The Effect of the China Connect

49 Pages Posted: 14 May 2020

See all articles by Chang Ma

Chang Ma

Fudan University

John H. Rogers

Board of Governors of the Federal Reserve System

Sili Zhou

Fudan University - Fanhai International School of Finance (FISF)

Multiple version iconThere are 2 versions of this paper

Date Written: December 30, 2019

Abstract

We document 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 China's overall capital controls policy remained in place. Using a difference-in-difference approach, and with careful attention to sample selection issues, 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 whose stock return has a higher covariance with the world market return. We also find that firms in the Connect enjoy lower financing costs, invest more, and have higher profitability than unconnected firms. We discuss the implications of our results for the debate on capital controls and independence of Chinese monetary policy.

Keywords: Capital controls; Global financial cycle; Foreign spillovers; FOMC shocks; China connect; Corporate investment

JEL Classification: E40; E52; F38; G15

Suggested Citation

Ma, Chang and Rogers, John H. and Zhou, Sili, The Effect of the China Connect (December 30, 2019). FEDS Working Paper No. 2019-087 https://doi.org/10.17016/FEDS.2019.087 , Available at SSRN: https://ssrn.com/abstract=3600363

Chang Ma (Contact Author)

Fudan University ( email )

Beijing West District Baiyun Load 10th
Shanghai, 100045
China

John H. Rogers

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sili Zhou

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

220 Handan Road
Shanghai, 200433
China

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