Divergence Between Hong Kong Stocks And Offshore RMB: Which One Is “Wrong,” The Market Or The Currency?

A notable and unexpected divergence has emerged recently: the renminbi has continued to strengthen, with the offshore RMB appreciating about 1.3% against the U.S. dollar since early October and approaching the symbolic 7.0 level, while equity markets have retreated, with Hong Kong equities showing larger declines; the Hang Seng Tech Index, for example, has fallen roughly 15% from its October peak.

Historically, exchange‑rate movements and both A‑share and H‑share markets have tended to move in the same direction, because a stronger RMB typically signals foreign capital inflows and improving Chinese fundamentals. For Hong Kong stocks, RMB appreciation also mechanically boosts earnings per share when converted into Hong Kong dollars. The recent pattern—currency strength coinciding with equity weakness—therefore breaks with the usual relationship and raises the question of which market is mispriced. Given China’s record trade surplus of USD 1.08 trillion in the first eleven months and the prospect of a new Federal Reserve chair, expectations that a weak dollar and heavy settlement demand would jointly support RMB appreciation have intensified; if the traditional linkage still held, such dynamics would point to a revaluation tailwind for Chinese assets.

A closer inspection shows the apparent contradiction is reconcilable: the drivers behind the currency and the equity market are different, so divergence is not necessarily inconsistent. Historical precedent exists—Japan experienced a prolonged five‑year period (1990–1995) in which the currency appreciated while equities did not. Examining the RMB‑market relationship historically, the two have mostly moved together, and episodes of RMB strength paired with weak equities have been rare. When such divergences occurred, their eventual convergence direction depended on whether policy supported growth or whether fundamentals deteriorated.

Two prior episodes of RMB appreciation alongside weak equities occurred in March–June 2013 and July 2021–October 2022. In 2013, equities later converged upward toward the currency after counter‑cyclical policy measures were implemented. By contrast, the 2021–2022 episode ended with the currency weakening to align with a slowing economy once export momentum faded. These cases illustrate that convergence is ultimately determined by the evolution of fundamentals and policy responses.

Turning to the present, the RMB’s recent appreciation has been concentrated against the dollar rather than a broad trade‑weighted basket, with the RMB up about 1.3% versus the USD but only about 0.6% on a trade‑weighted basis. The appreciation does not appear to be driven primarily by foreign equity or bond inflows: A‑shares and Hong Kong stocks have declined about 1.6% and 4.3% respectively since October, and data show external portfolio flows have been mixed. Domestic fundamentals also do not support a narrative of broad improvement—PMI remains below the 50 threshold, fixed‑asset investment has contracted for several months, retail sales growth has slowed, and credit demand is weak. Policy signals have softened, with central‑bank language on preventing exchange‑rate overshoots becoming less forceful.

Instead, the recent RMB strength is best understood as the product of dollar weakness combined with exceptionally large trade surpluses and seasonal settlement demand. The Federal Reserve’s shift toward easier policy expectations and leadership transition pressures have weighed on the dollar, while resilient exports and weak imports produced a record trade surplus of USD 1.0758 trillion through the first eleven months. Seasonal net settlement flows—about USD 47 billion in October–November—have further supported appreciation. These forces can produce a passive RMB appreciation even when domestic demand and credit conditions are soft.

Equities, by contrast, are reflecting the domestic credit‑cycle slowdown and weakening demand. Concerns about stretched valuations in technology sectors, limited near‑term policy stimulus, and episodic liquidity shocks have amplified downside pressure on risk assets. In this context, the recent divergence is not a contradiction but a manifestation of distinct drivers: currency moves dominated by external and settlement dynamics, and equity performance driven by domestic fundamentals and credit conditions.

Looking ahead, short‑term tailwinds for the RMB may persist if dollar weakness and seasonal settlement flows continue. However, a stronger RMB does not automatically translate into stronger equities. The duration of the divergence will depend on how long the external and settlement factors remain in force and on whether domestic fundamentals and policy evolve to support a synchronized recovery. If the underlying growth and credit trajectory improves materially—particularly through meaningful fiscal measures that restore cash‑flow expectations and address balance‑sheet pressures—equities could converge with the currency’s strength. Conversely, if fundamentals remain weak, the currency may eventually adjust downward to align with the domestic slowdown.

Sustained RMB appreciation would have differentiated market effects. Crossing key psychological thresholds can boost sentiment and trigger narrative‑driven trading that benefits growth and consumer sectors in the short term. At the industry level, import‑dependent sectors such as energy, agriculture and materials would see cost relief, while service‑trade industries including aviation, duty‑free retail and outbound tourism could benefit from stronger purchasing power. Firms with significant U.S. dollar liabilities—common in internet, shipping, aviation, utilities and energy sectors—would experience lower debt servicing costs. By contrast, exporters would face margin pressure, and persistent currency strength could exacerbate existing price‑deflationary trends.

In summary, the current divergence between Hong Kong equities and the offshore RMB reflects different underlying drivers: currency appreciation driven by dollar weakness and record trade surpluses, and equity weakness driven by domestic credit‑cycle deterioration and demand shortfalls. Whether and how the two converge will hinge on the persistence of external settlement dynamics and, crucially, the trajectory of China’s economic fundamentals.