Support from the Chinese mainland's investors for stocks in the Hong Kong Special Administrative Region is growing, helping to ease their valuation discount to onshore peers and indicating the city’s shares may rise further.

Southbound trading accounted for about 46 percent of the average daily turnover in February, versus about one-third a year ago, according to Bloomberg-compiled data.

Fueled by optimism around DeepSeek and artificial intelligence, traders on the mainland have snapped up mainland tech giants’ shares listed in the HKSAR and contributed to a strong rally this year. Their inflows have reduced onshore shares’ “A-H premium” over the city's shares to 34 percent — lower than the 42 percent average for the past five years.

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“Southbound capital has already seized the pricing power of Hong Kong stocks,” said Wang Sheng, an analyst at Shenwan Hongyuan Securities Co.

Mainland investors now own almost 12 percent of the SAR's shares, compared to less than 5 percent at the end of 2020, according to Industrial Securities Co data. In February, they bought HK$153 billion ($19.7 billion) of the city's shares on a net basis, the second-largest monthly purchase on record.

Mainland investors have been taking advantage of the discount in shares listed in the SAR, due largely to their expectations of companies’ growth potential that are different than their foreign counterparts, Wang said.

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US President Donald Trump’s tariff threats continue to weigh on Asian stock markets, illustrated by the declines Friday. But southbound inflows could put a floor on the market at a time when volatility is surging. The city’s stocks are typically seen as proxies for external risks and foreign investor sentiment.