U.S.–China Equity Gap Hits Historic High as Chinese Blue Chips Enter Bear Market

A longstanding divergence between the U.S. and Chinese equity markets reached unprecedented levels this week. According to 24/7 Wall St., figures from the close on October 22 showed the S&P 500’s value reaching 2.095 times the Shanghai Composite in local currency terms, a record ratio in data going back to 1997.

Market Divergence by the Numbers

For U.S. investors tracking global benchmarks, the scope of the gap is now historic. 24/7 Wall St. reports the S&P 500 ended October 22 at 2.095 times the Shanghai Composite, topping the previous record of 2.088 set on September 19, 2024. The S&P 500’s ratio to Hong Kong’s Hang Seng Index also closed at a record 0.334, with records dating back to 1990. Both ratios pulled back modestly the following trading day, but the weekly gap hit the widest margin ever recorded.

U.S.-tradeable ETFs illustrate the gulf for dollar-based investors: with dividends included, the SPDR S&P 500 ETF Trust (SPY) reached an all-time high compared to the iShares MSCI China ETF (MCHI) on October 22, in data back to 2011. In local currency terms, the S&P 500 is up 11.4% for 2026 through October 23. Over the same period, the Shanghai Composite lost 7.0% and the Hang Seng declined 9.9%. As calculated by 24/7 Wall St., the S&P 500 stands ahead of the Shanghai Composite by around 18 percentage points and by about 30 points ahead of MCHI, which is down 18.4%. The record shows up in the cumulative ratio, reflecting years of divergence, not a single year’s performance alone.

Chinese Blue Chips Enter Bear Market Territory

The gap widened as China’s primary blue-chip index, the CSI 300, entered a bear market on October 22, falling 1.8% to 4,036.30, its lowest close since July 2025. The index finished 20.2% below its June 2026 peak. The Shanghai Composite also dropped 1.5% to its lowest level in more than a year, while the Hang Seng Tech Index touched a two-year low. Alibaba Group shares fell by more than 6% and Tencent lost 2.9% that day, as investor confidence in the sustainability of AI-driven growth and valuations dropped. The market was further pressured after Beijing moved to tax offshore trusts held by shareholders of Hong Kong-listed Chinese firms. According to Hao Hong, CIO at Lotus Asset Management, "The market is in the dump," and the state-backed National Team “has been rather hesitant to make a move.”

Policy Response and Mixed Stabilization

On October 23, heavy trading in ETFs favored by state-backed investors helped lift the CSI 300 by 1.7% and the Shanghai Composite by 0.9%. Despite this intervention, the CSI 300 still lost 1.6% for the week, its 11th straight weekly decline and the longest losing streak since the index was created in 2005. The index ended roughly 19% below its June peak. Morgan Stanley analysts stated that "weak domestic demand and liquidity headwinds persist, while valuations have yet to reach an outright bottom." The S&P 500 also slipped 0.52% on Friday, meaning the record gap emerged as both U.S. and Chinese stocks retreated, but with heavier losses in China.

Internet-focused Chinese equities took the heaviest losses. The KraneShares CSI China Internet ETF (KWEB) fell 0.3% Friday to $23.14 and dropped about 5.2% for the week. It is down 32.0% in 2026, with a one-year total return of -37.79%. The iShares China Large-Cap ETF (FXI), with $3.78 billion in assets, fell 0.43% to $32.31 and is down 15.6% for the year, with a one-year return of -17.20%. MCHI declined 0.04% to $49.00, just above its 52-week low of $48.65, and its one-year return is -20.79%.

Value Trap Risks and Key Signals

Chinese equities now trade at a record discount to U.S. stocks, fueling debate over whether China is a value trap or a deep discount with rebound potential. The bear case rests on persistent weak earnings, piecemeal stimulus, and new policy risks such as the offshore trust tax. The National Team intervened only after blue chips dropped into bear market territory.

According to 24/7 Wall St., two key signals may change outlooks: a reversal of the CSI 300's losing streak with a weekly gain, and the announcement of a comprehensive fiscal package by Beijing. For bearish confirmation, a close in MCHI below $48.65 would reinforce concerns about ongoing downside pressure.

Sector-wise, FXI (which is bank-heavy) has fared better than internet-focused KWEB. As the week ended, U.S. stocks finished modestly lower, which shows that the record gap is driven mainly by declines in China, not by unusually strong U.S. performance.

In the weeks ahead, investors will watch for policy changes in Beijing, shifts in earnings trends, and stabilization in Chinese market sentiment. Until a turn in earnings or meaningful policy support emerges, the U.S.–China valuation gap may persist, keeping China’s market risk in sharp focus.