The Effect of the China Connect

33 Pages Posted: 8 Aug 2019 Last revised: 20 Aug 2019

See all articles by Chang Ma

Chang Ma

Fudan University - Fanhai International School of Finance (FISF)

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Sili Zhou

Fanhai International School of Finance and School of Economics, Fudan University

Date Written: August 1, 2019

Abstract

We study an important capital account liberalization in China: the Shanghai (Shenzhen)- Hong Kong Stock Connect of the mid-2010’s. This program created a channel for cross-border equity investments into a selected set of stocks while the overall capital controls policy remained in place. Using a difference-in-difference approach, we find that firm-level investment is negatively affected by US monetary policy shocks, argued by Miranda-Agrippino and Rey (2019) to be the crucial driver of the Global Financial Cycle, and that firms in the Connect are relatively more adversely affected than those that remained outside of it. These effects are economically large, robust, and stronger for firms with a weaker financial condition, higher level of financial constraints, higher equity return volatility, operating in the non-tradable sector. These empirical findings point to the adverse consequences that capital liberalization policies can have, and suggest that capital controls can be a way for emerging market economies to curb the negative consequences of global financial cycles. Balancing these negative consequences concerning increased sensitivity to external shocks, however, are the positive effects on equity valuations and capital issuance for firms under market liberalizations such as those in the Connect.

Keywords: Capital Liberalization; Foreign Spillovers; FOMC Shocks; China Connect; Corporate Investment

JEL Classification: F38; E40; E52; G15

Suggested Citation

Ma, Chang and Rogers, John H. and Zhou, Sili, The Effect of the China Connect (August 1, 2019). Available at SSRN: https://ssrn.com/abstract=3432134 or http://dx.doi.org/10.2139/ssrn.3432134

Chang Ma

Fudan University - Fanhai International School of Finance (FISF) ( email )

China

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

Sili Zhou (Contact Author)

Fanhai International School of Finance and School of Economics, Fudan University ( email )

Room 520, Building 5, 220 Handan Road
Shanghai
China

HOME PAGE: http://siliz.weebly.com/

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