By Samuel Shen and Summer Zhen

SHANGHAI/HONG KONG (Reuters) -Chinese investors are piling into Hong Kong shares lured by lower valuations and the city's strategic position in China's growing rivalry with the United States.

A record $90 billion of cash from the mainland has driven a stellar 21% rally in Hong Kong stocks in the first half of 2025, reshaping the landscape of a market foreign investors have avoided for several years.

"The Hong Kong stock market is being repriced by mainland money," said Chen Dong, fund manager at Hangzhou Ultraviolet Private Fund. Chinese money "is gushing in from various directions in a gold rush," he said.

In stark contrast, China's benchmark CSI 300 has barely moved. Disillusioned with the languid market, low returns and a stuttering domestic economy, domestic investors have shifted money from onshore A-shares to Hong Kong-listed equities, where stocks typically trade at a discount.

Hong Kong's H-share market has gained from robust flows via the cross-border link Stock Connect, a bumper string of initial public offerings (IPOs) and global investors diversifying away from a weakening U.S. dollar.

For 40-year-old Chinese investor Zhu Haifeng, Hong Kong equities now account for 80% of his portfolio.

For a dual-listed company, "you certainly want to pay less for the same assets," said Zhu, who bought Hong Kong-listed shares of Tsingtao Brewery and Guangzhou Baiyunshan Pharmaceutical - both trading at a sharp discount to their Shanghai-traded counterparts.

Mainland investors via Stock Connect now contribute to 50% of Hong Kong's daily stock turnover, up from around 30% at the beginning of 2024, Societe Generale estimates.

Institutional money is gushing in too, causing the gap in dual-listed stocks to compress, although China's capital controls ensure some variance remains.

The average premium of China's A-shares over Hong Kong's H-shares - traditionally high due to bigger volumes and activity in China - has narrowed to a five-year low of under 30%.

RALLY HAS LEGS

The tighter spreads potentially reduce the incentives for mainland investors to buy H-shares, but analysts expect Hong Kong's bull run to continue.

U.S. President Donald Trump's erratic policies, fresh U.S. rate cuts and bets on China's technological innovations will drive more money into the former British colony.

High-dividend bank shares in Hong Kong have attracted yield-focused investors such as Ping An Insurance and China Life, as long-term treasury yields flirt with record lows.