China and Hong Kong Stocks: A Tale of Flat Trading Amidst Sector Shifts

China and Hong Kong stocks showed minimal movement, with rare earth and defence shares balancing losses in technology and AI sectors. The Hang Seng Tech Index fell due to telecom tax adjustments, while China's market is gradually moving from liquidity-driven to earnings-driven, signaling a potential gradual recovery.

On Tuesday, stocks in China and Hong Kong displayed little movement, managing to stay nearly even as rare earth and defence shares balanced out losses in the technology and artificial intelligence sectors.

China's blue-chip CSI300 Index had only gained 0.1% by lunchtime, while the Shanghai Composite Index advanced by 0.4%. Similarly, Hong Kong's benchmark Hang Seng rose by a modest 0.1%.

The Hang Seng Tech Index dropped 3% to reach its lowest point since July 15, 2025, as reported adjustments to the value-added tax by Chinese telecom firms sparked wider concerns about increased taxes in the technology sector. Tencent shares also took a hit, dropping by as much as 6% before partially recovering.

Defence and rare earth shares emerged as gainers on the mainland, rising by 3.8% and 2.8% respectively. Meanwhile, AI stocks declined by 1%. In Hong Kong, material stocks recorded a gain of 1.6%.

UBS analysts expressed in a note that investors widely anticipate the macroeconomic environment to stay stable, indicating signs of a gradual recovery. They noted that market dynamics are shifting from a focus on liquidity and thematic investments to earnings and leading companies.

A crucial area of focus will be the verification of recovery within producer price indexes (PPI) and corporate profits, as these metrics will play a critical role in determining if the market can transition from valuation rerating to being driven by earnings growth.

Eastroc Beverage shares traded flat during their debut in Hong Kong, following the Chinese energy drinks producer's successful HK$10.14 billion ($1.3 billion) fundraising campaign through a share sale.

(With inputs from agencies.)