March 4, 2026 — A recent surge in South Korean equities, often dubbed the “Korean Wave” (Hallyu), has fueled market speculation that capital flowing into Korea is draining liquidity from Hong Kong’s stock market. However, a detailed breakdown of fund flows indicates that domestic Korean investors, not global capital rotating from Hong Kong, are the primary drivers behind Seoul’s rally. The persistent pressure on Hong Kong’s market liquidity appears to stem from other sources, notably selling by international intermediaries and a rise in short-selling and equity supply.
Debunking the “Korean Wave Drain” Narrative
Data from the Korea Exchange (KRX) shows that since October 2025, foreign investors (excluding ETFs) have been consistent net sellers of Korean stocks, with outflows accelerating in 2026 to 20.9 trillion won year-to-date as of February 27. Conversely, Korean institutional and retail investors have been net buyers, injecting 12.6 trillion and 3.6 trillion won, respectively, this year. Even for top-performing stocks like SK Hynix and Samsung Electronics, foreign investors were net sellers, with their price gains fueled by domestic buying.
While EPFR global fund flow data indicates over $7 billion in net inflows to Korea-focused funds in 2026—primarily into ETFs like the iShares MSCI South Korea ETF—this has not coincided with accelerated Korean capital flight from Hong Kong. Analysis shows Korean investors began reducing exposure to Chinese assets in mid-November 2025, before the significant outperformance of Korean stocks. Furthermore, Korean capital constitutes a relatively small portion of foreign participation in Chinese assets, making its impact on Hong Kong’s overall liquidity limited. EPFR data also shows passive funds continuing to flow into Hong Kong-focused ETFs year-to-date, contradicting the notion of a direct “Korean Wave” dilution effect in the ETF space.
Identifying the Core Pressure on Hong Kong Liquidity
The primary source of selling pressure appears to be international intermediaries. Hong Kong Exchange (HKEX) data on custodial holdings shows that from the start of 2026 to February 25, while southbound capital (mainland inflows) recorded net inflows of HK$151.9 billion, international intermediaries were net sellers of HK$62.19 billion, with accelerated selling beginning in late January. China mainland intermediaries also reduced holdings, while Hong Kong local intermediaries were modest net buyers. Given that EPFR data indicates continued inflows from active and passive mutual funds into Hong Kong, analysts at Industrial Securities speculate that the recent selling from international intermediaries is likely led by overseas hedge funds.
Other factors exacerbating the liquidity strain include a significant spike in short-selling and increased equity supply. The 5-day moving average of short-selling turnover as a percentage of total Hong Kong market turnover surged from around 12.6% in mid-to-late January to approximately 20% by the end of February 2026.
Additionally, equity supply rose marginally. Hong Kong IPO proceeds in February reached nearly HK$49 billion, accounting for 1.14% of total market turnover—a noticeable increase from Q4 2025 and January 2026. The scale of share lock-up expiries in February was HK$794.7 billion, a marginal increase from January.
Conclusion
The evidence suggests that the “Korean Wave” is not the principal cause of Hong Kong’s liquidity tightness. The rally in Seoul is predominantly a domestic story, funded by local Korean investors. The headwinds for Hong Kong equities are more directly linked to selling activities from specific international players, particularly hedge funds acting through intermediary channels, coupled with elevated short-selling and a seasonal increase in new share supply.
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