CFA Institute: Chinese and World Stock Market Co-Movements
China’s emergence as a global economy on the world stage is perhaps the biggest economic story of the last 30 years. During the last several decades, China’s industry has modernized, many of its tech companies have debuted on Chinese stock exchanges via initial public offerings (IPOs), and the nation’s markets and exchanges have opened to a degree to overseas investors.
China has become more and more integrated into the world economy. Yet despite this trend, China’s stock markets still sometimes move in idiosyncratic ways relative to other world exchanges. Due to short sale constraints, among other features, China’s exchanges have sometimes been prone to added volatility, with notable bubbles and busts occurring on the Shanghai Composite Index in 2007 and 2015.
How then have the co-movements of China’s stock exchanges developed over the last 25 years as the nation has become a greater presence in global markets?
To answer this question, we examined how correlations between the two major Chinese exchanges — the Shanghai Composite Index and the Hang Seng — and their counterparts around the globe have evolved. Then we divided the time periods into three categories — 1997 to 2004, 2005 to 2014, and 2015 to present — to see what sort of pattern emerged over time.
We isolated two key findings.
First, the Shanghai Composite has become much more highly correlated with the S&P 500 over the last quarter century. Between 1997 and 2004, it had a 0.08 correlation. In our most recent sample, the correlation coefficient soared to 0.47 and represents the greatest shift in co-movement over our entire study period.
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