Chinese and World Stock Market Co-Movements: Two Findings

China’s emergence as a global economy on the world stage is perhaps the biggest economic story of the past 30 years. Over the past few decades, China’s industry has modernized, many of its technology companies have debuted on Chinese stock markets through initial public offerings (IPOs), and the country’s markets and stock exchanges have opened up to some extent to foreign investors. .

China has become increasingly integrated into the world economy. However, despite this trend, Chinese stock markets still sometimes move in idiosyncratic ways relative to other global stock markets. Due to short-selling limitations, among other features, China’s stock markets have at times been prone to greater volatility, with notable bubbles and declines in the Shanghai Composite Index in 2007 and 2015.

So how have the joint movements of Chinese stock markets played out over the past 25 years as the nation has become a bigger presence in global markets?

To answer this question, we examined how the correlations between the two main Chinese exchanges, the Shanghai Composite and the Hang Seng, and their counterparts around the world have evolved. We then divided the time periods into three categories: 1997 to 2004, 2005 to 2014, and 2015 to present, to see what kind of pattern emerged over time.

We isolated two key findings.

First, the Shanghai Composite has become much more closely related to the S&P 500 over the past quarter century. Between 1997 and 2004, it had a correlation of 0.08. In our most recent sample, the correlation coefficient shot up to 0.47 and represents the largest change in co-movement over our entire study period.

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Correlations: Shanghai Composite to S&P 500

August 1997 to December 2004	0.08
January 2005 to December 2014	0.35
January 2015 to date	0.47

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The monumental jump in the Shanghai Composite’s co-movements is not isolated to the S&P 500. Correlation coefficients for almost every exchange around the world, even the US tech index XLK, have risen with the Shanghai Composite between 1997 and the present. The only exception? MOEX of Russia.

The question is why. What explains the increased correlations?

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Correlations: Shanghai Composite and Hang Seng vs. Global Exchanges
August 1997 to December 2004

	S&P 500	Nikkei	Bombay	FTSE	CAC 40	DAX	MOEX	TSX	ASX 200	XLK
shanghai Comp.	0.08	0.14	0.16	-0.09	0.02	0.08	0.26	0.13	-0.06	0.08
Hang Seng	0.59	0.41	0.28	0.63	0.50	0.50	0.49	0.64	0.58	0.66

January 2005 to December 2014

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We believe it comes down to two factors or a combination of them: the opening of China’s markets to the rest of the world and the growing presence of banking and technology stocks in the Shanghai Composite.

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All-time correlations: Shanghai Composite, Hang Seng and global indices

	S&P 500	Nikkei	Bombay	FTSE	CAC 40	DAX	MOEX	TSX	ASX 200	XLK
shanghai Comp.	0.28	0.30	0.30	0.25	0.21	0.25	0.25	0.29	0.26	0.25
Hang Seng	0.63	0.50	0.51	0.64	0.55	0.56	0.50	0.64	0.58	0.61

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Our second critical point is that the increasing correlation of the Shanghai Composite with global markets is not reflected in the Hang Seng. Historically, global indexes have had a higher correlation with the Hang Seng, but the co-movement between it and other exchanges has not increased much over the past quarter century. The S&P 500 had a correlation coefficient of 0.59 with the Hang Seng from 1997 to 2004. That has barely budged. Since 2015, it has stood at 0.60.

All in all, China’s emergence on the world stage has changed the correlations between its stock markets. The Shanghai Composite is now much more correlated with global markets, having nearly doubled its correlation coefficient in just 10 years.

However, there has been no similar trend in the Hang Seng. Its correlation with most global exchanges has barely budged over the past 25 years.

Whether these correlation trends continue in an era of increased geopolitical competition will be something to watch out for in the coming months and years.

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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.

Image credit: ©Getty Images/Johannes Mann

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