The Internationalization of China’s Equity Markets

TheInternationalizationofChina’sEquityMarkets JuanJ.Cortina,MariaSoledadMartinezPeria,SergioL.Schmukler,andJasmineXiao WP/23/26 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 FEB ©2023InternationalMonetaryFundWP/23/26 IMFWorkingPaper ResearchDepartment TheInternationalofChina’sEquityMarkets PreparedbyJuanJ.Cortina,MariaSoledadMartinezPeria,SergioL.Schmukler,andJasmineXiao* AuthorizedfordistributionbyGiovanniDell’Ariccia February2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:China’sequitymarketsinternationalizationprocessstartedintheearly2000sbutacceleratedafter2012,whenChinesefirms’shareslistedinShanghaiandShenzhengraduallybecameavailabletointernationalinvestors.Thispaperstudiestheeffectsofthepost-2012internationalizationeventsbycomparingtheevolutionofequityfinancingandinvestmentactivitiesfor:(i)domesticlistedfirmsrelativetofirmsthatalreadyhadaccesstointernationalinvestorsand(ii)domesticlistedfirmsthatweredirectlyconnectedtointernationalmarketsrelativetothosethatwerenot.Thepaperfindslargeincreasesinfinancialandinvestmentactivitiesfordomesticlistedandforconnectedfirms,withsignificantaggregateeffects.Theevidencealsosuggeststheriseinfirms’equityissuanceswasprimarilyandinitiallyfinancedbydomesticinvestors.Internationalinvestors’portfolioholdingsinChineseequitymarketsandownershipinfirmsincreasedmarkedlyonlyonceChinesefirms’locallyissuedsharesbecamepartoftheMSCIEmergingMarketsIndex. JELClassificationNumbers: F33;G00;G01;G15;G21;G23;G31 Keywords: equityfinancing;equitymarketliberalization;firminvestment;foreigninvestors;internationalinvestors;issuanceactivity;StockConnect Author’sE-MailAddress: jcortinalorente@worldbank.org;mmartinezperia@imf.org;sschmukler@worldbank.org;jasmine.xiao@nd.edu *WearegratefultoAriadneChecodelosSantos,GianlucaYongGonzalez,and,inparticular,YangLiuandPatricioYunisforexcellentresearchassistance.WereceivedveryhelpfulcommentsfromYingyuanChen,ErgysIslamaj,PhakawaJaesakul,JoongKang,MichaelKlein,MichaelLaw,AndreiLevchenko,GianMariaMilesi-Ferretti,TomasWilliamsandparticipantsintheIMF’s2023JacquesPolakAnnualResearchConference.Forresearchsupport,wearegratefultotheWorldBankKnowledgeforChangeProgramandtheResearchSupportBudget.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthors.TheydonotnecessarilyrepresenttheviewsoftheIMFortheWorldBankanditsaffiliatedorganizations,orthoseoftheIMFortheWorldBankmanagement,IMForWorldBankExecutiveDirectors,orthegovernmentstheyrepresent.CortinaandSchmukler WORKINGPAPERS TheInternationalizationofChina’sEquityMarkets PreparedbyJuanJ.Cortina,MariaSoledadMartinezPeria,SergioL.Schmukler,andJasmineXiao I.Introduction TheintegrationofmainlandChinaintoglobalfinancialmarketsinrecentdecadesisconsideredofcentralimportanceforeconomicdevelopmentbothwithinandoutsideChina(CeruttiandObstfeld,2019).PriortoChina’accessiontotheWorldTradeOrganization(WTO)in2001,internationalinvestors’accesstoChinesestockswasveryrestrictedandsegmented.1AfterChinabecameaWTOmember,itestablishedaQualifiedForeignInstitutionalInvestor(QFII)programthatgavelimitedaccesstoselectedinvestorstopurchasesharesissuedintheShanghaiandShenzhenstockmarkets.After2012,theinternationalizationprocessacceleratedsignificantlyasChineseauthoritiessteadilyeasedrestrictionsthatpreventedinternationalinstitutionalandretailinvestorsfrombuyingsharesinChinesefirmslistedindomesticmarkets(theso-calledAshares).China’sequitymarketsgrewmarkedlyfollowingthepost-2012internationalizationevents,becomingthesecondlargestequitymarketsintheworldintermsofmarketcapitalizationby2020,justbelowthoseintheUnitedStates. Thispaperstudiestheimpactofthepost-2012internationalizationeventsonfirms’equityfinancingandinvestmentactivities.In2013,theQFIIprogramandtheRenminbiQualifiedForeignInstitutionalInvestor(RQFII)program(initiatedin2011)expandedsignificantly,whileMorganStanleyCapitalInternational(MSCI)announcedareviewprocesstoeventuallyincorporatedomesticlistedChinesestocksintoitscloselyfollowedEmergingMarketsIndex.In2014and2016,China“connected”itsequitymarketsinShanghaiandShenzhen,respectively,withthatinHongKongSAR,China.Thisso-calledStockConnectprogramsnotonlyfurtherfacilitatedtheentryofinstitutionalinvestors,butalsograntedforeignretailinvestors’accesstoChineseequitymarketsforthefirsttime.In2018,ChineseAshareswereincorporatedintheMSCIEmergingMarketIndex,andtheirrelativeimportancewasallowedtoincreaseovertime.Weofferacomprehensivereviewtoevaluatetheimpactoftheseevents,whileattemptingtodistinguishitfromthatofcontemporarydomesticchangesandothershocks. Weconstructarichpaneldatasetthatcombinestransaction-leveldataonequ