Four Patterns of Disconnection Between A-Share and Hong Kong Stock Markets

Since 2000, A-H shares have experienced five bull markets. During these five cycles, A-H stocks mostly moved in sync, with similar styles and industry performance. Of course, there were some mismatches and divergences in details, mainly due to the slightly different global liquidity rhythms during certain periods and varying institutional investment preferences.

Over the past 20+ years, A-H stocks have generally shown strong correlation, partly because China and the US have had synchronized liquidity conditions, and partly because China’s growth, especially in the tech industry cycle, tends to mirror A-H stocks.

Through the linkage of A-H stocks, we can glimpse that over the past two decades, the global economy has largely been in a period of easing, with major economies including China and the US focusing on development as their primary goal, jointly responding to cyclical fluctuations. This is why A-H stocks have shown relatively strong correlation.

Looking ahead, to assess the correlation of A-H stocks, we need to consider more the reflection of the new wave of technological revolution across different sub-sectors and the policy divergences between China and the US amid global power struggles.

Summary

We previously reviewed the five bull markets of A-H stocks since 2000, detailing the macro background, industry cycles, and policy choices for each cycle. We answered why the bull markets started and what caused their end, and captured the global macro patterns depicted by each cycle’s industry and style characteristics.

This article again focuses on A-H bull markets, addressing a hotly debated question in the market: Are A-H stock bull markets synchronized or mismatched? Are there any patterns to be found?

Pattern One: The overall rhythm of A-H stock bull markets is relatively consistent

In terms of liquidity, the Hong Kong stock market, as an offshore dollar-denominated market, is closely related to the US dollar credit cycle. A-shares are more deeply influenced by domestic liquidity conditions, mainly real credit conditions. This explains why, during 2003–2007 and 2016–2017, even with nominal monetary convergence, the actual expansion of credit still fueled bull markets in Chinese A-shares.

Regarding profitability, A-H listed companies’ underlying assets are mainly domestic assets, with highly synchronized profit cycles. The recovery and downgrades of EPS in companies almost occur simultaneously in both markets. The underlying logic is that in the past, China and the US had high economic complementarity and resonance.

In terms of market sentiment, during periods of global economic easing—including China and the US—mainstream economies aimed primarily at managing economic cycles together. Therefore, sentiment shocks caused by economic cycles tend to be relatively synchronized.

The strong correlation between A-H stocks is due to the past resonance of China-US monetary and economic cycles, with both markets benefiting from global liquidity easing and China’s economic growth.

Pattern Two: In bull markets, H-shares usually start earlier and last longer

First, the trading systems and short-selling mechanisms differ significantly. The Hong Kong market operates on a “T+0” basis, with no daily price limits, and has a mature short-selling mechanism. When market expectations shift, short sellers have already partially priced in risks during the rally.

Second, the A-H premium creates a valuation cushion for Hong Kong stocks. The Hang Seng A-H Premium Index has long maintained a range of 120–140. When global liquidity tightens, the deep discount of Hong Kong stocks provides a protective effect on prices.

Third, institutional investors dominate Hong Kong’s investor composition, accounting for over 80%. The involvement of sovereign funds, pension funds, and hedge funds makes the Hong Kong market’s investment mode more mature.

Pattern Three: H-shares are more sensitive to global risk events

Historical data shows that during the 2008 Lehman crisis and the 2022 Fed aggressive rate hikes, Hong Kong stocks often experienced monthly declines exceeding those of A-shares.

One reason is that international funds tend to amplify shocks from overseas events.

Hong Kong’s capital markets allow free capital exchange and flow. When external risks rise—such as geopolitical conflicts or dollar liquidity crises—international investors may rebalance risk by reducing holdings in Hong Kong stocks, causing larger impacts.

Another reason is that China has more room for buffers through foreign exchange management and state-backed stabilization efforts.

In contrast, A-shares are subject to capital account controls and foreign exchange interventions. Although the Stock Connect programs are open, they are still limited by quotas and window guidance. Domestic insurance and social security funds, as “national teams,” have counter-cyclical adjustment capabilities, providing a cushion against declines.

Pattern Four: The fundamental differences in A-H stock components stem from corporate listing systems

Differences in listing systems between A-H stocks lead to divergence in their components, which is a core reason for their differing trends. Notably, the Hang Seng Tech Index includes a number of rare assets not listed in A-shares.

Regulatory adaptations have attracted some internet assets to list in Hong Kong, benefiting from free foreign capital flow, mature VIE structures, and the “same stock, different rights” arrangements.

In 2018, the Hong Kong Stock Exchange reformed its listing rules, introducing Chapters 18A (biotech) and 18C (specialized enterprises), attracting a batch of high-growth, R&D-heavy companies with weaker profitability but strong growth potential.

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This article is from: CITIC Securities

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