Shen Wan Hongyuan: With the gradual restoration of the revaluation effect and the effect of foreign capital allocation, the appreciation of the RMB is expected to drive the rise of Hong Kong stocks

The Zhitong Finance App learned that Shen Wan Hongyuan released a research report saying that looking back in history, there is a significant positive correlation between RMB and Hong Kong stocks; however, the RMB has appreciated rapidly recently, and Hong Kong stocks are still weakening. The reason may be that under the influence of weak performance, neither the effects of revaluation nor the effects of foreign capital allocation were evident. Regarding how to interpret the future market, the bank said that with the improvement in Hong Kong stock profits and the restoration of the “allocation effect” of foreign capital, the negative correlation between Hong Kong stocks and the US dollar may return. Looking back, the appreciation of the RMB is expected to once again help Hong Kong stocks rise. Along with the gradual restoration of the “revaluation effect” and “allocation effect” of exchange rate appreciation, the appreciation of the RMB is expected to be another boost to the rise of Hong Kong stocks at the macro level.

Shen Wan Hongyuan's main views are as follows:

Since 2016, the positive correlation between Hong Kong stocks and the RMB has been remarkable; however, the recent rapid appreciation of the RMB has caused Hong Kong stocks to “falter”. The logic behind the stock exchange linkage, who is whose “shadow”, and possible future interpretations?

1. Hot Thoughts: RMB and Hong Kong Stocks, Who's “Shadow”?

(1) The “bond” between the RMB exchange rate and Hong Kong stocks? The positive correlation is significant, but there has been a recent clear divergence

Looking back at history, there is a significant positive correlation between RMB and Hong Kong stocks; however, the RMB has appreciated rapidly recently, yet Hong Kong stocks are still weakening. Since 2016, the negative correlation between Hong Kong stocks and the US dollar against the RMB has reached -0.54; when the monthly increase of RMB exceeds 1.5%, the Hang Seng Index has a probability of rising 93.5% in that month. However, since November 13, the RMB rapidly appreciated by 1.9%, but the Hang Seng Index fell 4.8%, which clearly deviated from the exchange rate; this was the third time that the stock exchange divergence occurred among the 12 RMB appreciations since 2016.

When the RMB appreciates, Hong Kong stock profits, asset revaluation effects, and the return of foreign capital may be the main reason for the rise in Hong Kong stocks. 1) Currency revaluation. When RMB appreciates, RMB profits earned by Hong Kong stock companies will be amplified when converted to Hong Kong dollars. 2) Asset revaluation effect. Underlying assets such as Hong Kong-listed real estate stocks are denominated in RMB and face revaluation when appreciating. 3) Comparative effects of global allocations. The strengthening of the RMB exchange rate mostly indicates that China's fundamentals have a certain comparative advantage, which will enable global investors to allocate more Chinese assets.

(2) When the RMB appreciates, why are Hong Kong stocks not rising? Under the influence of weak performance, neither the effects of revaluation nor the effects of foreign capital allocation were evident

First, the weak performance of the weighted sector of Hong Kong stocks in 2025 caused the appreciation of the RMB to have limited effect on the profit expansion of Hong Kong stocks. 1) The appreciation of RMB will not only amplify Hong Kong stock profits but also increase losses; since the fourth quarter of 2025, the Hang Seng Index EPS will continue to decline over the next 12 months, weakening the “revaluation effect” of foreign exchange factors on Hong Kong stock profits. 2) The appreciation of the RMB has properly benefited multiple asset sectors, but housing prices and oil prices have not stabilized recently; on the contrary, it has become a drag on Hong Kong stocks. Nor is the “asset revaluation” logic beneficial to Hong Kong stocks.

Second, the Hong Kong stock market may focus on profitable settlement transactions. The overall lack of market trading limits the immediate feedback of Hong Kong stocks on favorable factors. 1) The current round of exchange rate appreciation was more driven by external factors than fundamental improvements, which weakened the “allocation effect” of foreign capital. 2) Looking back in history, the average turnover rate of the Hang Seng Index in December since 2011 was 4.4 times, the lowest in any month of the year. 3) Since November 13, many Internet platform companies and others have fallen short of expectations in their three-quarter reports, which has strengthened the inertia of profitable settlement transactions to a certain extent.

(3) Possible interpretations of the future relationship between Hong Kong stocks and RMB? Linkage may return, and Hong Kong stocks are expected to resonate with RMB

With the improvement in Hong Kong stock profits and the restoration of the “allocation effect” of foreign capital, the negative correlation between Hong Kong stocks and the US dollar may return. 1) Performance is the key to determining whether Hong Kong stocks can benefit from the “revaluation effect” of exchange rate appreciation, and the current combination of “rising profit growth for the next fiscal year+declining profit expectations for the current fiscal year” of Hong Kong stocks is often a forward-looking sign of improved profit expectations. 2) The allocation effect of exchange rate appreciation is expected to resume: the recovery in PPI is expected to continue to attract foreign capital inflows, and the effect of reallocating residents' deposits will also have a spillover effect on Hong Kong stocks.

Looking back, the appreciation of the RMB is expected to once again help Hong Kong stocks rise. In the short term, Hong Kong stocks tend to have a strong January effect at the beginning of the year after a profitable settlement of transactions at the end of the year. Looking ahead to the whole year, the resilience of the RMB is expected to continue with the interpretation of the “to be settled” logic, the restoration of nominal GDP, and the marginal cooling of trade frictions between China and the US. Along with the gradual restoration of the “revaluation effect” and “allocation effect” of exchange rate appreciation, the appreciation of the RMB is expected to be another boost to the rise of Hong Kong stocks at the macro level.

Risk warning: Geopolitical conflict escalated; the US economy slowed beyond expectations; the Federal Reserve exceeded expectations and turned into an “eagle.”