The Effect of the China Connect

42 Pages Posted: 8 Aug 2019 Last revised: 7 Oct 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: October 1, 2019

Abstract

We study the effect on Chinese firms of the Shanghai (Shenzhen)-Hong Kong Stock Connect. The Connect was an important capital account liberalization introduced in the mid-2010s. It created a channel for cross-border equity investments into a selected set of Chinese stocks while the overall capital controls policy remained in place. Using a difference-in-difference approach, we find that mainland Chinese firm-level investment is negatively affected by contractionary U.S. monetary policy shocks and that firms in the Connect are more adversely affected than those outside of it. These effects are economically large, robust, and stronger for firms with higher leverage, a higher share of foreign sales, and operating in the non-tradable sector. Because firms would try to stay out of the Connect if increased sensitivity to external shocks were the only effect, we broaden our analysis. We find that firms in the Connect hold more cash, enjoy lower financing costs, and have higher profitability than unconnected firms. We discuss the implications of our results for the de- bate on capital controls.

Keywords: Capital Controls; Global Financial Cycle; 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 (October 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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