Fears that Hong Kong’s stock market is reacting more to Beijing’s policies rather than to company fundamentals may lose their bite in the wake of the mainland’s stock-market rescue.

Vincent Kwan, general manager of Hang Seng Indexes, said the markets had behaved very differently over the summer. “In Hong Kong, the same companies [as listed in mainland China] trading as H-shares are traded very differently, and driven by factors such as fundamentals.”

Since the opening of Shanghai-Hong Kong Stock Connect in November last year, some investors and analysts  worried that Hong Kong would import the sort of volatility typical on the Shanghai and Shenzhen bourses. Mainland markets are heavily driven by retail punters reacting to government policy announcements.

A fund manager told AsianInvestor that odd cases such as the wild swings in A-share stock Hanergy, a solar power group, had raised questions about how Stock Connect might be impacting the Hong Kong market.

Hanergy stock was one of the most heavily traded across Stock Connect in February and March, but saw its price plunge by 47% in less than half an hour in May, wiping off $19 billion from the company’s market value.

“While we still do not know exactly what led to the plunge, we worry that there will be future cases such as Hanergy re-appearing on the Hong Kong stock market,” the fund manager said.

Henry Chan, CIO at BEA Union Investment in Hong Kong, said the mainland and Hong Kong markets had been showing signs of greater correlation, particularly in intra-day trading.

When a stock moved in Shanghai or Shenzhen, he said, it would probably do so in Hong Kong, too. “You would probably see the same rationale,” he said.

Asked about the potential A-shareification of Hong Kong, Chris Wood, global equity strategist at CLSA, noted that while he was reluctant to be underweight H-shares as they looked ridiculously cheap, he noted there was no evidence of them becoming decoupled from the mainland market.

"All the evidence is that they [H-shares] are the worst of both worlds, because they are not geared into any of the upside but they are geared into the downside," he said.

Asked about the outlook for Hong Kong's stock market, Wood said he saw it as two markets. "One is MSCI Hong Kong and the other is MSCI China," he observed. "I do not look at the Hang Seng Index any more because it is a mixture of two different markets."

Nevertheless, Hong Kong’s market is more liquid, with a variety of investor types including hedge funds that regularly go short and take the other side of popular trades. Hedging and the use of derivatives add to market stability, because when the herd moves against a stock or against the index, there is more likely to be a trade going the other way.

Investors say small- and mid-cap stocks in Hong Kong are most susceptible to tracing their related A-shares’ wild price movements in China. The large caps in Hong Kong are heavily owned by institutional investors, and the biggest H-shares remain stable, said Kwan. The difference is what explains the 24% premium for A-shares that exist over an index of Hong Kong stocks.

William Fong, a fund manager at Baring Asset Management, said that despite the appearance of increasing correlation between H-shares and A-shares, the opposite trend was more likely to happen.

“The A-share market is emerging and young,” he said, comparing it to the stock markets in Taiwan and Korea when they first opened to foreign investment in the 1980s and 1990s. Programmes such as the qualified foreign institutional investor scheme and Stock Connect will gradually bring more institutional, long-term money into mainland China.

Fund managers expect the correlations to Hong Kong to increase, but over time it will be Hong Kong’s standards that come to influence mainland China’s, not the other way around.