Hong Kong Market Sees Shift in Pricing Power as Correlation with A-shares Strengthens

Historically, the Hang Seng Index was highly correlated with the S&P 500, showing a 77% correlation from 1970 to 2020. During major downturns in U.S. markets, Hong Kong stocks saw an average drop of 44%, compared to 46% in U.S. markets. This linkage stemmed from a high foreign ownership ratio—exceeding 70%—and the Hong Kong dollar's peg to the U.S. dollar, which tied liquidity closely to Federal Reserve policy.

Since 2020, however, this dynamic has shifted significantly. The correlation between the Hang Seng Index and the CSI 300 Index has risen from 60% to 80–90% on a 12-month rolling basis. In both 2021 and 2023, Hong Kong stocks moved contrary to U.S. equities but mirrored the direction of A-shares. Guotai Haitong Securities notes that the decreasing correlation with U.S. markets and increasing alignment with A-shares reflect an evolving investment environment in Hong Kong.

This transformation is largely driven by a shift in liquidity pricing power toward the mainland. According to the Dividend Discount Model, returns are shaped by earnings growth and valuation changes. Since 2020, valuation factors have had a growing impact on price fluctuations in the Hong Kong market, aligning with the stronger correlation with A-shares. This indicates that changes in liquidity dynamics may be the underlying cause of altered market correlations.

In the past, Hong Kong's macro liquidity followed the Federal Reserve, with its linked exchange rate system maintaining a stable rate of 7.75–7.85 HKD per USD since 1983. At the micro level, foreign investors had long dominated the holding structure of Hong Kong stocks. However, the share of foreign capital has declined from 75% in October 2020 to 61% by June 2025. Since September 2020, more than HKD 740 billion has flowed out of the Hong Kong stock market.

This decline is attributed to factors including heightened geopolitical tensions, widening U.S.-Hong Kong interest rate differentials, and shifts in risk premium advantages relative to Japanese and Indian equities. For instance, U.S. restrictions on investment in Chinese military and tech sectors, such as those imposed in 2024, have contributed to reduced capital inflows. Meanwhile, rising interest rate spreads have prompted capital to shift from the HKD to higher-yielding U.S. assets. At the same time, narrowing risk premium gaps between Hong Kong, Japan, and India have diminished Hong Kong's relative attractiveness, leading to a decline in foreign participation.

As foreign ownership wanes, Hong Kong’s sensitivity to overseas market shifts is also weakening. The return of U.S.-listed Chinese firms to Hong Kong further reduces mid-term correlation with U.S. markets. Since 2020, many leading Chinese firms have pursued dual listings in Hong Kong. By April 18, 2025, approximately 70% of the market capitalization of such companies had completed dual listings, reshaping investor structures and response mechanisms.

At a structural level, Chinese enterprises are now the dominant force in the Hong Kong market, accounting for 71% of total market capitalization and contributing 91% of net profits as of June 2025. The return of firms such as Alibaba and JD.com has reinforced this trend. Without these firms, Hong Kong's return on equity drops significantly. Policy developments have further deepened mainland ties. In 2024, the China Securities Regulatory Commission introduced five new cooperative measures, and the Hong Kong–Shanghai coordinated development plan was implemented. The proportion of IPOs from mainland enterprises rose from 32% in 2017 to 88%, with notable listings such as CATL (宁德时代) and Jiangsu Hengrui Medicine Co,.Ltd (恒瑞医疗).

Meanwhile, Hong Kong's connection to overseas markets continues to weaken. The correlation between Chinese and U.S. economic cycles has declined, with PMI correlation falling from 47% to 20%. Currently, only 18% of the revenue of Hong Kong-listed companies is derived from overseas, limiting the impact of exports on corporate earnings. These developments signal a structural transformation in Hong Kong’s market environment, with its pricing power increasingly shaped by mainland dynamics rather than external influences.