Chinese equities no longer offer a haven from global sell-offs as correlation with US equities reaches record high
- The 120-day correlation between China’s CSI 300 Index and the S&P 500 has risen to its highest level ever since the Covid-19 outbreak
- Global economic integration and increased foreign ownership of Chinese equities are behind the performance convergence of the world’s two biggest markets
Traders seeking shelter in Chinese stocks to stay clear of a global sell-off might be disappointed.
While China’s equity market is the only major global bourse that has not plunged into bear territory amid the Covid-19 sell-off, the performance of stocks in the Asian nation and the US has converged by the most on record. The 120-day correlation between the CSI 300 Index and the S&P 500 index recently rose to its highest level since Bloomberg began compiling the data in 2002.
The metric rose to 0.44 on March 25, the highest in 18 years, Bloomberg data showed, before easing to 0.42 on Wednesday. The correlation between the Hang Seng Index and the US benchmark was 0.41. A reading of one means movements are in lockstep and a reading of zero indicates no relation at all.
The close correlation between the two benchmarks calls into question forecasts made by some analysts that mainland listed stocks would be shielded from the global rout because of China’s success in containing the coronavirus, easing lockdowns and reopening factories. Challenges to the theory range from severe damage to the global supply chains that will also hamper Beijing’s efforts to resume production, shrinking demand for exports and increasing influence of foreign fund flows on Chinese equity prices.
“Against the backdrop of global integration, movements on global markets are more correlated than before,” said Chen Hao, a strategist at KGI Securities in Shanghai. “China’s market is now part of the global asset allocations and rising foreign ownership of Chinese stocks has brought the performance of the market more in line with other world markets.”
A rally in Chinese stocks, which was spurred by Beijing’s unprecedented lockdown measures, has quickly vanished since the pandemic roiled global financial markets last month and given way to a sell-off. The CSI 300 Index and the S&P 500 have largely remained in tandem since then, falling 3.6 per cent and 3.7 per cent, respectively over the past one and a half months.