The rise and fall of Hong Kong stocks depends more on whose "expression"

Investment Highlights

The correlation between Hong Kong stocks and A-shares is rapidly increasing. Historically, Hong Kong stocks have shown a stronger correlation with U.S. stocks. Since 1970, the Hang Seng Index has closely followed the S&P 500, with the linkage between Hong Kong and U.S. stocks being particularly pronounced during significant declines in U.S. stocks. However, since 2020, the correlation between Hong Kong and U.S. stocks has gradually weakened, especially in 2021 and 2023, when their movements were even completely contrary. In contrast, the correlation between Hong Kong stocks and A-shares has been continuously strengthening. From an index perspective, since 2002, there has been some correlation between the Hang Seng Index and the CSI 300, but before 2020, this correlation was generally weaker than that between the Hang Seng Index and the S&P 500. Since 2020, the correlation between Hong Kong and A-shares has significantly increased compared to the past. The changes in the linkage between Hong Kong stocks, A-shares, and U.S. stocks may reflect a new shift in the investment environment for Hong Kong stocks.

Hong Kong stock liquidity is becoming less dependent on overseas factors. Since 2020, the contribution of valuation to the fluctuations of Hong Kong stocks has increased, coinciding with the strengthening of the linkage between Hong Kong and A-shares. Due to the linked exchange rate system and a high proportion of foreign capital, Hong Kong stock liquidity was previously heavily influenced by overseas factors. However, since 2020, due to geopolitical issues, Hong Kong dollar carry trades, and changes in the cost-performance ratio of Hong Kong stocks, the proportion of foreign capital has continued to decline, leading to a gradual decrease in Hong Kong stock liquidity's dependence on overseas factors. The repatriation of Chinese concept stocks may also have weakened the mid-term linkage between Hong Kong and U.S. stocks. At the same time, based on the price advantages of Hong Kong stocks, the scarcity of targets, and arbitrage demand, domestic capital has accelerated its inflow into Hong Kong stocks, deepening the connection between Hong Kong stock liquidity and the mainland. Hong Kong stocks are beginning to reflect the behavior logic and risk preferences of mainland funds to a greater extent, which may be the core reason for the enhanced correlation between Hong Kong and A-shares in recent years.

The fundamentals of Hong Kong stocks are more closely related to the mainland. The fundamentals of Hong Kong stocks have consistently shown a stronger correlation with the mainland. Currently, more than two-thirds of the companies listed in Hong Kong are Chinese-funded stocks, which contribute 90% of the net profits of Hong Kong stocks. The overall ROE of Hong Kong stocks is also primarily driven by Chinese-funded stocks, thus establishing a natural correlation between Hong Kong stocks and mainland fundamentals. Since 2020, with Chinese companies listing in Hong Kong and the return of Chinese concept stocks, the proportion of mainland enterprises in Hong Kong stocks has increased. Furthermore, since 2024, policies have clearly supported the development of Hong Kong's capital market, and the linkage between the two regions is expected to deepen further. The fundamentals of Hong Kong stocks have a weak correlation with overseas factors: first, changes in overseas demand directly affect the profitability of Hong Kong companies through exports; second, there is a certain linkage between the economic cycles of China and the U.S., but this linkage has weakened since 2020; third, exchange rates also impact the profitability of Hong Kong companies.

Report Body

Since the beginning of this year, Hong Kong stocks have performed well globally. As of June 23, the Hang Seng Index has increased by 18%, far exceeding the S&P 500, which has only slightly risen by 2%. Particularly in the first quarter, driven by Deepseek, the performance of Hong Kong stocks was exceptionally bright, with the Hang Seng Index reaching a maximum increase of 49%, while U.S. stocks performed weakly, with the S&P 500 down by 5%. We have observed that in recent years, the divergence in the movements of Hong Kong and U.S. stocks has become increasingly frequent. In the past, the market generally believed that Hong Kong stocks were highly correlated with U.S. stocks, but this correlation is weakening, replaced by a gradually strengthening linkage between Hong Kong and A-shares, which may reflect profound changes in the investment environment for Hong Kong stocks The following is an analysis of this topic.

1. The correlation between Hong Kong stocks and A-shares is rapidly increasing

In the past mainstream perception, due to the high proportion of international investors in the Hong Kong stock market, it was generally believed that its performance was more correlated with U.S. stocks than with A-shares. This has indeed been the case; for a long time, the performance of Hong Kong stocks has been highly correlated with U.S. stocks. From 1970 to the present, the Hang Seng Index and the S&P 500 Index have shown a consistent trend, with a correlation coefficient as high as 77%. The correlation between Hong Kong stocks and U.S. stocks is particularly pronounced during significant declines in the U.S. market. Since 2000, the U.S. stock market has experienced three corrections of over 30%, namely the burst of the tech bubble (2000/09-2002/10), the outbreak of the financial crisis (2007/10-2009/03), and the impact of the COVID-19 pandemic (2020/02-2020/03). During these three periods, the S&P 500 averaged a decline of 46%, while the Hang Seng Index fell by 44%, showing similar performance; in contrast, A-shares also declined but with an average drop of 33%, significantly lower than the former two, indicating relatively lower correlation.

It is noteworthy that since 2020, the correlation between Hong Kong stocks and U.S. stocks has gradually weakened. Particularly in 2021 and 2023, the trends of the two even diverged completely. Since 2020, the correlation coefficient between the Hang Seng Index and the S&P 500 has dropped to -39%, a trend that is challenging the inherent perception that Hong Kong stocks move in tandem with U.S. stocks. If we observe the Hang Seng Technology Index and its corresponding Nasdaq, a similar pattern can also be found; before 2020, their trends were roughly synchronized, but since then, instances of divergence have gradually increased, and the correlation has weakened.

Since 2020, the correlation between Hong Kong stocks and A-shares has significantly increased. The weakening correlation between Hong Kong stocks and U.S. stocks is contrasted by the continuous strengthening of the correlation between Hong Kong stocks and A-shares. From the perspective of index performance, since 2002, there has been a certain degree of correlation between the Hang Seng Index and the CSI 300, with a correlation coefficient of 51%. However, before 2020, the correlation between the two was weaker than that between the Hang Seng Index and the S&P 500 for most of the time (see Figure 4), and during this period, there were several notable divergences between Hong Kong stocks and A-shares, such as from 2003/04 to 2003/11, 2011/10 to 2014/09, and 2019/04 to 2020/09.

Since 2020, the correlation between Hong Kong stocks and A-shares has noticeably increased compared to the past, with the rolling 12-month correlation coefficient between the Hang Seng Index and the CSI 300 maintaining a high level of 80%-90%, while the average correlation coefficient before 2020 was less than 60%. To visually illustrate this change, we plotted the monthly returns of the Hang Seng Index since 2002 against the monthly returns of the CSI 300 and the S&P 500, and the results show that around 2020, the distribution of returns between Hong Kong stocks and A-shares has clearly "tightened." (See Figure 5), indicating an increase in the consistency of price movements, while the distribution of price movements in Hong Kong stocks and U.S. stocks has significantly "expanded," indicating a weakening of price movement consistency (see Figure 6).

Overall, since 2020, the correlation between Hong Kong stocks and U.S. stocks has weakened, while the correlation with A-shares has significantly strengthened. This phenomenon reflects that the investment environment for Hong Kong stocks is undergoing new changes. The following will detail the key factors affecting the pricing of Hong Kong stocks, thereby explaining the reasons behind the aforementioned changes.

2. The Dependence of Hong Kong Stock Liquidity on Overseas Factors is Weakening

According to the DDM model, stock returns have two main sources: earnings growth and valuation fluctuations. Looking back in history, the performance of Hong Kong stocks is roughly correlated with changes in their fundamentals and liquidity. Since 2020, the contribution of valuation to the price movements of Hong Kong stocks has increased, coinciding with the timing of the strengthened correlation between Hong Kong stocks and A-shares. Therefore, the changes in the pricing of Hong Kong stock liquidity may be a key reason for the changing relationship between Hong Kong stocks and A-shares and U.S. stocks.

In the past, Hong Kong stock liquidity was greatly influenced by overseas factors, but this relationship has weakened in recent years. From a macro liquidity perspective, Hong Kong has implemented a linked exchange rate system since 1983, pegging the Hong Kong dollar to the U.S. dollar, with the exchange rate stable at around 1 U.S. dollar to 7.75-7.85 Hong Kong dollars. As a result, Hong Kong's interest rates and monetary policy have closely followed changes in the Federal Reserve's policies. From a micro liquidity perspective, foreign capital currently dominates the shareholding structure of Hong Kong stocks, making them more susceptible to overseas influences.

In recent years, the proportion of foreign capital has continued to decline, and the dependence of Hong Kong stock liquidity on overseas factors has gradually weakened. Since 2020, foreign capital has continuously flowed out of the Hong Kong stock market, leading to a significant decline in its market share. In terms of stock scale, the proportion of foreign capital in Hong Kong stocks has decreased from 75% in October 2020 to 61% in June 2025; in terms of flow scale, from September 2020 to now (as of June 10, 2025), foreign capital has cumulatively flowed out of the Hong Kong stock market by over HKD 740 billion.

The decline in the proportion of foreign capital may be influenced by geopolitical factors, Hong Kong dollar carry trades, and changes in the cost-performance ratio of Hong Kong stocks. Specifically: 1) In recent years, international geopolitical tensions have intensified, and the U.S. has increased investment restrictions on China's military and high-tech sectors since 2020, for example, requiring large private equity firms like Blackstone to slow down their investments in China in 2024 2) Since 2020, due to the rising interest rate differential between the U.S. and Hong Kong, foreign capital has borrowed Hong Kong dollars to exchange for U.S. dollars to invest in high-yield assets, leading to a tendency for foreign capital to flow out. 3) From a global asset allocation perspective, backtesting shows that the relative levels of risk premiums between Hong Kong stocks and Japanese stocks (20%) and Indian stocks (10%) significantly impact global capital flows. Since 2020, the narrowing risk premium gap between Hong Kong and Japanese, as well as Hong Kong and Indian stock markets, may also have contributed to the outflow of foreign capital. Under the influence of multiple factors, foreign capital has continuously reduced its allocation to Hong Kong stocks over the past five years, weakening the liquidity of Hong Kong stocks. As an important participant in global capital flows, foreign capital acts as a bridge for liquidity transmission between Hong Kong stocks and the U.S. dollar system. Its declining share may indicate a reduced sensitivity of Hong Kong stocks to overseas changes.

In addition, the return of Chinese concept stocks may weaken the mid-term correlation between Hong Kong stocks and U.S. stocks. Since the delisting turmoil of Chinese concept stocks in 2020, most leading Chinese concept stocks have gradually returned to the Hong Kong market. As of April 18, 2025, approximately 70% of the market capitalization of Chinese concept stocks has achieved dual listings, promoting a gradual transformation of their investor structure and information response mechanism, which may also weaken the mid-term correlation between Hong Kong stocks and U.S. stocks to some extent.

In recent years, the liquidity of Hong Kong stocks has deepened its correlation with the mainland. The existence of the linked exchange rate system mentioned above has led to a high correlation between interest rates in Hong Kong and the Federal Reserve, while since 2012, the correlation between the monetary policy cycles of China and the U.S. has been relatively weak. Therefore, in the past, the macro liquidity of Hong Kong stocks had a weak relationship with the mainland.

From a micro-funding perspective, the accelerated inflow of domestic capital has deepened the correlation between the liquidity of Hong Kong stocks and the mainland. Since the launch of the Shanghai-Hong Kong Stock Connect, southbound funds have continuously flowed into Hong Kong stocks, with net inflows exceeding HKD 300 billion each year since 2020. Among them, approximately HKD 670 billion flowed in 2020, HKD 800 billion in 2024, and nearly HKD 700 billion has accumulated as of June 13, 2025. The share of Hong Kong stocks held by southbound funds has increased from 14% at the beginning of 2024 to 21% in June 2025. In addition, the trading volume of southbound funds has continuously increased, with the trading scale of the Hong Kong Stock Connect accounting for about 28% of the total trading volume of the Hong Kong Stock Exchange as of June 2025.

The continuous inflow of domestic capital may stem from the price advantages of Hong Kong stocks, the scarcity of targets, and arbitrage demand. First, the AH premium has long existed, giving Hong Kong stocks a price advantage compared to A-shares. Second, as pointed out in "Hong Kong Stocks as the Main Battlefield of This Bull Market," Hong Kong stocks possess scarce assets such as internet, new consumption, innovative drugs, and dividends, which not only benefit from industrial trends but also have significant attractiveness in a weak macro environment. Finally, southbound funds have strong arbitrage motives, often increasing their positions against the trend during corrections in Hong Kong stocks. Since 2022, the correlation coefficient between the weekly net buying amount of the Hong Kong Stock Connect and the fluctuations of the Hang Seng Index has been -14%, showing a "buy more as it falls" trading characteristic With the inflow of mainland funds into Hong Kong stocks, the Hong Kong stock market has begun to reflect the behavior logic and risk preferences of mainland funds to a greater extent. The micro liquidity rhythm of Hong Kong stocks is gradually aligning with that of the A-share market, which may be the core reason for the increased correlation between Hong Kong stocks and A-shares in recent years. For example, from an industry performance perspective, since the beginning of this year, the rise and fall of Hong Kong stock industries has been positively correlated with the scale of southbound inflows. Looking at a longer time frame, since the launch of the Stock Connect in late 2014, the mean square error of annual industry returns between the A-share and Hong Kong stock markets has generally narrowed, indicating a convergence in industry performance between the two markets.

3. The correlation between Hong Kong stocks' fundamentals and the mainland is stronger

In the second part, we pointed out that since 2020, the micro fund structure of Hong Kong stocks has undergone profound changes: foreign capital has continued to flow out, while domestic capital has continuously flowed in, pushing the pricing power of Hong Kong stocks gradually towards mainland funds. In this section, we will explore another core aspect of Hong Kong stock pricing, namely fundamentals, which have become more closely linked to mainland fundamentals since 2020.

The fundamentals of Hong Kong stocks have consistently shown a stronger correlation with the mainland. Currently, more than two-thirds of the listed companies in Hong Kong are Chinese-funded stocks, which are naturally related to mainland fundamentals. Due to differences in regulatory rules for listed companies in Hong Kong and providing more listing options for mainland enterprises, many mainland companies have gone public in Hong Kong since 2000, driving up the proportion of mainland companies in Hong Kong stocks and naturally increasing the correlation with mainland fundamentals. From the perspective of market capitalization, the proportion of mainland companies among all Hong Kong stocks has risen from 10% in 2000 to 70% in 2020 and has maintained that level, with the latest figure (as of 2025/06/11, the same below) reaching 71%; from the perspective of net profit attributable to the parent company on a TTM basis, the proportion of mainland companies has risen from 45% during the same period to 93%, with the latest figure being 91%; if we look solely at the latest constituents of the Hang Seng Tech Index, all except ASMPT are mainland enterprises. Additionally, from the perspective of profitability, the overall ROE of Hong Kong stocks is mainly driven by Chinese-funded stocks, and profitability significantly declines when excluding Chinese-funded companies, highlighting the dominant position of Chinese enterprises.

With A-share companies listing in Hong Kong and the return of Chinese concept stocks, the proportion of mainland enterprises in Hong Kong stocks may further increase. Since 2020, under the backdrop of policy support and enterprises expanding international business, many high-quality mainland companies have gone public in Hong Kong for a second time. This year, leading A-share companies such as CATL and Heng Rui Medical have also successively listed in Hong Kong. As of 25/06/11, the proportion of mainland companies among Hong Kong IPOs has rebounded from a low of 32% in 2017 to the current 88% The return of Chinese concept stocks is also an important driving force, and dual listings in A-shares and H-shares may become the norm, with the weight of mainland enterprises in the Hong Kong stock market expected to further increase. In addition, the proposal on June 10 to support Greater Bay Area enterprises listed in Hong Kong to also list on the Shenzhen Stock Exchange according to regulations will strengthen the linkage between the two markets.

Policies are driving the development of Hong Kong's capital market, and the linkage between the two markets is expected to deepen further. Since 2024, several policies have clearly supported the development of Hong Kong's capital market and strengthened the interconnection of the two financial markets. For example, in April 2024, the China Securities Regulatory Commission released five measures for cooperation with Hong Kong, and in January 2025, the central bank proposed to focus on four key areas to fully support the construction of Hong Kong as an international financial center. In June, Shanghai and Hong Kong signed the "Action Plan for Coordinated Development of Shanghai-Hong Kong International Financial Centers." Reforms in Hong Kong's local financial market are also underway, such as optimizing the listing approval process, initiating reforms for the Growth Enterprise Market, and optimizing information disclosure for the Hong Kong Stock Connect. In the future, with policy support, the capital market environment in Hong Kong will continue to improve, and the linkage between the two markets is expected to strengthen further.

The fundamentals of the Hong Kong stock market have a relatively weak correlation with overseas markets. Although most of the companies listed in Hong Kong are mainland enterprises, their fundamentals are still somewhat influenced by overseas economic cycles.

Changes in overseas demand directly affect the profitability of Hong Kong-listed companies through exports. As a free trade port, Hong Kong's economic growth has long relied on support from import and export trade, with exports accounting for more than 150% of GDP in most years from 2000 to 2023. Specifically at the corporate level, it is estimated that about 18% of the revenue of Hong Kong-listed companies comes from overseas markets, so the strength of overseas demand will directly impact the profitability of Hong Kong-listed companies.

There is a certain degree of linkage between the economic cycles of China and the United States, but this linkage has weakened since 2020. In the past, global division of labor and cooperation were relatively close, and the synchronization of economic cycles between China and the U.S. was high, with the rolling 12-month correlation coefficient of manufacturing PMI between the two countries averaging 47% from 2008 to 2019. However, since 2020, the competition between major powers has intensified, and as of April 10, 2025, U.S. import tariffs have risen to the highest level since 1939 at 14.5%, hindering the process of globalization and weakening the linkage of economic cycles between China and the U.S., with the PMI correlation coefficient dropping to 20%.

The impact of exchange rates on the profitability of Hong Kong-listed companies cannot be ignored. The revenues and costs of Chinese-funded stocks are mostly denominated in RMB, and their earnings per share (EPS) may be affected by exchange rate fluctuations when converted to Hong Kong dollars. If the RMB depreciates against the U.S. dollar, the converted EPS in Hong Kong dollars may be adversely affected; conversely, if the RMB appreciates, it will help enhance the profitability measured in Hong Kong dollars Since 2020, the correlation between Hong Kong stocks and A-shares has strengthened, while the correlation with U.S. stocks has weakened. Behind this is the gradual shift of pricing power in Hong Kong stocks from external to internal. On one hand, the liquidity of Hong Kong stocks is becoming less reliant on overseas sources, with a liquidity pattern dominated by domestic capital gradually being established; on the other hand, the listing of A-shares in Hong Kong, combined with the return of Chinese concept stocks, is driving up the proportion of mainland enterprises in Hong Kong stocks, making Hong Kong stocks more sensitive to mainland policies. The era of Hong Kong stocks rising and falling based on "external influences" may be fading, entering a new stage of "self-determination."

Authors of this article: Eddie Wu, Chen Fei, Source: Cathay Pacific Securities, Original title: "Hong Kong Stocks Rise and Fall More Based on Whose 'Influence'"

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