China is export oriented. Its economic growth till now has to a large extent relied on exports, especially to the US. The US economy has influences on China stock markets.

Influences of the US on Mainland China stock markets

The majority of China’s exports go to the US and therefore the performance of Wall Street has an impact on China stocks. If Wall Street plummets, the China stock markets, which open 6 hours after the US stock markets close in summer time, may react and follow the retreat. This often happened 2 years ago.  However, things have changed since China announced its RMB 4000 billion stimulus plan in November 2008. Shanghai and Shenzhen stock markets had then established bottoms after the announcement and reached their peaks in August 2009. This was different to Wall Street’s bottom built in March 2009. Recently, Wall Street is making new highs but Mainland China stock markets are still 10% off their 2009 highs. This is because China is tightening its stimulus plan.  Mainland China stock markets react more to internal policies than to external economic news nowadays.

Shanghai-Hong Kong-US 5-Year Comparison

Click to enlarge

Influences of the US on Hong Kong stock market

Influences of the US stock markets on Hong Kong stock market are more prominent. The US ADR closing prices have impacts on the opening prices of the corresponding Hong Kong stocks. Before the announcement of the “Hong Kong Stock Through Train” program by China government, the Hong Kong stock market, which also opened 6 hours after Wall Street closes in summer time, tended to follow Wall Street closely. Hong Kong followed the US in making the bottoms in March 2009, instead of November 2008. However, things have changed. Since mid 2006, there have been so many companies from mainland China, many of which are large state enterprises or financial entities, got public listing on the Hong Kong Stock Exchange, that China related stocks have now taken the major share of the total market capitalization of the Hong Kong stock market. Many of those stocks have double listings on both mainland China and Hong Kong stock markets. Therefore, the performance of those A shares will often, though not always, affect the performance of the corresponding H shares.

In addition, since the announcement of the “Hong Kong Stock Through Train” program, a lot of resourceful funds from mainland China have entered Hong Kong via special channels to speculate in the stock market. Most of such funds are managed by mainland China people, who are fond of H shares and Red Chips. They tend to react more to China’s economic news than that of the US. Hence, if Shanghai stocks rise while US stocks fall overnight, the Hong Kong stock market may ignore bad news from the US stock market and follow mainland China, and vice versa, depending on how important the news is and how far the US stocks have fallen or risen.  Studying the chart above and you will notice that since the last quarter of 2009, the Hang Seng Index has been more correlated to Shanghai Stock Exchange Composite Index than to Dow Jones Industrial index.

Influences of the US stock futures on Hong Kong stock market

When The Hong Kong stock market begins its afternoon session at 2.30 p.m. local time, the Tokyo stock market has already closed and the pre-market trading of US stock futures has begun. The influences from mainland stock markets diminish when both Shanghai and Shenzhen stock markets close at 3 p.m. Hong Kong is then on its own and the performance of the US stock futures may affect the Hong Kong stock market. This is prominent during volatile movements such as the plummets in October 2008 and March 2009.

Influences of China on the US stock markets

The total market capitalization of Shanghai, Shenzhen and Hong Kong stock markets combined is less than half the size of the US stock markets. Unless there are really big issues, like the announcement of the RMB 4 trillion stimulus plan, there are little influences on Wall Street performance.

Conclusions

Being the largest economic entity of the world, the performance of the US stock markets influences the China stock markets. Such influences are more obvious on Hong Kong than on Shanghai or Shenzhen. The US ADR closing prices influence the corresponding stock opening prices and the pre-market trading of US stock futures has some influences on the afternoon session trading of the Hong Kong stock market. However, as China is trying to shift its economic growth to internal consumption, and Hong Kong’s economic growth and stock market performance are getting closer to China, the influences from the US are fading gradually.

Related articles:

Hong Kong Stock Market Extends Trading Hours Starting March 7, 2011

Interactions Among Stock Markets in Mainland China, Hong Kong, Japan and Korea

Hong Kong Stock Through Train

China Stock Trading Hours Converted To Your Time Zone

What are A Share, B Share, H Share & Red Chip