The Effect of the China Connect

112 Pages Posted: 8 Aug 2019 Last revised: 27 Jan 2024

See all articles by Chang Ma

Chang Ma

Fudan University - Fanhai International School of Finance (FISF)

John H. Rogers

Fudan University - Fanhai International School of Finance (FISF)

Sili Zhou

University of Macau - Faculty of Business Administration

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

Ma, Chang and Rogers, John H. and Zhou, Sili, The Effect of the China Connect (August 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

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

220 Handan Road
Shanghai, 200433
China

Sili Zhou (Contact Author)

University of Macau - Faculty of Business Administration ( email )

Macau

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