With Regard to Local Contents Rule (Non-tariff Barriers to Trade): After Announcing the Shanghai-Hong Kong Stock Connect, is the Chinese Capital Market Suitable for Korean Investors?
Journal of Korea Trade Vol. 23, No. 7, November 2019, 147-155
9 Pages Posted: 9 Mar 2020
Date Written: November 15, 2019
Purpose – As the U.S.-China trade war has become considerably worse, the Chinese government is considering applying non-tariff barriers to trade, especially local contents rule. The main purpose of this research is to check whether it is suitable for Korean investors to invest in the current Chinese capital market.
Design/methodology – In order to check the stability of the recent Chinese capital market, we investigated the behavior of foreign equity investment (including Korean equity investment) in the Chinese capital market after China announced the Shanghai-Hong Kong Stock Connect (SH-HK Connect). In this paper, we researched whether international portfolio investment would or would not contribute to an increase the volatility of an emerging market’s stock market (Chinese capital market) when foreign investors make investment decisions based on the objective of short-term gains by rushing into countries whose markets are booming and fleeing from countries whose markets are falling.
Findings – The empirical results indicate that foreign investors show strong, negative feedback trading behavior with regard to the stock index of the Shanghai Stock Exchange (SSE), and when the performance of foreign investors in the Chinese stock market was fairly good. Also, we found evidence that the behavior of foreign investors significantly decreased volatility in SSE stock returns. Consequently, the SH-HK Connect brought on a win-win effect for both the Chinese capital market and foreign investors.
Originality/value – It appeared that the Chinese capital market was very suitable for Korean investors after the China’s declaration of the SH-HK Connect. However, the win-win effect was brought on by the Chinese government’s aggressive capital control but the capital controls could possibly cause financial turmoil in the Chinese capital market. Therefore, Chinese reform in industrial structure and the financial sector should keep pace with suitable capital control policies.
Keywords: Capital Market Openness, Chinese Economy, Foreign Investor, Shanghai-Hong Kong Stock Connect, Volatility
JEL Classification: F21, G11, G15, Q37
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