- China’s stock markets have become more integrated into the global economy over the last 25 years.
- The Shanghai Composite Index has shown a significant increase in correlation with the S&P 500, indicating a stronger relationship between Chinese and global markets.
- Other exchanges around the world have also seen increased correlation with the Shanghai Composite, except for Russia’s MOEX.
- The growing presence of banking and tech stocks on the Shanghai Composite is one factor contributing to the increasing correlations.
- However, the Hang Seng, another major Chinese exchange, has not shown a significant increase in correlation with global markets.
- China’s emergence on the world stage has shifted correlations across its stock markets, with the Shanghai Composite becoming more correlated with global markets.
- The future trend of these correlations will be worth monitoring, especially in an era of increased geopolitical competition.
China’s emergence as a global economy has been one of the biggest economic stories over the last few decades. As China’s industry modernized and its tech companies went public on Chinese stock exchanges, the nation’s markets and exchanges also opened up to overseas investors to some extent. Despite this integration into the world economy, China’s stock markets still exhibit idiosyncratic movements compared to other global exchanges, often experiencing added volatility due to short sale constraints and other factors.
To understand the co-movement of China’s stock exchanges with global markets over the past 25 years, a study was conducted to examine the correlation between the Shanghai Composite Index and the Hang Seng, China’s two major exchanges, and their counterparts around the world. The study divided the time periods into three categories: 1997 to 2004, 2005 to 2014, and 2015 to the present.
The study revealed two key findings. Firstly, the correlation between the Shanghai Composite and the S&P 500 has significantly increased over the past quarter century. In the period between 1997 and 2004, the correlation coefficient was 0.08. However, in the most recent sample, the correlation coefficient soared to 0.47, indicating a significant shift in co-movement between the two indices.
This monumental jump in correlations is not isolated to the S&P 500 but is observed with other exchanges around the world. Almost all exchanges, including the XLK US tech index, have shown increased correlation with the Shanghai Composite from 1997 to the present, with the exception of Russia’s MOEX.
The question arises as to what explains these increasing correlations. The study suggests that two factors or a combination thereof could be responsible: the opening of China’s markets to the rest of the world and the growing presence of banking and tech stocks on the Shanghai Composite.
However, while the Shanghai Composite has shown greater correlation with global markets, the same trend is not reflected in the Hang Seng. Historically, global indexes have had higher correlation with the Hang Seng, but the co-movement between the Hang Seng and other exchanges has not increased significantly over the past 25 years.
Overall, China’s emergence on the world stage has led to a shift in correlations across its stock markets. The Shanghai Composite has become more correlated with global markets, whereas the Hang Seng has not experienced a similar trend. It will be important to monitor these correlation trends, especially in the context of increased geopolitical competition in the future.
