The Diversification Benefits and Policy Risks of Accessing China's Stock Market

69 Pages Posted: 18 Feb 2021 Last revised: 12 Nov 2021

See all articles by Chenyu Shan

Chenyu Shan

Shanghai University of Finance and Economics

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Sarah Qian Wang

University of Warwick - Warwick Business School

Chang Zhang

University of Warwick - Warwick Business School

Date Written: November 11, 2021

Abstract

China's stock market (the "A share market'') has a lower correlation with the global market and is less affected by international financial contagions than any other major economy. The inclusion of mainland China stocks into an international portfolio increases its Sharpe ratio. However, we find that Chinese stocks providing the most diversification benefits also carry the most policy risk for international investors. Holding Chinese stocks listed in Hong Kong does not reap the same diversification benefits. While global market integration and the increase in foreign ownership can diminish diversification benefits, mainland China stocks still provide valuable diversification opportunities for international investors up till the most recent time in late 2010s.

Keywords: International diversification, Contagion, China, Stock market, Policy risks.

JEL Classification: F3, G01, G12, G15.

Suggested Citation

Shan, Chenyu and Tang, Dragon Yongjun and Wang, Sarah Qian and Zhang, Chang, The Diversification Benefits and Policy Risks of Accessing China's Stock Market (November 11, 2021). Available at SSRN: https://ssrn.com/abstract=3757701 or http://dx.doi.org/10.2139/ssrn.3757701

Chenyu Shan

Shanghai University of Finance and Economics ( email )

100 Wudong Road
Shanghai
China

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics ( email )

KKL 1004
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

Sarah Qian Wang (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Chang Zhang

University of Warwick - Warwick Business School ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 7AL
United Kingdom

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