US stocks may no longer be an effective guide to Hong Kong equities, as Beijing’s crackdown triggers decoupling

Looking to American stocks for clues on how the Hong Kong market will move may no longer be an effective strategy for local investors, with China’s regulatory crackdown loosening the relationship between the city’s stocks and the world’s biggest equity market.

The correlation between the Hang Seng Index and the S&P 500 is at its weakest in three years, according to Bloomberg data. The city’s stocks are also moving least in tandem with global equities since March 2020, the data shows.

This decoupling trend underscores how Beijing’s campaign of reining in industries that top policymakers view as having too much sway over the Chinese economy has altered the investment landscape. Until recently, Hong Kong’s US$6.3 billion stock market was seen as typically being more driven by overseas sentiment, because of its large base of foreign traders and the city’s monetary policies tracking those of the US Federal Reserve.

However, the market capitalisation of about 30 per cent of companies trading in Hong Kong is exposed to Chinese regulatory risk. These businesses range from private tutoring and e-commerce firms to internet and applied software companies, according to Citic Securities. Alibaba Group Holding, which owns the South China Morning Post, is the biggest constituent of the Hang Seng Index with a 10 per cent weighting, while Tencent Holdings and Meituan are fourth and fifth-largest.

And while sentiment about local stocks seems to have stabilised, with the Hang Seng Index posting a weekly gain last week, the regulatory overhang will continue to weigh on the market going forward. This in turn could lead to a further decoupling from the US market, which currently underpinned by the Fed’s dovish tone on monetary policies.