Mainland China, Hong Kong, Japan, Korea and Singapore have one thing in common – they are export oriented. Though mainland China is shifting its economic growth to internal consumption and Hong Kong has become a financial centre, exports, particular exports to the US, are still the major contribution to economic growths for the East Asian countries. The economy and the performance of the stock markets in US affect these East Asian stock markets.

Interactions between China and Japan stock markets

Owing to time zone differences, Asian stock markets open a few hours after the US stock markets have closed. Seoul and Tokyo stock markets are the first major Asian stock markets to open at 8 a.m., Hong Kong Shanghai standard time, and they are the first ones to react to US economic news and US stock performance overnight. At 9.30 a.m., Shanghai and Shenzhen stock markets open. Occasionally the mainland China stock markets follow the trends of Tokyo and Seoul stock markets, if there are big economic issues or very volatile stock movements such as the volatile stock movements during 2008 and early 2009. Most of the time, internal policies and economic data have more influences on mainland China stocks.

The economic news and stock market performance of mainland China have impacts on Tokyo and Seoul stock markets. This is because China is a major importer of Korean and Japanese products. Both Japan and Seoul benefit from China’s 4 trillion stimulus plans. News on the moves of China’s state investment fund in Japan and Korea also influences the stock markets there. Since the Seoul stock market is comparatively small, it often follows bigger stock markets like Japan and China. The chart below shows the stock markets of Tokyo and Seoul are closely related, just like that of Shanghai and Hong Kong.

Interactions Among Shanghai, Hong Kong, Tokyo and Seoul Stock Markets

Click to enlarge

Influences of Tokyo stock market’s performance on Hong Kong stock market

The Hong Kong stock market is the latest major stock market to open in Asia. It opens at 10 a.m., 2 hours after Tokyo stock market has opened and 30 minutes after Shanghai and Shenzhen stock exchanges have opened. The trends in those stock markets have given Hong Kong enough hints. Opening gaps are therefore common for Hong Kong stocks. In addition, the Hong Kong stock exchange has a two-hour long lunch break from 12.30 p.m. to 2.30 p.m.  When it resumes trading at 2.30 p.m., the Tokyo and Seoul stock markets have already closed, while mainland China stock markets have already started the afternoon session since 1 p.m. and have only 30 minutes left for the session. Again, opening gaps in the afternoon session of the Hong Kong stock market are very common, due to its reactions to the performances of Tokyo, Seoul and Shanghai stock markets.

Traditionally, Hong Kong follows Tokyo’s trends, which was the trend during the turmoil in 2008 and 2009. After China announced her 4 trillion stimulus plan in November 2008, Hong Kong has become closer to mainland China. Since the end of 2009, the Hong Kong stock market tends to follow the trends of mainland China stock markets more than that of Tokyo. When Shanghai and Shenzhen stock markets close for holiday while Hong Kong stock market still opens, Hong Kong will follow Tokyo’s trend again.  This was the case when Shanghai was on Chinese New Year holidays while Hong Kong stock market still opened from February 17 to February 19, 2010. On those days the Hong Kong stock market followed Tokyo’s trends and made opening gaps according to Tokyo’s performances in both morning and afternoon sessions.

Interactions with other Asian countries

The stock markets in Singapore, Thailand, Philippines, Malaysia, Indonesia, Taiwan and India have little impacts on China stock markets. Once a blue moon, there are incidents having impacts on China stock markets, for example, a sudden devaluation of currency, sudden prohibitions on foreign investments, a sudden interest rate increase and Barings collapse in Indonesia. On the other hand, Taiwan and Singapore are influenced by China, as the later is their major importer apart from the US.

Conclusions

China, Japan and Korea are correlated in stock performance. Though Shanghai and Shenzhen are quite independent of Japan’s influences, Hong Kong is more correlated to Japan in stock performance. If you trade Hong Kong stocks, you have to study the performance of the US stocks and the reactions of the Tokyo stock market to overnight issues in US before the Hong Kong stock market opens. At the end of the Hong Kong morning session, Japan has already started the afternoon session. You may have to make a decision if you want to carry your unfinished morning trades to the afternoon session by forecasting both the Japanese and China Shanghai afternoon session trends. A big plummet in the afternoon session of the Tokyo or Shanghai stock market may give rise to a runaway gap for the Hong Kong stocks when the afternoon session begins. If the Tokyo and Shanghai stock trends diverge, follow the Shanghai stock market trend for your decision. Mainland China stocks have more influences on Hong Kong because according to unproved report, 10% of Hong Kong stock market’s turnover are contributed by Mainland Chinese.

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