The Nexus between Exchange Rate and Foreign Equity Investors Behavior after the Shanghai-Hong Kong Stock Connect

Abstract

Purpose - This paper investigates the causal nexus between the exchange rate and foreign equity investors’ behavior in Shanghai and Hong Kong by using daily time series data after the Shanghai-Hong Kong Stock Connect scheme was launched.

Design/Methodology/Approach - The empirical data period is a sample of all daily trading data from the implementation of the Shanghai-Hong Kong Stock Connect to April 12, 2019. In order to analyze the nexus between the Shanghai Stock Exchange and Hong Kong Stock Exchange, we employed the impulse response function analysis based on the vector autoregression (VAR) model.

Findings - From estimation results on the Shanghai stock market, we found that exchange rates have not had a significant impact on foreign equity investors. Conversely, foreign equity flows have had a significant impact on exchange rate of the RMB. From estimation results on the Hong Kong stock market, it was found that mainland Chinese investors have not significantly affected the foreign exchange market of Hong Kong. On the other hand, the results show that exchange rates have had a significant impact on mainland Chinese investors in Hong Kong.

Research Implications or Originality - In the Shanghai stock market, exchange rates have not had a significant impact on foreign equity investors, which is due to exchange rate risk management by foreign investors. Conversely, a large amount of foreign equity inflows led to the appreciation of the RMB. In the Hong Kong stock market, mainland Chinese investors have not significantly affected the foreign exchange market of Hong Kong, which is due to a limited share of mainland Chinese investment in Hong Kong market capitalization. Conversely, exchange rates have had a significant impact on mainland Chinese investors in Hong Kong, which reveal that mainland Chinese equity flows into Hong Kong increased when the RMB depreciated against the Hong Kong dollar.

Keywords: Capital Market Openness, Equity Investor Behavior, Exchange Rate, Foreign Investor, Shanghai-Hong Kong Stock Connect

JEL Classification: F32, F34, G21, G15