CITIC Securities: The correlation between Hong Kong stocks and A-shares is rapidly strengthening

According to the Zhitong Finance APP, Guotai Junan Securities released a research report stating that historically, the Hong Kong stock market has been more correlated with the U.S. stock market, but since 2020, divergences have increased, while the correlation between the Hong Kong stock market and the A-share market has significantly strengthened. In the past, the high proportion of foreign capital in the Hong Kong stock market and the peg of the Hong Kong dollar to the U.S. dollar meant that liquidity was largely influenced by overseas factors. Currently, the proportion of foreign capital has decreased, and southbound inflows have deepened the linkage with domestic liquidity. As high-quality enterprises from the mainland list in Hong Kong, quality assets may concentrate in Hong Kong, and Chinese stocks play a crucial role in the market capitalization/profit structure of the Hong Kong stock market, making the fundamentals of the Hong Kong stock market more closely linked to the mainland.

The main points of Guotai Junan are as follows:

The correlation between the Hong Kong stock market and A-shares is rapidly increasing. Historically, the Hong Kong stock market has been more correlated with the U.S. stock market. From 1970 to the present, the Hang Seng Index has generally moved in line with the S&P 500, with the correlation between the Hong Kong and U.S. stock markets being particularly pronounced during significant declines in the U.S. stock market. However, since 2020, the correlation between the Hong Kong and U.S. stock markets has gradually weakened, especially in 2021 and 2023, when their movements were even completely contrary. In contrast, the correlation between the Hong Kong and A-share markets has been continuously strengthening. From the perspective of index movements, 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 the Hong Kong and A-share markets has significantly increased compared to the past. The changes in the correlation between the Hong Kong stock market and A-shares and U.S. stocks may reflect new changes in the investment environment of the Hong Kong stock market.

The liquidity of the Hong Kong stock market is less dependent on overseas factors. Since 2020, the contribution of valuation to the rise and fall of the Hong Kong stock market has increased, coinciding with the timing of the strengthening correlation with A-shares. Due to the linked exchange rate system and the high proportion of foreign capital, the liquidity of the Hong Kong stock market was previously heavily influenced by overseas factors. However, since 2020, due to geopolitical factors, 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, and the liquidity of the Hong Kong stock market has gradually become less dependent on overseas factors. The return of Chinese concept stocks may also have weakened the mid-term correlation between the Hong Kong and U.S. stock markets. 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 the Hong Kong stock market, deepening the correlation between Hong Kong stock liquidity and the mainland. The Hong Kong stock market is beginning to reflect the logic of domestic capital behavior and risk preferences to a greater extent, which may be the core reason for the increased correlation between the Hong Kong and A-share markets in recent years.

The fundamentals of the Hong Kong stock market are more closely related to the mainland. The fundamentals of the Hong Kong stock market have consistently been more closely related to the mainland. Currently, more than two-thirds of the companies listed in the Hong Kong stock market are Chinese stocks, which contribute 90% of the net profits of the Hong Kong stock market. The overall ROE of the Hong Kong stock market is also mainly driven by Chinese stocks, making the Hong Kong stock market inherently related to the fundamentals of the mainland. Since 2020, with A-share companies listing in Hong Kong and the return of Chinese concept stocks, the proportion of mainland enterprises in the Hong Kong stock market has increased. Furthermore, since 2024, policies have clearly supported the development of the capital market in Hong Kong, and the linkage between the two regions is expected to deepen further. The fundamentals of the Hong Kong stock market have a weak correlation with overseas factors: first, changes in overseas demand directly affect the profit performance of Hong Kong stock companies through exports; second, there is a certain correlation between the economic cycles of China and the U.S., but this correlation has weakened since 2020; third, exchange rates also impact the profits of Hong Kong stock companies Risk Warning: Southbound capital inflow is below expectations, foreign capital inflow exceeds expectations, and the implementation of the Mainland-Hong Kong Stock Connect policy is below expectations