The Effect of the China Connect
88 Pages Posted: 8 Aug 2019 Last revised: 10 Dec 2021
Date Written: December 1, 2021
We analyze the effects on Chinese firms of the "China Connect" equity market liberalization. Because China is a capital abundant country, unlike typical emerging markets in the literature, the benefits and costs of liberalization are logically different. Nonetheless, the liberalization brought benefits: lower funding costs, higher stock prices, and more investment for connected firms compared to unconnected firms, despite a common negative effect on all firms from capital outflows. These benefits come from a new channel: reducing domestic credit misallocation between private- and state-owned enterprises. We also document costs: connected firms became more sensitive to external shocks than unconnected firms.
Keywords: Capital Account Liberalization; Capital Controls; Global Financial Cycle; Foreign Spillovers; Equity Returns; Corporate Investment
JEL Classification: F38; E40; E52; G15
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