The Effect of the China Connect

88 Pages Posted: 8 Aug 2019 Last revised: 10 Dec 2021

See all articles by Chang Ma

Chang Ma

Fudan University - Fanhai International School of Finance (FISF)

John H. Rogers

Fudan University - Fanhai International School of Finance (FISF)

Sili Zhou

University of Macau - Faculty of Business Administration

Date Written: December 1, 2021

Abstract

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

Suggested Citation

Ma, Chang and Rogers, John H. and Zhou, Sili, The Effect of the China Connect (December 1, 2021). 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

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

220 Handan Road
Shanghai, 200433
China

Sili Zhou (Contact Author)

University of Macau - Faculty of Business Administration ( email )

Macau

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