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Connecting the Markets? Recent Evidence on China's Capital Account Liberalization

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  • Chan, Mark K.
  • Kwok, Simon

Abstract

We use longitudinal data on stock prices of cross-listed firms to investigate abnormal systematic changes in the price disparity of cross-listed stocks between the Hong Kong and Shanghai exchanges from 2002 to 2014. We identify a liberalization policy that generated an unprecedented abrupt convergence in price disparity. The policy, known as Shanghai-Hong Kong Stock Connect, serves to lower the capital control barrier of cross-market investment between both markets. In a quasi-experimental setup, we find that the announcement of the policy caused the price disparity between cross-listed shares in both markets to reduce by one-sixth. The magnitude of the effect was the largest since 2002, and was seven standard deviations away from the historical average. We also find that the convergence was asymmetric, and the convergence was driven by an upward revaluation of share prices.

Suggested Citation

  • Chan, Mark K. & Kwok, Simon, 2014. "Connecting the Markets? Recent Evidence on China's Capital Account Liberalization," Working Papers 2014-11, University of Sydney, School of Economics.
    • Handle: RePEc:syd:wpaper:2014-11
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    Cited by:

    1. Jia Wu & Jiada Lin & Zhenyu Yang & Luo Dong, 2021. "Effects of cross‐border capital flows on stock returns of dual‐listed firms in mainland China and Hong Kong: Evidence from a natural experiment," Pacific Economic Review, Wiley Blackwell, vol. 26(2), pages 212-240, May.
    2. Qianwei Ying & Yanyan Zhu & Mengchao Yao & Ziyang Li, 2021. "Does stock market liberalisation restrain corporate financialisation?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(5), pages 6263-6294, December.
    3. Li, Zhisheng & Liu, Chun & Ni, Xiaoran & Pang, Jiaren, 2024. "Stock market liberalization and corporate investment revisited: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 158(C).
    4. Chan, Marc K & Kwok, Simon, 2015. "The Effect of Risk Sharing on Asset Prices: Natural Experiment from the Chinese Stock Market Liberalization," Working Papers 2015-19, University of Sydney, School of Economics.

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    More about this item

    Keywords

    Capital account liberalization; Chinese financial market; law of one price; cross-listed shares; natural experiment;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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