The relationship between China Stocks Listed in U.S. and northbound capital

Since the end of July, China stocks listed in U.S., Hong Kong stocks and northbound capital have been closely tied together.

Northbound capital usually refers to funds that flow into A-shares through the Hong Kong market.

The logic here is very straightforward. The three markets all represent the views of foreign investors on investing in China, with slightly different levels of participation. Foreign investors have the highest participation in Chinese stocks, followed by Hong Kong stocks and finally northbound capital. Today, China Stocks fell sharply (KWEB-3.4%). From the surface, there is not much news. The only thing that makes people feel a little relevant is the first net outflow of northbound funds after the net inflow for 12 consecutive trading days.

Is there a strong relationship between China stocks listed in U.S. and northbound capital? If so, who is leading whom?

We take July 23rd as the starting time to study the relationship between the rise and fall of KWEB and the net inflow and outflow of northbound funds in this month and a half. From a global perspective, in the past 33 trading days, the rise and fall of KWEB and the inflow and outflow of northbound funds accounted for 22 trading days at the same time (KWEB rise and net inflow of northbound funds, or KWEB fall and net outflow of northbound funds), which was regarded as a relatively strong relationship.

From a partial perspective, the two days with the largest northbound capital inflow were July 28th and September 1st. Respectively,the increase of KWEB in these two days ranked second and third in 33 days. However, August 24th, the biggest increase of KWEB, did not cause a large-scale inflow of northbound funds on August 25th. The A-share market is earlier than the US stock market, therefore, from a bullish point of view, northbound funds are more forward-looking. 

If we look at it from the perspective of capital outflows, the largest northbound capital outflow occurred on July 26. Similarly, KWEB also experienced the largest decline on July 26. So from a bearish perspective, northbound funds are also forward-looking. Therefore, the first net outflow of northbound funds after the net inflow of funds in 12 trading days yesterday, it is easy to understand the decline of KWEB today.

Then the next question comes again. Why does the northbound capital play a guiding role in China Stocks listed in U.S., but the guiding role of China Stocks in northbound capital is relatively weak?