Hong Kong’s bull run leaves China in the dust

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0:33Today is Wednesday, July 2nd, and this is your FT News Briefing. The UK government got its welfare bill over the line, but only after huge concessions. And Hong Kong's stock market is leaving mainland China's in the dust. Meanwhile, China has a chokehold on the world's critical minerals. Can France change that? What's at stake really is the kind of viability and functioning of integral supply chains from wind turbine manufacturing to car manufacturing in Europe. I'm Sonia Hudson, and here's the news you need to start your day.

1:19UK Prime Minister Keir Starmer gutted his welfare reform bill yesterday, and only then got it through the House of Commons. But the move leaves a multi-billion dollar hole in the country's public finances. Starmer faced a massive rebellion from his own Labour Party over the controversial bill. It was initially supposed to save 5 billion pounds, but now experts say the government could even lose money on it. This U-turn leaves Chancellor Rachel Reeves in a tough spot. She'll have to look at other ways to raise money, like increasing taxes.

2:00Hong Kong's stock market is on a bull run. Chinese mainland equities, eh, not so much. They're basically flat so far this year, while the Hang Seng Index is up 20%. That's the most Hong Kong has outperformed the mainland since 2008. Here to explain what this divergence tells us about the Chinese economy is the FT's William Sandland. Hi, William. Hi, how are you? Doing well, thanks. So what has investors so excited about Hong Kong stocks? It does seem that most of this outperformance is being driven by Chinese investors going into Hong Kong. So Hong Kong has benefited because there are a number of Chinese technology companies like Alibaba and Tencent that are listed here that aren't available on mainland exchanges.

2:51In particular, since the release of DeepSeek, there's been this huge wave of enthusiasm for Chinese technology companies, especially from investors on the mainland. And we've seen that show up in these record-breaking southbound flows as Chinese investors get exposure to Chinese technology names. Okay, so a lot of money is flowing from mainland China to Hong Kong. Why aren't investors feeling the love for Chinese equities? Well, part of it is just the lack of these large tech companies listed in mainland China. But the other significant reason is that China's economic recovery this year hasn't been great.

3:33There was a lot of optimism last September after the government released a stimulus package. There has yet to be a fiscal follow-through on those measures. And so there are long-term difficulties China's facing with deflation, weak consumer sentiment, falling property prices. And on top of all of that, you have trade tensions with the U.S. that have weighed on sentiment in China. Yeah. Tell me a little bit more about how the trade war with the U.S. has influenced these two stock markets. Well, Hong Kong has actually benefited from its position as an intermediary between China and the U.S. At this time, it's seen a huge number of IPOs this year as Chinese companies list in the city, looking to capitalize on this revival in its market.

4:22In China, it's been much more directly affected by trade tensions with the U.S. And that's weighed on business sentiment, which in turn affects retail investors. and there's a lot of uncertainty over the shape of a trade deal. And many investors and analysts think that China is actually waiting on more clarity on the shape of this trade deal before they roll out more forceful measures to revive the domestic economy. Well, do analysts and investors then expect Hong Kong to continue to outperform the mainland? Well, Hong Kong, you know, it's more of a financial center And it's really been boosted by Beijing's policies to kind of revitalize its capital markets and open the pathway for Chinese companies to IPO here.

5:11They've just eased restrictions on domestic mainland Chinese investors to bring more money into Hong Kong. So there's been this really deliberate attempt to kind of revitalize Hong Kong at a time when markets on the mainland have been much more subdued. And Hong Kong has a fully convertible currency. It's pegged to the U.S. dollar. It has deep liquid financial markets. It makes it a really attractive place for Chinese companies to raise capital and for investors to feel safe buying companies. William Sandland is the FT's Asia Markets correspondent. Thanks, William. Thanks so much for having me.

5:54Eurozone inflation rose just a tad to 2 % in June. That's a notch above May's 1.9 percent figure, but it's right at the European Central Bank's medium-term target. Economists say that means the Central Bank will likely hold interest rates steady at the next meeting in July. The ECB has already lowered rates eight times since last June. And President Christine Lagarde said last month that the Central Bank was likely to slow things down.

6:30European companies are trying to shake their reliance on China for critical minerals. And now they're turning to France to fill the gap. This comes after Beijing upended supply chains by imposing export restrictions in April. That was in retaliation to U.S. President Donald Trump's so-called Liberation Day tariffs. Here to talk more about this is the FT's Commodities Correspondent, Camilla Hodgson. Hi, Camilla. Hi, good morning. So give me some of the details here. Just how reliant is Europe on China's rare earth minerals? Enormously, almost entirely. And that's not just a Europe problem. China totally dominates the rare earth supply chain.

7:13But for Europe in particular, China supplies about 98 % of the EU's rare earths magnets. And those are the magnets that go into things like defense applications and electric vehicles, all sorts of stuff. Okay, so lots of stuff that is super important strategically to a lot of countries in the West. But why is France in particular seen as the best place for Europe to become more self-sufficient in these minerals? Well, France is one option among really not very many. The thing with France is that it has a history, perhaps around the 90s, of some rare earths processing in particular. So where you take what's been mined and you separate it and you process it into material that could be used in magnets, for example.

7:59And that know-how, that knowledge, some of the expertise, the people that worked in the sector still are in France. And so I think the country and European companies in the sector are looking to kind of revive that. Even having two or three, a handful in France creates a kind of cluster effect. Okay, so it seems like France already has a lot of the infrastructure that's needed to process these raw materials. How do they compare with China? Well, at the moment, there is sort of no comparison. It's really a drop in the ocean. France's capabilities compared to China's, and efforts in France will take a while to ramp up.

8:38It takes time to build these facilities and to get them up and running. No one has huge surplus stocks of rare earths really in Europe. And I think it's also important to say that Western companies are not necessarily looking to cut China out of their supply chains. This is more to do with diversifying their sources of supply so that if there is a problem in future, if country X restricts exports, then they have alternative places to turn to. Well, Camilla, what's at stake, would you say, if France can't get up to speed quickly enough in this rare earth space? Does Europe have any other options that they're looking into?

9:17What's at stake really is the kind of viability and functioning of supply chains, really integral supply chains from wind turbine manufacturing to car manufacturing in Europe and really elsewhere, because these are global supply chains and global companies that are relying on this Chinese rare earth production. There are companies here and there. Brazil, for example, has deposits of rare earths, and there are companies looking to develop an industry there or grow the industry there. Also, the U.S. is very interested in becoming more self-sufficient in the space. But again, it's all very early stage, so it's not something that we're going to see suddenly change next year or the year after.

9:58Camilla Hodgson is the FT's Commodities Correspondent. Thanks, Camilla. Thanks so much. You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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