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Hong Kong stocks face challenges amid recent market volatility, with concerns growing over their ability to withstand frequent swings without assistance from the state. In mainland China, concerted buying by the government has helped stabilize the onshore stock market as part of Beijing's stabilization measures. However, Hong Kong investors worry about coping with high volatility at a critical time, considering various factors such as geopolitical tensions, sluggish earnings, a struggling artificial intelligence trade, possible U.S. interest rate hikes, and an anticipated supply glut from expiring share lock-ups.

Investor apprehension increased after Middle East military strikes pushed oil prices above $100 a barrel, while the recent attempt by Washington to inject up to $6 billion in long-end Treasuries did not curb bond-market sell-offs. Additionally, the potential unwinding of the Japanese yen-financed carry trade could further weigh on Hong Kong stocks, which are sensitive to overseas flows as expectations rise that the Bank of Japan will accelerate interest rate increases, potentially triggering sell-offs in assets bought on low-cost Japanese currency.

Dai Ming, a fund manager at Huichen Asset Management, notes that state intervention can help mitigate volatility and provide liquidity to stabilize mainland stocks in the short term. Nevertheless, the Hong Kong market appears marginalized due to poor liquidity. The Hang Seng Index dropped 1.3% by midday on Thursday, echoing global caution about risk assets amid rising Treasury yields and crude prices.

The benchmark was on track for its biggest decline in two weeks, while mainland equities experienced a milder decline, with the CSI 300 Index losing 0.3%.

Beijing's regulatory efforts to boost stocks, accompanied by at least 60 billion yuan (US$9 billion) of state buying, have temporarily reduced panic selling. Key tech indices have shown signs of recovery after sliding into bear-market territory in July. The China Securities Regulatory Commission has emphasized stability to prevent sharp fluctuations in stock prices, making it costly for investors to defy state support.

Hong Kong stocks have been lagging, largely depending on the performance of the AI trade and potential moves from the U.S. Federal Reserve to tighten monetary policy.

Most Hong Kong-listed firms are from mainland China, including state-owned banks, energy firms, and industrial giants. Some have already followed Beijing's call to buy back yuan-denominated A-shares or increase their stakes. State support is one reason cited by investment banks, such as Morgan Stanley, for favoring A-shares over Hong Kong shares. The Hang Seng Tech Index has lagged behind mainland benchmarks due to limited exposure to AI hardware companies.

Direct government intervention in Hong Kong is rare, except during extreme turmoil. During the 1998 Asian financial crisis, the Hong Kong government spent about HK$120 billion (US$15.3 billion) to buy key Hang Seng Index members and index-futures contracts to curb contagion risks stemming from the currency market. In developed markets, Hong Kong's support for stocks is mainly through indirect measures, like interest rate cuts and liquidity injections into the financial system.

Due to its role as a global financial hub with high institutional participation, direct intervention could expose the Hong Kong government or Beijing to criticism for potentially creating a moral hazard by insulating investors from downside risks and encouraging excessive risk-taking. However, such intervention might be necessary in the mainland market, where foreign ownership is low, at around 4% of the total market value, and a large number of individual investors contribute to market swings.