China and U.S. stock gap hits record high as blue chips slide

The gap between U.S. and Chinese equities reached its widest margin on record on Thursday, October 22, with the S&P 500 trading at 2.095 times the Shanghai Composite. This ratio, calculated from daily closes, exceeds the previous record of 2.088 set in September 2024 and marks the highest level in data dating back to 1997. The S&P 500 also hit a record ratio of 0.334 against the Hang Seng Index, a metric tracked since 1990. Although both ratios retreated slightly on Friday as Shanghai rallied, the weekly period ending October 23 still produced the widest historical divergence.

The divergence is evident in year-to-date performance through October 23. The S&P 500 has gained 11.4% in 2026, while the Shanghai Composite fell 7.0% and the Hang Seng dropped 9.9%. Consequently, the U.S. benchmark leads the Shanghai index by approximately 18 percentage points and the iShares MSCI China ETF (MCHI) by about 30 points, as MCHI is down 18.4%. This cumulative gap reflects years of differing performance rather than a single-year swing.

Chinese blue-chip stocks have faced significant pressure this week. The CSI 300 fell 1.8% to 4,036.30 on Thursday, its lowest close since July 2025, and entered a bear market by finishing 20.2% below its June 22 peak. The Shanghai Composite dropped to its lowest level in more than a year, while the Hang Seng Tech index hit a two-year low. Major tech names led the decline, with Alibaba Group falling more than 6% and Tencent dropping 2.9%. Investors expressed doubt about the sustainability of AI-driven growth and valuations, while also reacting to Beijing’s incremental stimulus measures and a new tax on offshore trusts held by shareholders of Hong Kong-listed Chinese companies.

Hao Hong, chief investment officer at Lotus Asset Management, described the market as being "in the dump" and noted that the National Team, a group of state-backed funds that purchases shares to stabilize prices, has been hesitant to intervene. However, state-backed buying appeared on Friday, lifting the CSI 300 by 1.7% and the Shanghai Composite by 0.9%. Despite this rebound, the CSI 300 still lost 1.6% for the week, marking its eleventh consecutive weekly decline, the longest losing streak since the index was created in 2005.

Morgan Stanley analysts stated that weak domestic demand and liquidity headwinds persist, noting that valuations have yet to reach an outright bottom. The S&P 500 dropped 0.52% on Friday, indicating that the record gap widened primarily due to Chinese declines rather than U.S. strength.

Exchange-traded funds tracking Chinese assets show varied performance reflecting sector exposures. The KraneShares CSI China Internet ETF (KWEB) fell to $23.14 on Friday and is down 32.0% in 2026, with a one-year total return of -37.79%, highlighting the damage to internet stocks amid AI valuation concerns. The iShares China Large-Cap ETF (FXI), which holds $3.78 billion in assets, fell to $32.31 and is down 15.6% in 2026; its one-year return is -17.20%, as bank holdings offset some tech losses. MCHI dropped to $49.00, sitting just above its 52-week low of $48.65, with a one-year return of -20.79%.

The investment case for China remains divided between price and earnings fundamentals. Bulls point to record discounts relative to U.S. stocks and evidence that state money will step in during chaotic selling. Bears argue that weak domestic demand, piecemeal stimulus, and new policy risks from the offshore trust tax keep the market a value trap until earnings improve. The National Team’s delay in acting until after the CSI 300 entered bear market territory further supports the bearish view.

Two specific signals could shift this outlook: if the CSI 300 ends its losing streak with a weekly gain alongside a substantial fiscal package from Beijing, the bull case strengthens. Conversely, if MCHI closes below its 52-week low of $48.65, it would confirm the bearish thesis.