Indian stock markets need to focus more on Hong Kong than Shanghai: Here's why

The stock market meltdown in China, a year after an unbridled speculative rally, might not be too negative for Nifty, which data shows is more correlated to the Hang Seng than to the SSE Composite — mainland China's bellwether index. A look at data over the past decade suffi ces to draw this conclusion. While indices of both India and Hong Kong are driven by foreign investors, China is dominated by resident investors. Simply put, the stock market crisis in China is unlikely to spill over to India.

For one, Nifty and Hang Seng have gained 0.5 per cent and 2.5 per cent each so far this calendar year, while SSE Composite has surged over 11 per cent. Analysts said the increasing economic interdependence between the China and India has contributed to the inverse correlation between these two countries.

What's sure is that a hard landing of the Chinese economy will result in decreased global demand for commodities like crude oil and copper, which ironically, works to India's advantage as it is one of the chief importers of the same commodities.

Lower commodity prices remove infl ationary pressures here and may spur RBI to cut rates, which can kickstart growth.

"Data shows India's stock index has a higher correlation with Hong Kong than with the mainland," said Sumeet Jain, technical analyst - institutional research, SBICAP Securities. "While India and Hong Kong markets are largely driven by foreign investors, China's stock market is driven by domestic players."

"The impact of the meltdown in Chinese markets is going to be limited as far as the Indian stock markets are concerned because the Chinese stock market has mainly native retail investors and China tightly limits foreign investment in mainland stocks," said Atul Kumar, head-equity funds, Quantum AMC.

"However, if Hang Seng falls, our markets could also take a hit though the quantum of hit may differ," said Jain of SBICAP Securities.