubscription and strong performance providing strong evidence for the continuation of AI momentum trading. In early July, Meta signaled the sale of some excess computing power, raising market concerns about a slowdown in capital expenditure among tech giants, leading to significant volatility in the semiconductor sector.

However, recent market sentiment has reversed again, with Meta announcing a CAD 13 billion investment in a new data center in Canada, sending a strong signal that its willingness to spend on capital expenditures has not decreased but rather increased. Meanwhile, Amazon submitted a bond issuance document to the SEC this week, initiating an issuance of bonds with eight maturities; according to reports from Bloomberg, CNBC, and other media, the total scale of Amazon's bond issuance is approximately USD 25 billion.

Although there are short-term market disagreements regarding the sustainability of AI capital expenditures, the actual actions of leading companies have not turned conservative, and the narrative of the computing power arms race remains valid, becoming a key fundamental basis for the continuation of this momentum trading.

In the U.S. Stock Market, the AI Hardware Supply Chain and Cloud Computing Capital Expenditure Lines Confirm Each Other, and Previous Concerns May Gradually Be Digested, with Momentum Trading Characteristics Expected to Continue

As of July 10, the dynamic PE ratios of the S&P 500 (20.4x) and the Nasdaq 100 (23.3x) have expanded by 0.9 and 2.4 percentage points, respectively, compared to last week, and remain relatively low compared to the peak on June 2; at the same time, the profit growth rates of the Nasdaq 100 and MAG8 have been revised up by 0.36 and 0.08 percentage points, respectively, compared to last week.

Combining the current valuation levels and the ongoing trend of upward revisions in performance, we judge that the U.S. stock market will maintain a fluctuating upward pattern in the short term and recommend focusing on:

1) The software industry, which may see further capital inflows;

2) The military industry, which has high demand certainty due to long-term geopolitical risks;

3) Energy infrastructure benefiting from data center construction and electrification transformation;

4) The financial sector (banks and Fintech) benefiting from dual drivers of capital returns and regulatory improvements.