The Effect of the China Connect
112 Pages Posted: 8 Aug 2019 Last revised: 27 Jan 2024
Date Written: August 1, 2019
Abstract
Liberalization improves allocative efficiency but generates volatility. In the short run, foreign capital flows lower funding costs and enhance market efficiency. Domestic investment decisions change through both a funding cost channel and a learning channel. In the long run, foreign capital flows make domestic firms more sensitive to global shocks. The “China Connect”, a carefully designed partial equity market liberalization in a capital-abundant country, provides a quasi-natural policy experiment to investigate the capital inflow effects of liberalization using firm-level data. Identification is further improved by the unique Chinese environment including the trapped savings problem, significant domestic capital misallocation, and overall tight capital controls.
Keywords: Equity Market Liberalization; Quasi-Natural Policy Experiment; Market Efficiency
JEL Classification: F38; E40; E52; G15
Suggested Citation: Suggested Citation