Hang Seng Index Forecast: New bullish leg supported by southbound flows and improvement in China services activities

[Redator]

This is a follow-up analysis and update of our prior report, “Hang Seng Index Forecast: Rising Liquidity is Supporting The Bulls” published on 9 June 2025.

Key takeaways

• Hong Kong 33 CFD Index rose 6% after a bullish breakout but retraced by 5% due to a stronger US dollar, testing key support at 24,290.
• July's Caixin Services PMI surged to 56.6, the highest since May 2024, signaling renewed expansion driven by new business and foreign demand.
• Net capital inflows from mainland China into Hong Kong equities have turned positive, supporting a medium-term bullish outlook.
• Key technical indicators suggest renewed upside momentum for the Hong Kong 33 CFD Index, with 24,290 acting as a pivotal support for a potential move toward 26,200 and 27,500.

Since our last publication, the Hong Kong 33 CFD Index (a proxy for the Hang Seng Index futures) has staged the expected bullish move and rallied by 6%. It surpassed the first medium-term resistance of 25,080 and printed an intraday high of 25,738 on 24 July 2025.

Thereafter, the Hong Kong 33 CFD Index recorded a decline of -5% that almost wiped out the prior gains to print a recent intraday low of 24,246 on 1 August on the backdrop of a firmer US dollar.

Right now, let's examine the latest relevant macro and momentum factors to determine whether the two-week corrective decline may extend further to the downside or a new bullish impulsive up move has been reignited.

Services activities in China have improved

Fig. 1: China Caixin Services PMI as of Jul 2025 (Source: Trading Economics)

Manufacturing activities continued to show a lacklustre performance since April, where the official NBS Manufacturing PMI for July contracted for the fourth consecutive month with a reading of 49.3, its steepest decline since January.

In contrast, the services sector has started to show signs of picking up after a slew of expansionary stimulus measures to improve consumer sentiment and negate the risk of a deflationary spiral.

China Caixin Services PMI, a leading indicator to gauge services activities that includes small and medium enterprises, rose to 56.6 in July, from June’s nine-month low of 50.6 and exceeding market expectations of 50.4. The reading signalled the fastest expansion in the services sector since May 2024, driven by rising inflows of new business and a renewed increase in foreign demand (see Fig. 1).

The latest pick-up in the services activities in China is likely to act as a positive cushion to boost consumer sentiment to negate the negative feedback loop from the trade tension between the US and China, where a trade truce is likely to be extended for 90 days from the 12 August deadline, pending approval from US President Trump.

Southbound fund inflows from China have ticked up

Fig. 2: Southbound net inflows with 20-day moving average trend as of 1 Aug 2025 (Source: MacroMicro)

A pickup in Chinese consumer sentiment may see an increase in mainland China investment in equities bound for Hong Kong via the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect Programmes. The total number of the two programmes is known as southbound fund inflows.

Southbound fund flows have shown signs of recovery, with net inflows improving steadily after a decline from 22 April to 23 May. The 20-day moving average of southbound inflows rose to 6.959 billion yuan as of 1 August, up from a negative 1.48 billion yuan on 23 May (see Fig. 2).

This uptrend in capital inflows from mainland China is likely to support a medium-term bullish outlook for the Hong Kong Hang Seng Index.

Start of a new potential impulsive bullish leg for the Hang Seng index

Fig. 3: Hong Kong 33 CFD Index major & medium-term trends as of 5 Aug 2025 (Source: TradingView)

The recent 6% corrective decline seen in the Hong Kong 33 CFD Index (a proxy of the Hang Seng Index futures) has managed to stall at a key support/inflection level of 24,290, which is defined by the 50-day moving average, lower boundary of the medium-term ascending channel from the 2 June 2025 low, and Fibonacci retracement.

In addition, the daily RSI momentum indicator has managed to stage a bounce right above a parallel horizontal support at the 41 level and inched back up above 50, which suggests the revival of medium-term bullish momentum (see Fig. 3).

Bullish bias; 24,290 as the key medium-term pivotal support for the next medium-term resistance to come in at 26,200 before the major resistance of 27,500 (Fibonacci extension cluster and long-term secular descending trendline from January 20218 swing high).

On the other hand, a break below 24,290 invalidates the bullish scenario for an extension of the corrective decline sequence to expose the next medium-term support at 22,670.

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