Recently, the Hong Kong stock market experienced significant volatility, marked by a rapid surge followed by a sharp decline. Meanwhile, during this period of fluctuations in Hong Kong, the A-shares market remained relatively stable, prompting widespread discussions among investors regarding the relationship between these two markets.

Factors Contributing to the Surge in Hong Kong Stocks

The rapid rise in Hong Kong stocks can be attributed to several factors. One of the primary drivers was the correction of the A-H share premium. Many A-shares experienced notable gains before the holidays, and this momentum spilled over into the corresponding stocks listed in Hong Kong, particularly in the brokerage sector, where the effect was especially pronounced. Furthermore, the strong performance of technology stocks, especially in the semiconductor sector with companies like SMIC, further fueled the market rally. However, it is important to note that this surge lacked solid fundamental support, making a short-term correction inevitable.

Causes of the Sharp Decline in Hong Kong Stocks

Following the post-holiday surge, the Hong Kong market underwent a significant correction on October 8th. The Hang Seng Technology Index experienced an intra-day drop exceeding 14%, while the Hang Seng Index fell by over 10%, closing with a 9.41% decline. Additionally, the Hang Seng Technology Index and the Hang Seng China Enterprises Index recorded losses of 12.82% and 10.17%, respectively.

The decline was driven by several factors, including weakened expectations for economic recovery and poor performance in key sectors such as real estate and retail, both of which have underperformed over the past year. In particular, real estate and retail were significant drags on the Hang Seng Index. Moreover, liquidity challenges remain a major issue in the Hong Kong market. Although many companies have initiated stock buybacks to stabilize prices, overall liquidity issues persist.

Linkage and Differences Between A-shares and Hong Kong Stocks

Market analysts suggest that the sharp decline in Hong Kong stocks was partly justified, as it reflected market anticipation of A-shares resuming trading after the holiday. From a cumulative performance perspective over recent weeks, the correction in the Hang Seng Index appears relatively moderate. Furthermore, the large trading volumes on the day indicate active investor participation in anticipation of A-shares reopening.

Although both A-shares and Hong Kong stocks are part of China's capital markets, there are distinct differences in their correlation and performance. In the short term, fluctuations in Hong Kong stocks can influence market sentiment in A-shares, especially when Hong Kong stocks rally during holiday periods, leading to increases in A-shares when trading resumes. However, over the long term, the connection between the two markets is weaker. Hong Kong stocks are more sensitive to international capital flows and macroeconomic factors due to their stronger integration with global markets, while A-shares are primarily driven by domestic policies and economic cycles.

Key Aspects of the A-share and Hong Kong Stock Relationship

1. Interplay of Liquidity: Liquidity between A-shares and Hong Kong stocks is closely connected through mechanisms such as the Stock Connect programs (Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects). The rise in Hong Kong stocks often attracts more capital to A-shares, and vice versa. Consequently, the surge in Hong Kong stocks can have a positive spillover effect on A-shares, boosting investor confidence. On October 8th, A-shares opened significantly higher, with total market turnover reaching a record high of 3.45 trillion RMB, underscoring the positive role of liquidity flows.
2. Resonance of Market Sentiment: Sustained gains in Hong Kong stocks may influence investor sentiment in the A-shares market, fostering a more optimistic outlook. Improved expectations for future market performance could lead to increased trading activity in A-shares, particularly in sectors such as technology. Conversely, sharp declines in Hong Kong stocks could trigger fluctuations in A-shares' market sentiment, potentially affecting investor behavior.
3. Sectoral Rotation: The surge in Hong Kong stocks may trigger sectoral rotation within the A-shares market, with investors shifting their focus to industries linked to gains in Hong Kong, such as technology, consumer goods, and emerging industries. High-quality companies in these sectors may become market leaders, generating ripple effects across different sectors in the A-shares market.