Top Government Meetings in China

Abstract

Policymaking in China takes place at the highest level of the government. As such, top government meetings presided by the top leader in China (e.g., Politburo meetings) are highly anticipated, akin to FOMC meetings in the US. Over the 48-hour window prior to the announcement of top government meetings, we document a significant pre-Govt return of 42 basis points in Chinese equity. Similar to the pre-FOMC drift, this market-wide pre-Govt drift in China is significantly larger than that before the macro announcements, demonstrating the unique importance of top government meetings in China. We identify two distinct drivers for the pre-Govt returns. Under high market volatility, the heightened uncertainty channel of Hu et al. (2022) dominates and the pre-Govt drift escalates to 91 basis points. Under low market volatility, the pre-Govt drift disappears and we find evidence of information leakage – the pre-Govt returns can significantly predict the post-Govt returns. Our overall results offer direct evidence that China is a top-down economy with policy-driven markets.